Will Vanguard start the mutual fund price war?

One of the hot topics of the week is the announcement that US Mutual Fund giant Vanguard is coming to Canada. Lot’s has been written on this topic this week so rather than re-invent the wheel, I thought I would share some great articles from personal finance heavyweights:

  • According to an article by Jonathan Chevreau of the National Post, “Vanguard’s combined total assets are US$1.7-trillion, the lion’s share in mutual funds, a market it entered in 1975 (with one of the first S&P500 index funds). It launched its first ETFs only in 2001 and ETF assets account for only US$174-billion of the total.”
  • John Bogle was the original founder of Vanguard back in 1975. Back in 2010, Mr. Bogle was interviewed by Rob Carrick of the Globe and Mail. This interview pretty much sums up why Vanguard’s move into Canada is a big deal. They represent what low-cost passive index investing is all about.
  • Vanguard is well known for it passive, low-cost strategies and Mike Holman from MoneySmartsBlog feels that “Canadians will benefit from a good selection of low-cost index funds.” He also speculates that Canadians might benefit from unhedged Canadian Dollar versions of their international investments.
  • Tom Bradley of Steadyhand Funds weighs in with some very insightful thoughts on Vanguard. I especially like this paragraph, “If Vanguard chooses to focus on selling ETFs to advisers, as most people expect, its entry into Canada will be more evolutionary than revolutionary. In my opinion, it would have a far greater impact if it developed the other side of its U.S. model – a direct-to-client fund company that doesn’t rely on the adviser network. Without the middleman, the cost for clients would be substantially lower and Vanguard would have a bigger impact on investor behavior.”
  • Michael James on Money says “This announcement is initially disappointing because Vanguard’s initial focus in Canada will be to offer investment products to Canadian investors through investment advisors. While some investors prefer to get advice from an investment advisor, many of us prefer to save the added cost and make our own choices. Vanguard’s offerings are unlikely to be of much interest to me until I can purchase ETFs directly on a stock exchange.”
  • Dan Hallet from the Wealth Steward hopes that “Vanguard launches a family of low-cost mutual funds in Canada that cater to both advisors and investors. Canadian investors, advisors and institutions have had broad-based access to Vanguard ETFs for a decade so it’s not clear that there is a great motivation for them to launch a TSX-traded ETF family.”
  • Preet Banerjee of Where Does All My Money Go shares some information about Vanguard United Kingdom launch to perhaps figure out their modus operandi for launching into a new country with an advisory focus. With some exceptions, if expansion into a new territory works, you just wash, rinse and repeat.
  • Ram, the Canadian Capitalist exposes some of Vanguard’s wishy-washy views on active management from their website, “It’s not clear how one can avoid “the pangs of regret” since very few funds manage to beat the humble index fund in most time periods and it is nearly impossible to pick the winning fund in advance.”
  • Here’s the official Press release shared by the National Post and Jonathan Chevreau

My two cents

I am really intrigued by Vanguard’s focus on advisors. On one hand, it makes sense because so many Canadians use advisors to help them manage their portfolios. Will the advisor community ‘buy-in’ and start recommending products from a company that has been so significant in building a message about the significance of passive indexing strategies which is the polar opposite of the active management products most advisors are promoting in the first place?

Given their focus on the advisor channel, I’m not sure a price war will happen initially. From what I see in the industry, most fee-based advisors are charging around 1% for their discretionary accounts. How much cheaper will Vanguard Funds be compared to the F-class mutual funds that already exist? I guess we will all have to wait and see.

The bottom line is the feed does matter. It’s really too bad that recent studies are showing that Canadians have no idea what fees they are paying in the first place.

My hope is that Vanguard stays true to what Mr’ Bogle started in the first place . . . a commitment to lower fees. In Mr. Bogle’s words “Performance comes and goes, but costs go on forever.”


  1. Mike Holman

    Nice article Jim. You’re right that most investors are clueless when it comes to how much they pay in fees.

    It’s hard to start a price war when most investors think (incorrectly) they are not paying any fees. 🙂

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