Introduction

Vanguard has revolutionized retail investing. In this commentary we explain at some length who exactly is Vanguard, why most Canadians have never heard of Vanguard, the challenges for Canadians in investing with Vanguard, why Canada has no home-grown equivalents, and finally we describe some of the Vanguard ETF’s which Canadian investors can invest in. If it is only the latter which interests you, go directly to the heading Vanguard ETF’s: an overview

Who exactly is Vanguard?

The Vanguard Group, Inc. is a privately owned investment manager. It primarily provides its services to investment companies. Vanguard began operations on May 1, 1975. It is based in Valley Forge, Pennsylvania, and has 12,500 US-based employees. Its founder John C. Bogle was determined to create a new kind of mutual fund company that would operate only in the best interests of fund shareholders. Mr. Bogle believed that shareholders were not well served by the standard practice in the US mutual fund industry (the same thing prevails in Canada), in which funds are captive to a fund management company that seeks profits through providing portfolio management, marketing, and administrative services to the funds. In a span of more than three decades, Vanguard has grown to become a global investment management company with total assets of over $1.3 trillion (at June 30, 2010) invested in a broad spectrum of mutual funds, exchanged-traded funds, commingled trust funds and separate accounts that follow a variety of active, quantitative and index strategies. Its aggregate expense ratio is a low 0.23% (expenses as a percentage of 2009 average complex net assets). In general, see Vanguard (and Vanguard press ), Wikipedia and BusinessWeek. 

Is Vanguard active in Canada?

Vanguard offers investors around the world cost-efficient, high-quality investment funds delivered by local teams of investment professionals. Outside the U.S., Vanguard focuses primarily on large institutional investors including prominent institutions and governments, leading public and private pension funds, life insurers, fund-of-funds mangers, banks, and fund platforms. Vanguard also serves the retail direct market, and financial advisor markets in some countries. Vanguard has developed special families of funds for distribution outside of the U.S., such as Vanguard's Dublin-domiciled UCITS funds offered throughout Europe, and Vanguard's Australian fund offerings.

Regrettably, Vanguard does not yet operate at a retail level in Canada. See Bylo or as a PDF doc.1716 It has recently begun seeking out the Canadian institutional market; see Chevreau or as a PDF doc.1717. As a result of Canadian securities commission restrictions that are supposed to protect Canadian investors but in this case are a source of harm, Canadian individual investors can’t directly buy Vanguard’s US-based mutual funds; see ByLo or as a PDF doc.1718  and FinancialWeBring or as a PDF doc.1719.

Fortunately this prohibition does not apply to Vanguard’s exchange traded funds.

…there are several possible reasons for favoring ETFs:- First and foremost, if you are not a U.S. citizen, ETFs may well be your best fund choice. Residents of the land of the free and home of the brave do not appreciate just how miserable mutual fund offerings are outside these shores. With outsized expenses and dismal ongoing performance, foreign mutual funds make the average U.S. brokerage house look like a charitable foundation. At a stroke, ETFs may make the World According to Bogle available around the globe. Source: Bernstein 2001 or as a PDF doc.1720

Are Canadians penalized by being limited to Vanguard’s ETF’s?

Traditionally it does not appear to have been a significant problem.

Why deal with ETFs if you can own the same indexes without all the hassle of paying brokerage fees and spreads? Figure about 15 basis points in commissions and spreads each way. In the case of the iShares S&P 500 Index Fund, with its 9 basis-point advantage over the Vanguard 500 Fund, the ETF will take about three years to make up the difference. In all other cases, the iShares/Vanguard expense gap is smaller or even zero, so the ETF break-even points will range from very long to never. Even then, most of the time, the expense difference will likely be blown away by tracking-error differences. Nevertheless, there are several possible reasons for favoring ETFs Source: EfficientFrontier doc.1720 See also CanadianFinancialDIY or as a PDF doc.1721and  SeekingAlpha or as a PDF doc.1722.

For readers interested in the more general question (do Vanguard’s ETF’s come at the expense of its mutual funds, see the papers by Anna Agapova paper1 or as a PDF doc.1723  and paper2 or as a PDF doc.1724 ).

However, because a Canadian investor can’t open US account with Vanguard, he or she cannot enjoy free commissions on ETF trades that Vanguard recently introduced for investors who open an account directly with Vanguard to purchase Vanguard ETF’s; see IndexUniverse or as a PDF doc.1725;  ETFTrends or as a PDF doc.1726;  ETFDataBase or as a PDF doc.1727 ; and SeekingAlpha or as a PDF doc.1728 .