It is now more than one year since Vanguard came to Canada by launching its first set of Exchange-Traded Funds (ETFs). Last week, I had a chance to chat with Atul Tiwari Chief of Vanguard Canada. I asked him a few of my questions and those of Canadian Money Forum members (here) about Vanguard’s plans for the future, ownership structure and securities lending policies.
It is now over an year since Vanguard launched its first suite of ETFs. The flagship Vanguard MSCI Canada Index ETF (VCE) has just $91 million in AUM. Can long-term investors assume that Vanguard is committed to doing business in Canada?
We are very pleased with where Vanguard Canada is today, exactly one year (Dec. 6th) after our launch. We have $430 million in assets and accounted for 12.5 percent of inflow into ETFs in the categories of our 6 core products to date in 2012. Investors can be confident that Vanguard plans to be in Canada for a long, long time. That’s because Vanguard has expanded into new markets in a careful, deliberate fashion.
Any comment on upcoming ETFs?
We will be launching our third tranche of ETFs in 2013. We are looking into launching unhedged versions of Vanguard EAFE Index ETF (CAD-Hedged) (TSX: VEF) and Vanguard MSCI US Broad Market Index ETF (TSX: VUS) but our plans are not final.
Vanguard in the US offers extras to investors with $50,000 or more in assets such as commission-free ETF trading, financial plans etc. Are there any plans to launch similar services in Canada in the future?
Vanguard in the US operates a brokerage that allows it to offer clients commission-free ETF trading. We don’t have plans to offer such services in the near future. Canadian investors wishing to purchase Vanguard ETFs can currently do so through brokerages such as iTrade and others that offer them.
ETFs such as VEF and VEE which are wraps around US-listed ETFs. Will these ETFs hold component securities directly at some point in the future?
The issue is cost. It is very expensive to buy and take custody of foreign shares in Canada compared to the United States, which has the deepest capital markets in the world. Vanguard is aware that holding wrap ETFs in registered accounts incurs a cost and investors should weigh that against the benefits of not having to convert currencies and US estate tax implications. Withholding taxes should be only one of the factors you consider when you invest.
Can you comment on the ownership structure of Vanguard Canada? Is it similar to that of the US, where Vanguard is set up as a mutual company in which the company is owned by the funds and the interests of Vanguard’s are aligned with that of investors in its funds?
Vanguard Canada is set up as a subsidiary of Vanguard US. Since Vanguard in the US is set up as a mutual company in which the mutual funds own the fund company, and it operates on an “at cost” basis, it translates into lower costs for investors over time. Vanguard Canada will operate on the same principle. At present, we are in start-up mode, so essentially Vanguard US fund holders are subsidizing investors in Vanguard’s Canadian ETFs. As the ETFs gather more assets and the operations become profitable, the profits will, in effect, flow back to investors in the form of lower fees.
Can you comment on your securities lending policies? What about collateral? Is there a chance, however remote, that the collateral can turn illiquid or experience losses? (Interested readers may want to check out this paper on how Vanguard practises securities lending).
Vanguard does securities lending differently from other ETF vendors. First, there is no securities lending in fixed-income products. In equity ETFs, only a small percentage of a fund’s assets — between 1 to 5 percent, typically around 3 percent — are lent out. Vanguard lends out only scarce securities to earn better fees. For example, Vanguard ETFs will not generally lend a stock such as IBM that is easily available for borrowing. It should be noted that unlike other firms that allocate a significant portion of lending revenues to their management companies, Vanguard returns all lending revenues, net of broker rebates, program costs, and agent fees, to the funds for the benefit of investors. Vanguard invests the collateral in high quality short term instruments, such as Government securities or cash deposits and marks to market daily at 102-105%.
