The Vanguard Effect on Mutual Funds, Fees and Performance

Vanguard is best known in Canada for its low cost, passively managed ETFs. Indeed, since entering the Canadian market in 2011, Vanguard now boasts a line-up of 37 ETFs with more than $40 billion in assets under management – making it the third largest ETF provider in Canada.

Keeping costs low is in Vanguard’s DNA. Their low fee philosophy hasn’t only benefited investors in Vanguard ETFs – it’s helped drive down costs across the Canadian ETF industry. This process has come to be known as the “Vanguard Effect”.

The cost of Vanguard ETFs is 54% lower than the industry average. Since 2011, they’ve cut their ETF’s average MER by almost half – saving their investors more than $10 million.

The Vanguard effect has made a noticeable difference for ETF investors in Canada, but the vast majority of Canadian investments are still held in actively managed mutual funds.

• Mutual fund assets totalled $1.896 trillion at the end of May 2021.
• ETF assets totalled $297.4 billion at the end of May 2021.

The Vanguard Effect on Mutual Funds

Vanguard took aim at the Canadian mutual fund market three years ago with the launch of four actively managed funds, including the Vanguard Global Balanced Fund (VIC100), the Vanguard Global Dividend Fund (VIC200), the Vanguard U.S. Value Windsor Fund (VIC300) and the Vanguard International Growth Fund (VIC400).

These funds have gathered about $630 million in assets and are available to fee-based clients as F-Series funds, and to DIY investors through the Questrade and Qtrade online brokerage platforms. F-Series funds do not include embedded or trailing commissions back to the advisor.

With three years under their belt in the Canadian mutual fund space, I thought I’d check in on the performance of Vanguard’s mutual funds.

While investors can’t glean much over a three-year period, the Vanguard funds have performed well compared to their benchmarks and industry peers.

• Vanguard Global Balanced Fund (VIC100): +9.28% – VIC100 is a global balanced strategy with a strategic mix of 35% fixed income and 65% equities. It was designed to mirror the Vanguard Global Wellington Fund offered in the US – a 5-star rated fund by Morningstar. VIC100’s returns place it in the first quartile of its Global Equity Balanced category since inception.
• Global Dividend Fund-Series F (VIC200): +6.06% – VIC200 invests in higher dividend yielding securities across the globe. Its style has been out of favour for most of the time since inception as markets have preferred high growth companies that don’t pay dividends. That has changed Year-to-Date (YTD), and VIC200’s returns are in the first quartile of its Global Equity category.
• Windsor U.S. Value Fund-Series F (VIC300): +11.28% – VIC300 is the sister fund to the Vanguard Windsor Fund, offered in the US. The fund offers exposure to US large and mid-cap value stocks. Its value orientation was out of favour for the last few years but it’s ahead of its Russell 1000 Value Benchmark after fees since inception. As value has roared back, the fund is in the first decile of the US Equity category in Canada YTD.
• International Growth Fund-Series F (VIC400): +19.20% – VIC400 has been a top performing fund since inception. It offers exposure to stocks primarily outside of North America. It mirrors a fund of the same name offered to US investors since 1981. The US fund is rated 5-stars by Morningstar. VIC400 has outperformed its benchmark by 12% per year.

I recently had the opportunity to speak with Tim Huver, Head of Intermediary Sales at Vanguard Investments Canada about the success of their mutual funds and what we can expect in the future.

Q: Tim, one of the unique features of Vanguard’s mutual fund line-up is its so-called fulcrum pricing where if the fund fails to meet its benchmark target then the management fee will go down. How has that worked so far?

A: To our knowledge, no other actively managed fund is structured in this manner. There’s typically a “heads I win, tails you lose” mentality in the mutual fund industry. We wanted to change that by offering a performance-based pricing structure where the price of the fund is adjustable based on outperformance or underperformance.

Quite simply, if the fund doesn’t perform as we expect, the investor pays less. If it does well, you pay a little more but it is still well below the industry average. So the structure of the fund aligns totally with investors.

We wanted to keep costs low by only offering the funds in F-Series with no trailer fee and no commissions, and to DIY investors through online brokers that offer mutual funds with no kick-back to the platform.

And, even though management fees are capped at 0.50%, the fee on our top performing fund (VIC400) has remained the same at 0.40%.

Q: Vanguard mutual funds have been available for DIY investors on the Qtrade and Questrade platforms? Have any other discount brokers come onboard?

A: Not at this time. We want to make sure our mutual funds are available without any trailer fees paid back to the brokerage (which would increase the total cost of the fund). DIY investors can purchase Vanguard mutual funds at Questrade and Qtrade.

*Note: Questrade charges $9.95 per mutual fund trade, while Qtrade offers commission-free mutual fund trades.

Q: I’m a big fan of low-cost investing through passively managed ETFs. In fact, I invest my own money in Vanguard’s All-Equity ETF (VEQT). How should passive investors think about Vanguard’s actively managed mutual fund line-up?

A: First of all, asset allocation ETFs are a great starting point (and in some cases a great end point) for many investors. We’re seeing a lot more active-passive investing combos, where investors who are comfortable with more risk are looking to low-cost active funds for diversification and to minimize dispersion of returns.

Vanguard brought its flagship products, best in-class managers, and size & scale to Canada at institutional pricing, and we feel this shows up in the growth and performance of these four funds.

Vanguard is one of the largest active managers in the world, with a strong belief that active and passive/index-tracking funds can play a critical role in a well-diversified investment portfolio. Globally, Vanguard manages over $2.1 trillion CAD in active funds. To put that in perspective, it is more than the entire Mutual Fund industry’s assets in Canada. In the U.S., Vanguard’s active investments were ranked #1 for 10 year- and for 5-year returns, according to Barron’s.

Q: I have to ask, is Vanguard looking to expand its mutual fund line-up in Canada? We have a global balanced, a global dividend fund, a US value fund, and an international growth fund. Any plans to add a Canadian equity fund or a bond fund?

A: We are definitely looking to expand the line-up but all I can say right now is to stay tuned.

Final thoughts

Canadians pay some of the highest mutual fund fees in the world, so it’s great to see Vanguard entering the mutual fund space and having success.

I’d love to see Vanguard expand its mutual fund line-up and take a bigger bite out of the $1.9 trillion that Canadians have invested in predominantly actively managed mutual funds. Bringing the Vanguard effect to Canadian mutual funds would be amazing for investors.

Meanwhile, fee-based clients can encourage their advisors to add the Vanguard mutual funds to their platform, and DIY investors using the Questrade or Qtrade platforms can trade the Vanguard mutual funds directly.

While the overwhelming odds are in favour of passive investors over the long term, active investors can improve their chances of success by following Vanguard’s formula of low costs, patience, and conviction in the process.