The wait is over: New ETFs from Vanguard

“Ask and ye shall receive.” That should be the refrain of Couch Potato investors during the last 10 months or so as the industry has filled just about all the gaps in the ETF marketplace.



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“Ask and ye shall receive.” That should be the refrain of Couch Potato investors during the last 10 months or so as the industry has filled just about all the gaps in the ETF marketplace.

First it was the flurry of S&P 500 ETFs without currency hedging: Vanguard, BMO, iShares and Horizons have all launched one since October. Then iShares brought out a pair of broadly diversified international equity ETFs, also without the hedging. Now Vanguard Canada has announced a new suite of ETFs that includes a few we’ve been eagerly awaiting.

Vanguard filed the preliminary prospectus for these new ETFs on June 19, and since new products typically appear about 90 days later, at least some should start trading by the end of summer.

First there’s the long-awaited Vanguard U.S. Total Market, an unhedged version of VUS. Its underlying holding will be the US-listed version of this fund, the Vanguard Total Stock Market (VTI), a core piece of my Complete Couch Potato.

While the fees for the new ETFs haven’t been announced, it’s likely this new fund will have the same 0.17% MER as the unhedged version. While VTI costs just 0.05%, investors with non-registered accounts may be better off paying the extra 12 basis points to save the expense and hassle of converting their loonies to US dollars. However, VTI would be more tax-efficient in an RRSP, since it is exempt from US withholding taxes on dividends, while the Canadian version won’t be. Based on a yield of 2%, the withholding tax amounts to an added cost of 0.30%.

Next up is the Vanguard FTSE Canada All Cap. The Vanguard FTSE Canada (VCE) includes just 85 holdings and is dominated by large-cap stocks, but the new ETF will track an index covering large, mid and small caps. A source at Vanguard explained this new FTSE benchmark is still in development, but it should be made public next month. For what it’s worth, the MSCI Canada Investable Market Index, which has the same all-cap mandate, includes 329 stocks.

Foreign content

Vanguard will also launch the first ETFs for Canadians who want to invest in US and international government bonds with currency hedging. The Vanguard U.S. Aggregate Bond (CAD-hedged) will hold the US-listed Vanguard Total Bond Market (BND), while the Vanguard Global ex-U.S. Aggregate Bond (CAD-hedged) will hold the brand new Vanguard Total International Bond ETF (BNDX), which is designed for American investors and therefore hedged to the US dollar.

I don’t see these asset classes as core holdings for the average investor, but they might play a role if your portfolio is mostly fixed income. A conservative investor who holds 60% to 70% in bonds, for example, may be able to lower volatility by including a some U.S. and international exposure, since interest rates in various countries do not move in lockstep. (An international bond fund was actually one of the ETFs on my wish list earlier this year.)

As I’ve written about before, I recommend avoiding currency hedging with equities, but it’s a good idea for foreign fixed income. Bonds prices fluctuate less than currency movements, so if you don’t use hedging you will actually increase the volatility of your portfolio without increasing your expected return. That’s the precise opposite of what you want to do when you add a new asset class to the mix.

Rounding out the new lineup

The new tranche of ETFs will include a few other useful funds. The Vanguard FTSE Developed ex North America will be an unhedged version of VEF. This one is also long overdue, but the new iShares MSCI EAFE IMI (XEF) is cheaper and more broadly diversified.

Dividend junkies will be pleased to see the Vanguard U.S. Dividend Appreciation, which will have versions with and without currency hedging. These ETFs will hold the US-listed Vanguard Dividend Appreciation (VIG), which focuses on about 140 companies with a record of increasing payouts. iShares and First Asset already offer US dividend ETFs, but both have fewer holdings and hedge the currency.

Kudos to Vanguard Canada for an excellent new offering. As I see it, there’s only more hole in the marketplace: an unhedged TSX-listed version of the Vanguard Total International Stock (VXUS). Maybe next year?

3 comments on “The wait is over: New ETFs from Vanguard

  1. The listing are so important for clients to really know the latest in the real estate industry and to make major changes in the investments.


  2. Hi,

    You did not post the Ticker symbol for the unhedged version of VEF, and it is not listed on the vanguard canada website. Do you know if it will appear soon? Also, IShares does not list the actual MER for XEF, which is different from total annual fee that it lists. Do you have more info on this? Thank you for the relevant article.


  3. Please disregard my comment above regarding the ticker symbol for the unhedged version of VEF. I understand that the new ETFs are not yet introduced to the market.


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