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Low Cost ETFs – Canadian Vanguard ETFs





With the rising popularity of ETFs, more ETF products are being released which brings more competition and better value for investors. I’ve written about low cost ETFs before and put together a diversified low cost ETF portfolio. However, the landscape has changed with Vanguard ETFs coming to Canada.

Vanguard has been around for a while and are well known for low cost ETFs in the US. Some popular U.S based Vanguard ETFs that I like are:

  • VTI – Total US stock market index with over 3000 stocks – MER: 0.06%
  • VWO – FTSE Emerging markets – MER: 0.18%
  • VEA – MSCI EAFE index (Europe and Pacific) – MER: 0.12%
  • VXUS – MSCI All Country (except US) – MER: 0.16%
  • VIG – US Dividend Achievers - MER: 0.13%

So if you have Canada covered, for low cost US and international exposure, a combination of VTI and VXUS would do the trick.  In fact, my wife’s RRSP holds both.

Now that we have some context, lets talk more about the Canada’s newest set of ETFs launched by Vanguard which have low MERs compared to other the competition.

Canadian Vanguard ETFs

Canadian Index

Canadian index ETFs have come a long way since XIU was introduced.  Vanguards version is the MSCI Canada index ETF (VCE) that has 97 holdings and a very low MER of 0.09% (vs. 0.15% for XIU).  Note that the Canadian index space is very competitive with Horizons S&P/TSX 60 Index ETF offering their ETF with a MER of 0.07%.

U.S Index

My preference for broad based U.S coverage is VTI with a low MER of 0.06%.  However, if you are set on staying with Canadian products, Vanguard has a few options, some hedged, some not (preferred).  First there is the MSCI U.S Broad Market Index ETF (CAD-hedged) (VUS) with 3,237 holdings and a MER of 0.15%.  Next is the S&P500 Index ETF (VFV) and hedged version (VSP), both have a MER of 0.15%.

International/Emerging Markets Index

As mentioned above, I like VXUS as an all in one solution low cost solution for international exposure, but here are the CAD versions.  Vanguard Canada offers FTSE Emerging Markets (VEE) for 0.49%, and the MSCI EAFE Index ETF (CAD-hedged) (VEF) for 0.37%.  Still a bit pricey in my opinion.

Canadian Bond Index

iShares XBB may be the most popular Canadian bond index ETF which has a MER of 0.30%.  Vanguard’s Canadian Aggregate Bond Index ETF (VAB) undercuts them bit by charging a MER of 0.20%.

Short Term Bond

There are quite a few options for short term bonds for Canadians, some popular ones include the iShares XSB (MER 0.25%), CLF (government) (MER 0.15%) and CBO (corporate) (MER 0.25%).  Vanguards Canadian Short-Term Bond Index ETF (VSB) charges 0.15%.  The Vanguard short term corporate bond index ETF (VSC) charges 0.15% as well.

Dividend

I included this one in my Canadian Dividend ETF article and explained that this product is highly competitive.  I won’t get into too much detail here, but the Canadian Dividend ETF competitors are basically CDZ, XDV, ZDV and Vanguards VDY.  The MERs can be quite high for this genre, but Vanguard’s comes in at the lowest with a MER of 0.30%.

REIT Index

Last, but not least, Vanguards FTSE Capped REIT Index ETF (VRE) has 19 holdings with a MER of 0.35%.  Who are the competitors?  iShares XRE and BMO ZRE both with a relatively high MER of 0.55%.  With so few holdings in these ETFs, you may be better off holding the largest players in the space directly.

Final Thoughts

As you can see from the list above, Vanguard offers some very competitive products.  Which ones are my favorite?  As I mentioned before, I like their VTI and VXUS for US and international exposure.  I like their Canadian Index ETF (VCE), their Canadian dividend ETF (VDY), and their short term bonds (VSB and VSC).

Do you have Vanguard ETF products for your portfolio?

 





40 Comments, Comment or Ping

  1. 1. Goldberg

    Will you do other companies as well or just Vanguard ?

    If you focus on cost alone, you will not necessarily have the best returns.

    VDY is Vanguard’s high dividend yield ETF. A yield of 0.5% according to TMX.com. Great! BMO’s ZDV has a slightly higher cost but has a div of 4.2%…

    In many of these, Vanguard is like Walmart, cheapest but not necessarily best value for money.

    You don’t discuss differences between similar ETFs. Is one S&P500 ETF equally weighted versus another company’s ETF weighted by market cap… that would matter more to me than simply MER.

    I don’t own any Vanguard and don’t plan on ever holding any.

  2. 2. Chris

    You say you don’t prefer the hedged versions. Is this just because of the slightly increased MER or is there another reason?

  3. 3. Andrew

    I like VFV but… I know owning US stock as a foreigner you forgo %15 on dividend payouts. Does anyone know if this is the case with VFV (sorry if it’s a stupid question or incorrect on both counts, newbie here).

  4. 4. Bernie

    I agree with Goldberg. Vanguard is notoriously cheap with distributions. I would not recommend any of their products if you are needing income!

  5. 5. Mike

    VDY just started roughly 4-5 months ago, the distributions will be increasing to a yield of roughly 3.5% as they begin to receive distributions themselves (most dividend distributions are quarterly, they can’t distribute what they haven’t already received)

  6. Good discussion.

    @Goldberg, good points. In my opinion though, if the Vanguard CAD index is very similar to a competitor product, MER is a big factor. However, another factor is liquidity, which I suspect will pick up over time.

    @Chris, from what I’ve read, it has been shown that hedging actually drags returns.

    @Andrew – if you hold the ETF in your RRSP, you won’t get dinged with the withholding tax.

  7. 7. Trent

    @Bernie,

    These ETF providers work their hardest to keep the distributions as low as possible for tax reasons (because such distributions could be taxable for many of its investors). Essentially they distribute the minimum amount necessary in order to prevent any tax liability at the fund level. As a result there could be other things happening that cause them to not have to pass on the dividends.

  8. I would be quite worried if I was working as an advisor for Investors Group when I see Vanguard coming with such low fees ETFs!

    One of my investing goal this year is to buy a ETF that will track the US market. I believe that the US market will continue to outperform the Canadian market this year. I have a feeling that we are about to start paying the price of our high level of debt combined to a housing market on fire…

  9. 9. Andrew

    Thanks Frugal. I thought so.

  10. 10. Jeff

    Hi folks,

    I’m an old fart but a newbie here. I feel younger already :)

    I could sure use some help. Fingers crossed that you can help me out.

    Here’s the deal:

    I need an ETF with US exposure for my RRSP.

    My preferred choice is to put 30K into the Vanguard VTI. But when I compare it to the Vanguard VUS, VFV, and VSP I’m overwhelmed with tax lingo I just don’t understand.

    Which of these is my best bet or are they all bad? If they aren’t what I need, any better suggestions for this money?

    I want simplicity and real good ( an Inexpensive) exposure to the US inside my RRSP. That’s all, and right now all I have is a large headache.

    Many thanks,

    Jeff

  11. 11. Goldberg

    I just read a bit more on the founder, John Boggle. Not a bad guy at all. I’ll look at his ETFs again but I’m just not an ETF or mutual fund type of guy.

  12. 12. Sampson

    @ jeff.

    buy VTI directly, no need to hold a currency hedged product, these typically underperform due to the added costs and risks associated with hedging.

    No tax implications since it will be held in the RRSP.

  13. 13. Scott

    The Dividend Guy, as an IG consultant I’m not too worried. You think it’s an apples to apples comparison but really I offer apple pie so of course it’s going to be more expensive. Last week I worked with a client to figure out her finances and showed her that she will be OK financially if she left her abusive husband. What ETF would have done that for her?

  14. 14. SST

    Oh, Investors Group.

    Have heard some wonderful stories about them.

    I’d take my chances with an ETF, thanks.

  15. 15. Goldberg

    So? Thousands of people overpay so one person can be told that its OK to stop accepting being beaten up by her spouse for money.

    I agree with SST.

  16. 16. Chris

    For all of us reading MDJ, I totally agree to stay away from professional advisors to save on fees. But that is because we are all comfortable (and interested in) managing our own money. That’s why we are here. Not everyone is comfortable doing this though, so I will never say advisors serve no purpose. Just that I (and others hanging around here) have no use for them. Maybe someday everyone will take an interest in managing their finances and advisors won’t be needed, however I don’t see that happening until they start teaching basic personal finances in school (personally I think they should!)

  17. 17. SST

    Why are there no “Low Cost Financial Advisors”?
    (maybe there are? MDJ list?)

    With a government-backed ‘zero liability’ business model, you would think the industry could lighten up on the fees. After all, the product quality of advisors is far more WalMart than TIffany’s.

  18. 18. Scott

    Thank you Chris, for all the years I’ve been reading various personal finance web sites you are one of the few who actually get it. I don’t pretend that our services are for everyone, much like there are people who will change their own oil or build their own decks absolutely there are people who will manage their own finances and really that’s what IG does, it’s not simply a mutual fund that you invest in, we offer comprehensive financial planning that addresses cash flow management, retirement planning, tax planning, risk management (insurance), estate planning and investment management.

    People value their time differently, while I and anyone who visits these types of sites certainly enjoy spending time reading up on finances others simply do not. The federal budget was released yesterday afternoon, how many people out there have already taken the time to read through how changes will affect them? Most of clients don’t care to spend the time reading up on it, they know they can simply ask me (again, I’ll ask does your ETF do that for you?),

    Investors Group has 4,600 consultants servicing nearly one million Canadians, I don’t doubt that you can find some stories about bad consultants or bad client experiences, I challenge you to show me any company that size that doesn’t. But obviously, as a whole, we must be doing something right to be this size. Studies show that, on average, those who work with an advisor are better off financially over time than those who don’t.

    I have no problems with DIYers, kudos to you for taking control of your situation but unless you do absolutely everything in life yourself (like automotive repairs, home repairs, etc) at least acknowledge that not everyone out there wants, or simply has, the time to do it themselves and they are better off paying someone to help them rather than not doing it at all.

  19. 19. Chris

    @Scott

    I had to laugh a bit when you mentioned changing your own oil, building your own deck, doing home repairs, and doing your own automotive repairs because I do/have done all of those things :) I used to do my own oil every time but recently I’ve been taking it in just due to lack of time.

  20. 20. Jeff

    Yesterday I bought VTI @ $80.41, approx 10K worth
    Today it is up 20 cents
    and I’m down $430

    There is a $20 trade cost in there and currency stuff too but honestly, I am sick to my stomach….Buying an ETF that then goes up in a day and I’m down $430…Talk about a gut punch…Thank God I only bought 10K worth of it…

    I admit to not knowing near enough about this stuff and I also admit to not being too bright but it’s beyond frustrating when I research this stuff to no end, seek good advice, buy on a down day—essentially do so much right, and the next day the ETF goes up and yet I lose over $400 in 24 hours…

    All I can do now is vent and hope it goes on a roll then sell it and put this money in something else where the currency gouge can’t get me…

    All I was looking for was a real safe and inexpensive place to get US exposure in my RRSP….

    I’m 100% to blame here, me and what passes as my less than mediocre brain just isn’t bright enough to do this right….

    I don’t trade near enough to do this in US funds if anyone was going to suggest I go that route…

    If anyone can suggest an ETF for me to get into once I get my money back, I’d really genuinely appreciate it….I realize I’ll get gouged again by the currency conversion once I sell VTI so I probably need a 10% price gain to get out of this breaking even….Is this day over yet?

  21. 21. Chris

    @Jeff

    If you are worried about your one-day return, investing is probably not for you. Still, I don’t understand how the ETF could go up and you lose money. You’ll have to explain that a little better. There must be something you are missing. In any case, sit tight and think long term.

  22. 22. Jeff

    Thanks Chris….I’m a long term guy….probably too much of a long term investor truth be told…the only reason I looked today was to see if the ETF was in there with the rest of my holdings etc….One day returns never enter into my mind set, heck 6 month returns rarely do…but what caught my attention was that I bought at $80.41 and it showed up as me buying at $83.88 due the the conversion gouge, hence I’m down $400 in 24 hours….Sorry I can’t explain it any better than that…I’ll just sit on this and hope it’s up enough in the next year where I can get out of it and get into something that’s easier for me to understand and something where I don’t have to worry about currency hits….

  23. 23. Bernie

    @ Trent
    Thanks. Perhaps Vanguard should have two versions of each of their ETF’s, ie: low payout (for tax conscious investors) & high payout (for income oriented investors). Retired boomers are rapidly increasing in numbers. Many would prefer higher payouts from their investments so they don’t have to liquidate units/shares.

  24. 24. Tweev

    @Jeff – If I’m understanding you correctly it sounds like you got charged on conversion fees.

    To avoid those you can do what called Norberts Gambit.

    For a TDW account you would:
    1) Call and set up automatic ‘washed’
    2) buy a very liquid fund on TSX (e.g. TDW)
    3) sell this stock once the order is filled on the NYSE
    4) These money will be automatically put into a US money market fund
    5) then you can use this fund to buy American securities.

    Consider it a relatively cheap lesson about not fully doing your homework first.

  25. 25. SST

    @Scott: “Studies show that, on average, those who work with an advisor are better off financially over time than those who don’t.”

    Sources?

    Thanks.

  26. 26. Jeff

    Well said, Tweev. As lessons go, 3 percent down in a day never to be repeated again is pretty good.

    I’ve learned from this and now it’s time to move on. I hope to look back on this in ten years and see that the 3 percent hit I took today by not knowing how the currency gouge would affect me is irrelevant after a decade of nice gains with VTI.

  27. 27. Tweev

    @Jeff: You know I feel the same way when I buy something. I buy it, then it goes down 2% — ARG!! This is something you can’t control so put it out of your mind.

    To put it in a more relevant context this 4% ‘loss’ will be covered with the difference in management fees in two years. Further, I personally expect the Canadian dollar to drop about 10% over those two years as well so you are more than covered.

    Basically: don’t sweat it, this is just a little trip towards the kingdom of financial success.

    Now it’s Friday – go have yourself some QT – the markets are closed for the weekend :)

  28. 28. Scott

    @SST, I don’t know if I can post links here, so just Google these studies…

    Morningstar: “Alpha, Beta, and now… Gamma”

    CIRANO: “Econometric Models on the Value of Advice of a Financial Advisor”

    I will not quote a highlight or post a summary because quite frankly I know I would be accused of bias, so read the full study yourself.

  29. 29. Tweev

    The studies you cite do have a bias bend to them as they mix up correlation with causation.

    Will a financial advisor benefit someone with no training or personal interest in finances? Absolutely.

    Will someone who is willing to put in a work and follow simple advice that can be contained in a 4 page pamphlet beat most advisors after ten year. Again, absolutely.

  30. 30. SST

    Ah, yes. The gamma paper. Read it.

    “We define Gamma as the additional value achieved by an individual investor from making more intelligent financial planning decisions.”

    Nothing mentioned in the paper about the added value of paying a financial advisor.

    As for the other, here’s a link poking big holes in it:
    (yes, you can post links)

    http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/financial-industry-overselling-value-of-financial-advice/article5360796/

    Severe limitations do not make a good, or valid, study:

    “Professor Claude Montmarquette, president and CEO of CIRANO and one of the authors of the study, and he indicated that the study “is absolutely refutable given the limitations of the data.” ”

    So….not sure why it was even published…???

    Oh, that’s right — another financial industry marketing scheme!

    Wonder how much CIRANO was paid to put this thing out?

    Still looking for any independent/third-party analysis which proves hiring a financial advisor equates to substantially higher (or even cost-covering) returns than non-advised investors (or low-cost ETFs).

  31. 31. Scott

    @Tweev

    You know simply reciting the phrase “correlation does not equal causation” does not rule out every study, right? I know you didn’t read either study, you have a belief and don’t want to be exposed to anything that challenges that belief.

    As for the last part of your comment, do you mind if I print that out and show it to my colleagues? I’m sure they’d get a kick finding out the entirety of our CFP studies can be reduced to a “4 page pamphlet”. If you truly believe that comprehensive financial planning can be reduced to a 4 page pamphlet why do you bother continuing to visit these types of sites, surely you have learned everything that could go into that 4 page pamphlet by now.

    The expression “a little knowledge is a dangerous thing” comes to mind. I’m reminded of a colleague who a couple years back had a client who had long ago purchased a whole life policy for their child (now whether or not that was the right thing to do at the time is up for debate but it’s something they had done before working with my colleague). The child was now in his mid 20s and read an article that could be summarized “permanent insurance bad, buy term only”. So the kid calls up the insurance company, cancels the insurance and gets a cheque for the cash value. He then does some term price shopping on the ‘net, finds the lowest price and applies, turned out the kid had an early stage of cancer and was deemed uninsurable. Guess what the article forgot to mention, that he should have applied for the term coverage first before cancelling his existing policy (is that in your 4 page pamphlet?). A year or so later he passes away and leaves his wife and young child with nothing. Score one for “free” internet advice, all it cost him (well, technically his wife) was the few hundred thousand that the whole life policy would have paid. If the kid had worked with my colleague and wasn’t given the “apply for term first” advice, my colleague would have been on the hook and would have had to make good, but free advice doesn’t have that same duty of care.

    See, those of us working in the industry have stories too, for every bad advisor story you guys come up with, I know one where free internet advice has screwed a person. Am I saying everyone needs to pay for advice, absolutely not, there are people out there that really put the time into DIY but where it can get dangerous is when someone gets a little information and acts on it without fully understanding the consequences (as in my example) so when you are talking to family/friends don’t just give them the headline, make sure they understand the story.

  32. 32. Tweev

    @Scott

    1) I agree that simply because a study is based on correlation that doesn’t necessarily exclude a causal mechanism, however, to be convincing supporting evidence needs to be included and I found it lacking.

    2) Feel free to print that out for your colleagues but I would suggest you simply email that to them. I see no reason to use paper for something so well accepted (but obviously not fully understood).

    3a) You are correct, I didn’t do an exhaustive review of both studies. I glanced at the ‘economic models’ one and I found some of their stats a bit puzzling. They seemed to want to log everything (which is sometimes not a terrible idea to account for variance issues) but also they seemed to be ignoring the important serial autocorrelation of financial time series data. Anyway, honestly, I didn’t go through that study carefully so I would have to do that to give a full critique.

    3b)I did, however look at the second one the Gamma one. Seems reasonable enough and is consistent with what I said before. Of interest is the statement at the end: “. This additional income is equivalent to an average annual return increase of +1.82%”. This is a percentage that is approximately what the fees would be from this active management (maybe actually lower indicating that passive in more expensive).

    4) As for your example of internet advice. Yes, I agree with a simple caveat. Everyone knows that when using internet advice caveat emptor but most people don’t think this way when using a financial advisor. For every example of someone taking bad internet advice I can point to one example of getting bad advice for a paid for financial advisor (the sheer existence of back load funds supports this). The difference is people expect crap advice from the internet and are duly suspicious while when using a financial advisor they expect someone to watch out for their financial best interest. Unfortunately this does not happen as often as it should.

    5) I think the evidence supports that a financial advisor is better for people with zero interest or inclination in financial matters, however 90% of the people out there would do far better by simply following a 4 page pamphlet of rules to follow.

  33. 33. Chris

    This has turned into a pretty interesting discussion! I think I come down somewhere in between these two guys. Yes, I think a four page pamphlet could explain how to put together a basic portfolio. But you couldn’t also include stuff like saving, insurance, tax planning, etc. You would need more than a four page pamphlet for that. A good book, for example The Wealthy Barber, is enough to get one started on a DIY path (although after re-reading Wealthy Barber recently, there are a few things out of date, so I’d also recommend Wealthy Barber Returns to see what advice Chilton himself would now change). You’d be amazed though how many people could never bring themselves to read a short book on financial planning. It’s sad really, but it’s the truth. For these people, they probably are better off talking to an advisor rather than trying to do things themselves without the required research and screwing things up.

    That being said, if you do go to an advisor, you need to make sure they are looking after your interests not their own (i.e. their commission). I know many people that use advisors and some of the advice they have received is clearly in the interest of selling a product that will make the advisor more money. For example, one friend was told by an advisor to never buy an ETF because there is no one there to watch the money and basically implied it could crash at any moment as a result. This is completely untrue and I am sure was said only because the advisor wanted to sell more product. They have every right to try to sell their product, but it must be done truthfully.

  34. 34. Mike

    Hi Chris,

    Just two quick questions for you. Do you think you will have better long term returns after fees than something simple like this:

    VUS.TO=25%
    VCE.TO=15%
    VEF.TO=30%
    VEE.TO=30%

    “Whenever you save a bit more money, put more money into one of the above in order to bring you back to your target allocation above.” Questrade offers free ETF purchases meaning the distributions can also be dripped in a manner to keep the allocation.

    The answer is absolutely not.

    Question #2

    When a young client without any complicated life scenarios happening comes to see you, do you tell him to open a questrade account and simply follow the simple and easy strategy above?

    The answer is absolutely not.

    That is why you can try to back up your position anyway you like, but you are ultimately an unproductive scab on society that spends more of your time trying to trick people into thinking you are a necessity versus actually doing something useful for society.

  35. 35. Chris

    @Mike

    Is this really directed at me? If so, did you even read what I wrote?

    I am not a financial advisor. I do not have a financial advisor. I am an R&D engineer with a PhD who happens to take an interest in finances and investing. Unproductive scab? I think not.

    I don’t defend the advisors who engage in the behaviours you describe. My only point was that we shouldn’t say all advisors are bad even though a lot of them are, nor should we say that no one should use an advisor because some people need them.

  36. 36. Mike

    Sorry Chris…that was directed at Scott…

  37. 37. Mike

    To go back to your original analogy Scott…

    Sure some people would rather not change their own oil…but that isn’t really a fair comparison.

    What you are really more akin to is a greasy mechanic. The person that doesn’t know much about vehicles shows up to your door and instead of telling them to go to Canadian Tire to buy a replacement fuse, you bring them in for the complete overhaul and charge them a fortune for it.

  38. 39. Tweev

    The thing is that I actually think having a financial advisor is potentially great. Unfortunately, they charge far in excess of what they bring to the table and almost all of the benefit they provide is washed away by their fees.

    To be honest, I was quite shocked to see the Canadian Couch Potato offer the investor service: http://canadiancouchpotato.com/diy-investor-service/ but it wasn’t because I don’t think it would be useful but simply the price.

    Setting up a couch potato portfolio (even a complex one) would take someone less then a day to sort through and give advice on. For this, they are charging $3000! It’s incredible and absolutely unreasonable. For this, I can see $500 MAXIMUM.

    These financial products these people are selling are generally really simple and are not worth the cost that Canadians are charged (see the G&M for numerous articles on how Canadian are being hosed by the financial industry.

    TL;DR: Financial advisors would be great if they were only reasonably priced.

  39. 40. SST

    The Scorpio Partnership reports cost-to-income ratio of the global money management industry has risen 16% over the last 4 years.

    Average annual increase in management fees of 3.8%.

    What was the increase in low-cost ETFs?

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