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By John Gabriel and Ashley Redmond | 06-12-2013 12:00 AM

How Vanguard is faring in the Canadian market

ETF Analyst John Gabriel says Vanguard doesn't have the brand recognition in Canada, however from an asset gathering stand point the products are doing well.

Ashley Redmond: We’re here at the Morningstar Investment Conference in Chicago, and so far so good. We’re on day two, and I’m sitting here with John Gabriel, our ETF specialist in Canada. So, John, thanks for joining me.

John Gabriel: It’s great to be here.

Redmond: So, this morning we both attended John Bogle’s session. He was the keynote speaker this morning, opened the day up, and I was really surprised about how candid he was. Were you surprised by this?

Gabriel: No, not really. I mean anyone who has seen Jack Bogle speak, knows he is not one to mince his words, and he is not shy about his opinion and he is willing to be vocal. And one of the things he did say was that you have to stand for what you stand for and that came across very clearly today.

Redmond: Yeah, and he actually also pointed out that him and Vanguard quite frequently don’t see eye to eye.

Gabriel: Right, that’s true. I mean he is widely – I mean he is the creator of Vanguard, and a lot of people still associate him with that, but he did step away in 2000, and since he started the John C. Bogle Foundation. But because he is not necessarily tied to them, I mean he – and like we said, he speaks his mind and he won’t be shy about what he feels. There are several instances where they are on opposite sides, but that’s one of the things you've got to love about John Bogle.

Redmond: Yeah, that was really great. So, now it's 2013. Vanguard is in Canada, and the Canadian marketplace – they have 11 ETFs right now. So, how are they doing?

Gabriel: They’re doing very well. I mean it’s what you would expect from Vanguard. It’s a suite of low-cost, high-quality index-based products, and there is really nothing fancy about it. It’s market capitalization weighted, very broad-based, and the way to think about the products themselves, they’re really just portfolio building blocks. So, you can build a global diversified portfolio with 11 suites. So, 11 doesn’t sound like a high number, but it’s plenty to get started. And Vanguard in Canada doesn’t quite have the brand recognition that it does in the U.S, but the products from an asset gathering standpoint have done pretty well, several hundred million dollars, and I think the momentum is just getting started as it is with ETFs in general in Canada.

Redmond: Yeah, because with the ETF space in Canada we have iShares and then we have BMO and then we sort of have everyone else. So, do you think Vanguard has done a good job so far or is it too early to tell since most of the products are still under a year old?

Gabriel: Yeah, I mean it is a little early to tell. I think the original launch with the six ETFs they came with was November 2011, but then yes, since they've followed on they're – it is a little early. Some people had been a little bit disappointed that they haven’t been more vocal or taken more of a public stance to get the message out, the Vanguard message. But I think it’s very Vanguard-like and their very calculated approach. They’re really not in a rush, they’re committed to Canada, and so they’re here for the long haul, and I think that shows in their strategy. But one thing that I was really excited about, I think, a lot of people in the industry were excited about when Vanguard comes is that it kind of raises the bar for everyone else. I mean you can tell the other competitors in the space in the fund industry in general are very aware that Vanguard is now in Canada, and it has kind of put them on notice, people are considering fees and the quality of products, and you know you have – now that Vanguard is in, everyone kind of has to raise their game a little bit.

Redmond: Yeah, it will be interesting to see what happens over the next couple of years.

Gabriel: Right.

Redmond: And I'm sure a lot of the investors watching they'll want to know what are some of the ETFs that you like that Vanguard has in Canada right now?

Gabriel: Right. So I think really depending on the holes in your portfolio and the asset exposure that you're looking for, I think there is something there for Vanguard. Personally one ETF that stands out to me is their U.S. equity product. The ticker is VUS, and for 15 basis points you get Canadian dollar hedged exposure to the U.S. equity market. The thing I like about it is it's over 3,300 stocks, so it's really the definition of indexing. I mean you're owning the entire U.S. market. So a lot of people will look at for their equity exposure the S&P 500 or something, the top 500. Here you have 3,300, and what that means is you're getting not only large-cap exposure, but you go to a mid-cap, small-cap and even microcap exposure. So it's really one-stop-shop for your U.S. equity exposure, and in Canada a lot of people have started to realize that they may be overexposed to their domestic equities, Canadian equities, which is natural, the home country bias, but for those looking to get some more U.S. equity exposure, I think VUS is an excellent option.

Redmond: Thanks so much John.

Gabriel: Thank you. Glad to be here.

Redmond: To get more conference coverage, go to www.morningstar.com or www.morningstar.ca.

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