Keeping cost low is difficult even for Vanguard in the US. Most of their mutual funds require you to have either a 3k or 10k minimum per fund. Depending what kind of account you have with Vanguard US, you might be charged additional account fees. My discussion with other people is just easier for a lot of people to invest in ETFs instead.

In Canada, Questrade offers 4.95 trades and that work well with investing in ETFs as little as 1k (only 10CAD for a round trip commission). In the bank owned brokerages, it is possible to get 10 CAD trades, if you qualify the asset threshold or you have a lot of business with the bank. With 10 CAD trade, 2k minimum investment per ETF works well (20 CAD for a round trip commission). ETFs work well for self directed investors.

In terms of Canadian brokerages, I believe the paper work and administration cost is lower with stocks and ETFs than regular mutual funds. Even though the brokerage may wave the trade cost, the brokerage still make money from bid and ask spreads. So for fee based accounts, I see ETFs as the way to go, because F series have higher administration and no bid ask spread profit.

Vanguard’s ETFs in the states are actually a separate share class of their index funds. One of the ancillary benefits is that you can switch from the index funds to the ETFs if you desire without much in the way of penalties (or taxes, but I’m not 100% sure on that – used to know). The ETFs being a separate share class may just be an artefact of ETFs arriving later on the scene.

The F-class platform doesn’t exist across all dealers, so in Canada it generally means you offer loaded classes if you are going to offer F-class only. OR you offer A and B class with no embedded trailers and few dealers will promote them – there’s a tradeoff.

I think where vanguard would do well would be their actively managed funds (active management will never die), which also have their trademark low fees.

I think Vanguard launching ETFs in Canada is still a good idea. Regarding to launching index funds identical to the ETFs, that may or may not be a good idea. Launching a F series of index funds in Canada is compatible with Bogle’s vision. Once distribution fees or trailer commissions are incorporated, I think that contradicts Bogle’s vision. There are more costs involved and may not be extremely successful, since there is already competition from CIBC index funds with MER rebate.

I think what Vanguard can do in Canada is to launch Life Cycle Funds and Tactical Asset Allocation Funds. There are very limited number of competitors in both areas and it is an area where Vanguard’s low MERs can truly shine. Vanguard can charge .50 to .60 bps for these funds. These funds can be managed through Vanguard Quantitative department in the US. These funds can invest in Vanguard Canadian ETFs. As a result, Vanguard can generate revenue from both the mutual funds (.50 to .60 bps) and ETFs (.10 bps), while providing competitive and excellent product.

Am I thinking more like a business person?

Again, a great name for those who already know him, and unfortunately he is not young enough that we can’t consider longevity risk.

“Regarding to bank branches distributing ETFs, that is possible, but there needs to be two major changes.”

No – no changes needed. ING Direct is already doing it, or structuring it so that it can be done. Banks need only create mutual funds that hold ETFs to get around licensing issues – that too is already being done – look at the JOV Fiera portfolios.

“Will there be incentives for bank reps to offer ETFs to their customers? Most likely no.”

Many banks will offer proprietary funds with no trailers to the advisors, who are paid base salary plus bonus. Investment portfolios “in a can” can be peddled through the branch channels with high margins.

“As you know, the actively managed bond funds have a trailer fee of .5%, balanced funds have .75%, broad equity funds have 1.0%, and sector equity funds have 1.25%. If the present system of 1% MER bank index funds doesn’t work, why would an ETF with trailer fee system work unless both the bank and the bank reps are willing to take a cut?”

There are bond funds that pay 1%, and equity funds that pay 0.25%, trailing commissions are all over the place. An ETF with trailer fee doesn’t need to be created for branch distribution. All they have to do is bonus advisors on volume.

“By the way, do you know why Claymore and DFA came to Canada? Do you consider either one to be successfully established in Canada? Are either one profitable in Canada? Do you think Invesco will launch ETFs in Canada?”

Claymore and DFA came to make money. They are owned by shareholders, but not necessarily the clients. I believe they are both profitable. Invesco Trimark has portfolios (mutual fund of funds) with ETFs in them, but stand alone ETFs will probably launch once investor confidence is higher.

Thanks for your comments Henry, always a pleasure.

Regarding to making Vanguard’s name mainstream in Canada, I think that will be difficult but not possible. Vanguard does advertise in the US so I think it will be able to advertise in Canada using reasonable amount of resources. My original idea is that John Bogle can come to Canada and give investment seminars to create publicity for Vanguard.

Regarding to bank branches distributing ETFs, that is possible, but there needs to be two major changes. Regulation needs to change for bank reps who are under MFDA to allow them to sell ETFs. The banks have to create ETFs with trailer fees, which may or may not happen. Will there be incentives for bank reps to offer ETFs to their customers? Most likely no. Almost all banks except Royal Bank have a complete line of index funds that are offered through bank reps. Those index funds have a MER of 1% and a trailer fee of .25%. There is no incentive to tell the customer about the index funds, since the MERs are not that low and the trailer fee is low. As you know, the actively managed bond funds have a trailer fee of .5%, balanced funds have .75%, broad equity funds have 1.0%, and sector equity funds have 1.25%. If the present system of 1% MER bank index funds doesn’t work, why would an ETF with trailer fee system work unless both the bank and the bank reps are willing to take a cut?

By the way, do you know why Claymore and DFA came to Canada? Do you consider either one to be successfully established in Canada? Are either one profitable in Canada? Do you think Invesco will launch ETFs in Canada?