Following in the footsteps of its parent company in the U.S., Vanguard Investments Canada Inc. announced on Tuesday the biggest fee cut in its history.
The fee cut applies to 12 mutual funds and ETFs in all — comprising a quarter of Vanguard Canada’s investment fund lineup. All of the firm’s asset-allocation mutual funds and ETFs, plus one fixed-income ETF (TSX: VGV) saw a five-basis-point fee cut, while two other fixed-income ETFs received cuts of 10 (TSX: VGAB) and 15 basis points (TSX: VBG), respectively. And this comes just months after its parent company, The Vanguard Group, Inc., cut fees on 168 share classes across 87 funds in the U.S., amounting to its biggest-ever fee reduction.
The parent company is owned by Vanguard’s U.S.-domiciled funds and ETFs, which, in turn, are owned by Vanguard investors. That independence from external ownership allows the company to “deliver … value back through fee cuts,” said Sal D’Angelo, head of product for Vanguard Americas and head of marketing for Vanguard Canada in Toronto.
“In the end, the investors are really the owners out of the U.S. It works a little differently here, but the same mission and philosophy stay alive with the Canadian business,” D’Angelo said.
This is the seventh time Vanguard Canada has made fee cuts to its investment funds since 2011, when it launched its first ETFs in the country. The six previous fee cuts are estimated to have translated to $200 million in savings for Canadian investors, according to D’Angelo.
“It’s just part of our DNA. It’s what we do,” he said.
“It’s also a function of where we’ve grown to, where we’ve passed $100 billion in assets [under management with our Canadian ETFs], which is great. And as we grow and scale, we pass more returns back to investors.”
CRM3, industry trends
The change comes ahead of the implementation of total cost reporting or CRM3 in Canada, which will provide investors with enhanced fee transparency on financial products and advice.
While Vanguard focuses on its own economics and remaining competitive when making pricing decisions, D’Angelo said it’s “perfect timing” for the fee cut, given that CRM3 is on its way. And he said other asset managers are likely to follow suit.
“I think you’ll just continually see more focus on lower cost, especially amidst this regulatory reform and increased transparency for investors and advisors,” he said, citing recent data from Morningstar Canada, which found that mutual fund and ETF investment management fees have declined steadily in the last decade.
“Industry level, the direction is down. We’ve seen it over the years, and I think the industry average fee will continue to go down.”
Daniel Straus, managing director, ETF research at National Bank Capital Markets in Toronto, shared a similar outlook, saying this is “just the latest salvo of a fee war that’s been going on for well over 10 years.”
“And it’s been investors who’ve benefited, because it’s not just Vanguard, but BMO and iShares and other competitors have similar products that are offered at similar bargain-basement fees,” Straus said.
He noted that Vanguard’s fee cut applies to its fastest growing products in terms of assets gathered, though there are similar products that are competitively priced.
For example, BlackRock Canada’s iShares Core Equity ETF Portfolio (TSX: XEQT) has a 0.18% management fee and 0.2% management expense ratio (MER), compared to the Vanguard All-Equity ETF Portfolio (TSX: VEQT), which now has a 0.17% management fee, down from 0.22%. Prior to the fee cut, VEQT’s MER stood at 0.24%. The MER will be recalculated at the end of the fund’s fiscal year.
“When we talk about a four-basis-point difference, it’s like a hairline difference that only the most well-capitalized investors would even notice. Four basis points is very, very low. It’s essentially close to zero,” Straus explained.
“A five-basis-point fee cut, it’s significant from the perspective of Vanguard, but five basis points is one penny on $20. So, it’s not nothing, and it will help you compound. But we think that when two ETFs are [a few] basis points apart, it’s very possible that your execution costs will eat up the difference if one is more liquid than another.”
Therefore, he said advisors and investors must “look at many other metrics besides just MER when comparing ETFs that are this close” in terms of fees.
Meanwhile, amid the shift to lower-cost products, D’Angelo urged advisors to demonstrate their value beyond product advice and recommended investors to assess the value they’re receiving from advisors relative to the fees they’re paying them.
“It’s a great time to assess what you’re getting,” he said.
This story contains a correction. Vanguard’s fee cut applied to three fixed-income ETFs, with different reductions applied to each.