Vanguard Canada ETF changes

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Vanguard Canada ETF changes

Post by Peculiar_Investor » 02 Jun 2015 10:12

More fees being cut as part of the announcement that Vanguard Investments Canada Inc. | Six Vanguard TSX-Listed International Equity ETFs To Broaden Diversification With All-Cap Exposure.
Vanguard Canada wrote:Management fee reductions to 0.20% from 0.23% for the Vanguard FTSE Developed Europe Index ETF and Vanguard FTSE Developed Asia Pacific Index ETF became effective June 1, 2015.
Of course the big part of the announcement is about adding exposure to China-A shares to a number of funds
The firm is proposing to broaden the diversification of six Vanguard TSX-listed international equity index ETFs and move them to all-capitalization benchmarks. The proposed changes, which would occur over several months, will also give Vanguard FTSE Emerging Markets Index ETF and Vanguard FTSE All-World ex Canada Index ETF exposure to China A-shares. Currently, no similar broad-based TSX-listed index ETFs offer access to these shares.

These proposed changes are subject to receipt of all required unitholder approvals, and follow closely index changes to the U.S.-listed Vanguard ETFs in which the six Vanguard TSX-listed ETFs invest.
The changes have been discussed on Bogleheads, see FTSE Emerging Markets Index adds China A shares if you are interested.

For those holding VEA and/or VDU for international equity exposure, there is another impact
Additionally, Vanguard FTSE Developed ex North America Index ETF and Vanguard FTSE Developed ex North America Index ETF (CAD-hedged) will now offer all-cap exposure to developed markets excluding only the U.S., and will be renamed accordingly. The new target benchmark for the two ETFs will include Canada as an 8% weighting.
Not sure this is positive news for Canadian investors.
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Re: Vanguard Canada ETF changes

Post by longinvest » 02 Jun 2015 10:23

I just don't understand Vanguard's move to add Canada to VDU and VEF, and then create two new ETFs for Developed Markets ex-North America.
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VXC adding small caps!

Post by longinvest » 02 Jun 2015 10:25

Some good news for Vanguard FTSE All-World ex Canada Index ETF (VXC) investors:
https://www.vanguardcanada.ca/documents ... roaden.pdf
Exposure to small-caps will move investors in the TSX-listed ETFs closer to complete
global market-cap weightings and provide broader diversification. Small-cap stocks will account
for approximately 10% of each benchmark.
It seems that Vanguard is feeling the heat from iShares Core MSCI All Country World ex Canada Index ETF (XAW), launched a few months ago with small caps included in its benchmark.

Unfortunately, VXC's management fee is kept at 0.25%, higher than XAW's 0.20%.
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Re: VXC adding small caps!

Post by Koogie » 02 Jun 2015 10:43

longinvest wrote:It seems that Vanguard is feeling the heat from iShares Core MSCI All Country World ex Canada Index ETF (XAW), launched a few months ago with small caps included in its benchmark.
Unfortunately, VXC's management fee is kept at 0.25%, higher than XAW's 0.20%.
I don't think it is that. Isn't it just Vanguard Canada having to adjust to what Vanguard USA has already done because VXC, et al are just ETFs of ETFs ? This is just an announcement to relay the fact that the underlying US ETFs have changed composition so therefore VXC and the rest do as well by default ?

I'll be more excited when they get enough scale to change to a direct investment style.
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Re: VXC adding small caps!

Post by longinvest » 02 Jun 2015 11:10

Koogie wrote: I don't think it is that. Isn't it just Vanguard Canada having to adjust to what Vanguard USA has already done because VXC, et al are just ETFs of ETFs ? This is just an announcement to relay the fact that the underlying US ETFs have changed composition so therefore VXC and the rest do as well by default ?
I'm not so sure. Vanguard Canada started VXC using four US ETFs:
  • Vanguard Large-Cap ETF (VV)
  • Vanguard FTSE Europe ETF (VGK)
  • Vanguard FTSE Pacific ETF (VPL)
  • Vanguard FTSE Emerging Markets ETF (VWO)
Vanguard Canada could have used VTI (Vanguard Total Stock Market ETF) instead of VV, to provide exposure to U.S. small caps. The problem was probably to provide Europe and Pacific small caps exposure, thus the choice of a large and mid cap index.
Koogie wrote: I'll be more excited when they get enough scale to change to a direct investment style.
Yeah, that's the dream.
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Re: Vanguard Canada ETF changes

Post by Insomniac » 02 Jun 2015 12:07

Peculiar_Investor wrote: For those holding VEA and/or VDU for international equity exposure, there is another impact
Additionally, Vanguard FTSE Developed ex North America Index ETF and Vanguard FTSE Developed ex North America Index ETF (CAD-hedged) will now offer all-cap exposure to developed markets excluding only the U.S., and will be renamed accordingly. The new target benchmark for the two ETFs will include Canada as an 8% weighting.
Not sure this is positive news for Canadian investors.
I think you meant VEF instead of VEA? Personally, I hold VDU and am disappointed that they are adding Canada to the mix, but I don't think it's enough to change my asset allocation.

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Re: Vanguard Canada ETF changes

Post by ockham » 02 Jun 2015 16:48

longinvest wrote:I just don't understand Vanguard's move to add Canada to VDU and VEF, and then create two new ETFs for Developed Markets ex-North America.
I agree, this one is a puzzler. Add Canada to VDU but then create a new ETF that again excludes Canada?? Beats me. Anyway, I own VDU, and have zero interest in it having Canada exposure. Looks like I'll have a decision to make. Sell VDU for the new ETF? or, Sell VDU and VUN for VXC?? (I think I can tolerate the increased emerging market exposure this option would give).

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Re: Vanguard Canada ETF changes

Post by Cincinnatus » 02 Jun 2015 17:00

My interpretation is that Vanguard Canada is simply responding to the decision of the US mothership to convert VEA into a "total ex-US developed" fund. Since VDU uses VEA as its underlying, the fund's composition and geographic targeting are changed by default. Vanguard Canada's response is to establish new funds specifically for developed Ex-NA (a useful category for Canadian investors but of much less interest to those in the US). Now here is the interesting bit: these new Ex-NA funds are not being mirrored by similar funds at Vanguard USA (at least there is no mention of the creation of new funds in the US press release that mirrors that of Vanguard Canada). This means that it is possible that these EX-NA Vanguard Canada funds may not be wrappers of US-listed ETFs, which could wind up a boon for Canadian investors from a withholding tax perspective (at the cost of the annoyance of having to shift holdings).

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Re: Vanguard Canada ETF changes

Post by longinvest » 02 Jun 2015 19:15

Cincinnatus wrote:Now here is the interesting bit: these new Ex-NA funds are not being mirrored by similar funds at Vanguard USA (at least there is no mention of the creation of new funds in the US press release that mirrors that of Vanguard Canada). This means that it is possible that these EX-NA Vanguard Canada funds may not be wrappers of US-listed ETFs, which could wind up a boon for Canadian investors from a withholding tax perspective (at the cost of the annoyance of having to shift holdings).
Good catch!

But on second thought, there are U.S.-based building blocks:
  • Vanguard FTSE Pacific ETF (VPL)
  • Vanguard FTSE Europe ETF (VGK)
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Re: Vanguard Canada ETF changes

Post by Sumaco » 02 Jun 2015 19:24

Insomniac wrote:I think you meant VEF instead of VEA? Personally, I hold VDU and am disappointed that they are adding Canada to the mix, but I don't think it's enough to change my asset allocation.
I am disappointed also as I viewed this as my International exposure supplementing my individual NA stocks. I am considering a move but need to find something suitable to replace... sigh
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Re: Vanguard Canada ETF changes

Post by Insomniac » 02 Jun 2015 20:01

Sumaco wrote:
Insomniac wrote:I think you meant VEF instead of VEA? Personally, I hold VDU and am disappointed that they are adding Canada to the mix, but I don't think it's enough to change my asset allocation.
I am disappointed also as I viewed this as my International exposure supplementing my individual NA stocks. I am considering a move but need to find something suitable to replace... sigh
My target allocation for EAFE is 15% of my portfolio. If they make VDU 8% Canada, it only drops my allocation by 1.2% to 13.8%. I really don't think it's worth worrying about, but I suppose if I wanted to go nuts on it, I could sell some VCE and buy more VDU to balance it out.

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Re: Vanguard Canada ETF changes

Post by Lazy Ninja » 02 Jun 2015 20:09

I have no problem with the addition of small caps but really don't want the increased exposure to Canada through VEA. I'll consider replacing it with VGK and VPL. VEA is only about 5% of my portfolio so it's just an additional 0.4% in Canadian equity. On the other hand, I hold it in an RRSP where there will be no tax consequences to shifting, so it's a matter of $30 in trades and 3 basis points a year to hold VGK/VPL instead. Probably not a big deal either way....

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Re: Vanguard Canada ETF changes

Post by Peculiar_Investor » 03 Jun 2015 08:31

Insomniac wrote:
Peculiar_Investor wrote: For those holding VEA and/or VDU for international equity exposure, there is another impact
Additionally, Vanguard FTSE Developed ex North America Index ETF and Vanguard FTSE Developed ex North America Index ETF (CAD-hedged) will now offer all-cap exposure to developed markets excluding only the U.S., and will be renamed accordingly. The new target benchmark for the two ETFs will include Canada as an 8% weighting.
Not sure this is positive news for Canadian investors.
I think you meant VEF instead of VEA? Personally, I hold VDU and am disappointed that they are adding Canada to the mix, but I don't think it's enough to change my asset allocation.
The Vanguard press releases leave something to be desired in spelling out the exact details, including impacted ticker symbols. I've re-read them a couple of times and also found Vanguard Tinkers With Some International ETFs | ETF Trends which states
VEA will also Canadian stocks for the first time. The ETF currently allocates 22.5% to Japan and 19.3% to the U.K. VEA will have an 8.2% weight to Canada.
I've got holdings in both VEA and VDU as my international equity allocation. With this change I'm probably going to revisit how to implement my international equity allocation to reduce and/or eliminate the overlap. VEA has been a long-term holding, so there are capital gains considerations that will come into the decision making process.

I concur with the views of others that it would be very helpful for Vanguard Canada to implement their TSX listed ETFs as stand-alone funds rather than wrapping their US based ETFs. Maybe someday the economics be compelling enough for Vanguard Canada to change toward this direction.
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Re: Vanguard Canada ETF changes

Post by Shakespeare » 03 Jun 2015 09:04

The ETF currently allocates 22.5% to Japan and 19.3% to the U.K. VEA will have an 8.2% weight to Canada.
Selling in those circumstances is an overreaction. Minor weight adjustments are, on a portfolio basis, not significant. If you want to be anal about, say, "25% Canada", and are in accumulation, adjust what you buy. But the difference between 25% Canada and 28% Canada isn't worth worrying about.
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Re: Vanguard Canada ETF changes

Post by Peculiar_Investor » 03 Jun 2015 09:31

Shakespeare wrote:Minor weight adjustments are, on a portfolio basis, not significant.
I'm not concerned with the minor weight adjustments, but rather the significant change in the base index being used for VEA and hence VDU. It has moved from using MSCI EAFE as the underlying index to something very different.

I understood the rationale of reducing costs when Vanguard moved the underlying index from MSCI EAFE to the FTSE Developed ex North America Index. To me that is pretty close to apples to apples. But this latest announcement that brings a Canadian equity weight into VEA's (and VDU's) underlying index is a head scratcher to me.

Almost seems like "style drift" that generally gets criticized by the passive indexing crowd. Going forward I'm thinking that this will make comparing the ETF against the underlying index more complicated.
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Re: Vanguard Canada ETF changes

Post by Taggart » 03 Jun 2015 10:20

This is the part a don't understand:

"For investors seeking exposure to developed markets outside both Canada and the United States, we plan to introduce two new developed ex North America ETFs."

Why not just leave VDU the way it was and incorporate Canada into the two new ETF's?

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Re: Vanguard Canada ETF changes

Post by snowback96 » 03 Jun 2015 10:29

Personally, I hold the US versions of Vanguard funds but the impact is similar. I am annoyed by this. We go to great lengths to optimize our portfolios based on our individual situations and then they keep changing the underlying indices. Adding Canada to their international indices is no big deal (and likely positive) for a US investor, but it does impact a Canadian portfolio (even if it is objectively a relatively minor change).

The only reason I went with a combination of VEA and VWO for international was to avoid Canada (and keep it as a separate allocation). If I was okay with Canadian stocks tainting these funds, I would rather just have VXUS to simplify the portfolio (1 fund for international). Alternatively, I can trade VEA for VGK and VPL which would mean holding 3 funds for international (VGK, VPL, and VWO) and add complexity in order to maintain purity.

[Edited by author to delete inaccurate statement.]
Last edited by snowback96 on 03 Jun 2015 11:57, edited 1 time in total.

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Re: Vanguard Canada ETF changes

Post by Lazy Ninja » 03 Jun 2015 11:23

Shakespeare wrote:Selling in those circumstances is an overreaction.
Perhaps, and I likely wouldn't in a taxable account. The additional Canadian exposure is just a nudge in the wrong direction for me, as I'm already overweight Canada (which obviously isn't Vanguard's fault). In an RRSP though, there is no significant deterrent to making the switch. I'm considering reallocating my international exposure in a 40/20/20/20 split amongst VGK/VPL/VWO/VNQI and adding a few dollars in the process.

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Re: Vanguard Canada ETF changes

Post by longinvest » 03 Jun 2015 11:40

Taggart wrote:This is the part a don't understand:

"For investors seeking exposure to developed markets outside both Canada and the United States, we plan to introduce two new developed ex North America ETFs."

Why not just leave VDU the way it was and incorporate Canada into the two new ETF's?
I think that it is for tax efficiency reasons. As VEA, the U.S.-domiciled ETF wrapped by VDU and VEF, is changing its benchmark to include Canada, changing the benchmarks of VEF and VDU avoids having to (1) sell VEA, (2) buy VGK and VPL, and (3) distribute capital gains to unit holders in the process.

Creating two new ETFs that will invest in VGK and VPL (or their existing wrappers VE and VA) allows unit holders that are willing trigger capital gains to continue tracking an ex-NA benchmark. For those not willing to trigger capital gains, they can leave their old VDU/VEF investments in place but use the new ETFs for reinvesting distributions and new investments.
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Re: Vanguard Canada ETF changes

Post by ockham » 03 Jun 2015 11:46

Taggart wrote:This is the part a don't understand:

"For investors seeking exposure to developed markets outside both Canada and the United States, we plan to introduce two new developed ex North America ETFs."

Why not just leave VDU the way it was and incorporate Canada into the two new ETF's?
In a sense, Vanguard IS leaving VDU "the way it was". VDU's "way" is to hold VEA. Changes in VEA, like them or not, compel changes in VDU. The endgame here (istm) sees VDU eventually being absorbed into the new ETF or just withering on the vine.

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Re: Vanguard Canada ETF changes

Post by Bylo Selhi » 03 Jun 2015 11:58

I have a large position in VEU which is NY-listed, "FTSE All-World ex-US ETF seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world." I bought into it before the original version of VEA was introduced and way before Vanguard had any presence in Canada.

I presume it's not affected by the latest set of announcements. In any case I'm sitting on a huge unrealized capital gain so it would make no sense to sell and switch. So I suppose my "reward" for being a loyal early-adopter is to be stuck where I am. Anyone see a more viable alternative?
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Re: Vanguard Canada ETF changes

Post by Peculiar_Investor » 03 Jun 2015 12:24

Another parallel discussion -- Four Vanguard International Equity Index changing/broadening indexes - Bogleheads that may be helpful for those wondering about the impact to the underlying Vanguard US ETFs.
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Re: Vanguard Canada ETF changes

Post by snowback96 » 03 Jun 2015 12:55

Bylo Selhi wrote:I presume it's not affected by the latest set of announcements. In any case I'm sitting on a huge unrealized capital gain so it would make no sense to sell and switch. So I suppose my "reward" for being a loyal early-adopter is to be stuck where I am. Anyone see a more viable alternative?
I think your assessment is correct. There is really no change to this fund (yet). The only thing you are missing is the global small caps. Of course, given VG's movement towards all-cap funds, I suppose there is the potential that they will merge VEU into VXUS at some point in the future. Since that would be a tax-free reorganization, it's still not a problem.

As a matter of fact, I think you are lucky you are stuck in VEU. Other than the small caps (which you could add with VSS), you are positioned where many of us will be after all the dust has settled.

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Re: Vanguard Canada ETF changes

Post by ockham » 03 Jun 2015 13:28

Bylo Selhi wrote: So I suppose my "reward" for being a loyal early-adopter is to be stuck where I am.
Best not to dwell on this line of thinking for long. I hold VWO + VEA + VTI. If memory serves, these positions were started well before the advent of VXUS or VT. Starting over, if I could, I would for sure opt either for VXUS + VTI, or, more likely, embrace simplicity and just buy VT.

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Re: Vanguard Canada ETF changes

Post by AltaRed » 03 Jun 2015 13:42

ockham wrote:Best not to dwell on this line of thinking for long.
I agree. I have XWD that I bought when it first came out in 2009 to reduce potential US Estate Law exposure, well before better alternatives like VXC came along. It was most cost effective to get into XWD then when I could take advantage of depressed equity prices at the time and minimize cap gains taxes to consolidate much of my ex-Canada stuff. It has more than doubled since that time. I can only hope iShares will feel some heat from a close competitor VXC and reduce their MER. C'est la vie. No regrets.
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