ETF fees in Canada are continuing to fall as providers compete for investors in an increasingly crowded market.
This week, Vanguard Investments Canada cut management fees on a dozen of its exchange-traded funds and mutual funds, including its all-in-one portfolios. The move marks the company’s seventh fee cut since launching its first suite of ETFs in 2011.
Vanguard’s All-Equity ETF Portfolio (VEQT), for instance, now has a reduced annual management fee of 0.17 per cent, down from 0.22 per cent. A comparable product, the iShares Core Equity ETF Portfolio (XEQT), has an annual management fee of 0.18 per cent.
When a company like Vanguard drops fees, it can have a ripple effect across the industry, financial experts say. Falling ETF costs can pressure competition among Canada’s biggest fund providers, leaving only a few basis points separating some of their products.
Each time Vanguard lowers costs, it encourages other providers to follow suit, says Jason Pereira, a financial planner at Toronto-based Woodgate Financial.
“So overall, it’s not just the fees that are going to save investors, it’s the fees that they’re going to force everybody else to pass along,” he said. In a commodity market, the lowest price wins; competitors want to be “toe-to-toe with the cheapest player in the game if they can be,” he said.
As ETF assets grow, asset managers are able to charge lower fees because they benefit from economies of scale, says Jason Heath, managing director at Objective Financial Partners. It doesn’t cost much for an asset manager to manage $9 billion assets versus $10 billion, he adds,
“It really is sort of a race to the bottom, and at some point, we will be close to zero, or zero for these fees,” he said.
Even with current fees, it’s almost free to invest in ETFs or near enough, he adds. As a result, investors can retain a larger portion of their return.
One reason Vanguard, in particular, is able to drop fees is because it operates at an at-cost model, Pereira said. Its parent company, the Vanguard Group, is owned by its funds, which in turn are owned by Vanguard’s fund shareholders. “They’re basically meant to run at sustainable levels, not trying to feed some large corporate bottom line,” Pereira said.
Despite lower fees, investors shouldn’t rush to switch ETFs, Pereira cautioned. Allocations between individual ETF products differ, so it’s not guaranteed you’ll get the same results, he said.
A few basis points also won’t dramatically change returns. One basis point, equivalent to 0.01 per cent, on $100,000 is $10 per year, Pereira said. That’s not going to make a meaningful difference over time unless you’re fortunate enough to have very large sums invested.