A note: in honor of Jack Bogle, as well as to simplify things for myself and give a better estimation of returns in $CAD for Canadians, I replaced some of the international indices with TSX-listed Vanguard ETFs.

Well, looks like January - predictably - proved once again the old adage that "the stock market is a giant distraction to the business of investing". There isn't even really a point in devoting much space here to what the markets did, because they do what they've always done: they generally trend upward, occasionally take a break, cause a bunch of pointless panic (which always passes after stock ownership passes from speculators and trader to investors), then resume their march upward.


The quote above comes from one of the investing greats, John C Bogle, whom the world lost on January 16th. I don't know if "investing greats" is an official category of people, but I have no doubt that in the long run Bogle will be remembered alongside other greats, like Benjamin Graham, so he belongs right up there. 


If you're not familiar with who Jack Bogle, the founder of Vanguard, was I direct you to Barry Ritholtz's recent "Masters of Business" podcast, where he did a replay of an interview he did with Bogle in 2016. This interview was so good I had to listen to it twice! Not only will you learn his history, you really get a glimpse into the type of person it takes to go against convention in the investment industry, propose the concept of an "index fund", sort of fail at it, but still go on to build what would become the biggest money manager in the world. 



Rather than wax on about Bogle and repeat what countless others in the industry have written over the past weeks, let's take a look at what Bogle has meant for investors in Canada by way the changes Vanguard Canada has brought to the investment industry here. Now, to be objective here I'm not going to talk about the advantage of a Vanguard ETF versus the equivalent iShares ETF, nor speak to the virtues of any of their factor-based ETFs or active mutual funds; rather I will speak only to one thing that Vanguard is known for: pricing.


To the average Canadian, Vanguard is an ETF (Exchange Traded Fund) company, as that's what they started offering here in 2011; only recently in 2018 did they start to offer mutual funds. For indexers or so-called "couch potato investors", ETFs are the way to go in Canada, and mutual funds, in fact, have gained a negative reputation in those circles. It might surprise those people to know that Vanguard is primarily a mutual fund company in the U.S., and it's the index mutual fund that Bogle invented, not the ETF. 


It may even shock those people in the Canadian indexing community to learn that Bogle, in fact, had a disdain for ETFs - calling them "bastardized versions of index mutual funds" borne out of his experiences witnessing and comparing fund flows between Vanguard index mutual funds with their equivalent ETF. What he observed among fund flows was that index mutual funds were typically held longer than ETFs, thus ETFs were facilitating bad investor behavior and speculation.


Introducing TSX-listed ETFs may have been Vanguard's easiest way of cracking into the Canadian market for investment funds, a market that was plagued by sky-high management fees all around. At the time there were very few players in the ETF space. If you wanted a Canadian-listed ETF that tracks the S&P 500, your only choice back then was iShares' XSP with an MER of 0.24% (source: 2011 financial report off SEDAR). BMO, Canada's second largest ETF provider today after iShares, was not yet playing in the ETF pool and another player, Claymore ETFs, was just in the process of being swallowed up by iShares.


In 2012 Vanguard incepted VFV (Vanguard S&P500) with an MER of 0.17%. BMO also entered the market with ZSP around the same time with a similar MER. In the years since, Vanguard has continuously led prices lower, and you can now purchase VFV with an MER of 0.08%, ZSP at 0.09% or the CAD-hedged XSP at 0.11%. What happened to pricing has been coined "the Vanguard Effect". 


Vanguard entered the factor-based ETF realm a few years ago, also pricing well below most other factor-based ETFs. When everyone else was in the 0.50% to 0.70% range, Vanguard started at 0.40%. More recently Vanguard incepted their balanced portfolio ETFs with MERs of 0.25%. The equivalent portfolios from iShares show trailing MERs in the 0.75% range, though it appears they have lowered their underlying management fees to 0.25% since the inception of Vanguard's products.



In the mutual fund space, Vanguard debuted 4 actively managed products last year with management fees capped at 0.50%, while their lowest fee competitors are at best in the 0.80% range, the vast majority well above 1%.


One area of the Canadian markets not yet upended by Vanguard is where Jack Bogle started it all: index mutual funds. While we have plenty of index ETFs available to us now, it would be nice if we had truly low-cost index mutual funds, as they do in the U.S., where Fidelity now offers them at 0% MERs (out-Vanguarding Vanguard!) and other players are competing at two decimal point rounding errors close to 0%. Mutual funds are easier for small investors to get into and set up monthly contributions. Here in Canada, the lowest cost index mutual funds I can find (using S&P 500 index funds to compare apples to apples) are TD's e-series fund at 0.35% or RBC's f-class U.S. index fund at 0.33%. Nothing close to what's available in the U.S.


Anyway, to sum it up, I think we Canadians know we have some of the highest-costing investment funds in the world. In the past decade those fees have actually gone down pretty substantially; actively managed equity funds are available at under 1%, where they used to all be well over 1%, and more and more of investor's assets are shifting away from commission-laden funds with MERs well north of 2.5% to lower costing product. We Canadians probably can be more thankful for Jack Bogle than anyone else.


Further reading:


Tweets and Articles for January


Whenever I read something good, I tweet it out from @CGWM_Muhs. Follow me on Twitter if you want live updates of what I'm reading. For those who don't have the time for Twitter, a short list of some of the best stuff I read below.


More Stuff


RBC Global Asset Management's One Minute Market Update for New Year 2019 CLICK HERE

RBCGAM's One Minute Market Update is a short quarterly overview of the markets. What I especially like is their "Fair value range" charts on the right side, taking very long term views of various markets and where stocks are trading relative to long-term fair value.


JP Morgan's latest Guide to the Markets CLICK HERE

This 60+ page slideshow is chock full of charts, facts and figures, that give you pretty much everything about everything you could possibly want to know about the economy and markets. Want to know how U.S. stock valuations compare either historically or with the rest of the world? Want to know how much the U.S. government is borrowing? You'll find it all here.

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