The race to the bottom continues as Vanguard Canada recently lowered the fees on 11 of their ETFs.  The cost that investors will pay to construct a balanced portfolio of Vanguard ETFs is now just 0.13% (the same cost as a similar portfolio from iShares, and slightly cheaper than one from BMO).

iShares and BMO have also taken action to improve the tax-efficiency of their international equity ETFs by holding the underlying securities directly, while Vanguard continues to use a less tax-efficient “wrap” structure (choosing to hold US-domiciled ETFs instead).  This structure leads to an additional layer of non-recoverable foreign withholding tax (for more information, please refer to our white paper, Foreign Withholding Taxes).

In the chart below, I’ve constructed balanced portfolios from the three companies and estimated their total costs (including foreign withholding taxes).  The costs have been calculated separately for RRSP/TFSA accounts and taxable accounts.  The results indicate that the iShares portfolio is still slightly cheaper in both cases by about 0.04%, although I would call this a draw.  Canadian investors will be paying low costs no matter which plain-vanilla ETF they choose.

Estimated Total Cost of a Balanced ETF Portfolio*

Security

MER FWT Level I FWT Level II Total Cost RRSP/TFSA Total Cost Taxable
Vanguard Canadian Aggregate Bond Index ETF (VAB) 0.14% 0.14% 0.14%
Vanguard FTSE Canada All Cap Index ETF (VCN) 0.06% 0.06% 0.06%
Vanguard S&P 500 ETF (VFV) 0.09% 0.29% 0.38% 0.09%
Vanguard FTSE Developed ex North America Index ETF (VDU) 0.23% 0.18% 0.39% 0.80% 0.41%
Weighted Average Cost 0.13% 0.30% 0.17%
BMO Aggregate Bond Index ETF (ZAG) 0.23% 0.23% 0.23%
BMO S&P/TSX Capped Composite Index ETF (ZCN) 0.06% 0.06% 0.06%
BMO S&P 500 Index ETF (ZSP) 0.11% 0.30% 0.41% 0.11%
BMO MSCI EAFE Index ETF (ZEA) 0.23% 0.33% 0.56% 0.23%
Weighted Average Cost 0.17% 0.30% 0.17%
iShares Core High Quality Canadian Bond Index ETF (XQB) 0.14% 0.14% 0.14%
iShares Core S&P/TSX Capped Composite Index ETF (XIC) 0.06% 0.06% 0.06%
iShares Core S&P 500 Index ETF (XUS) 0.11% 0.29%
iShares Core MSCI EAFE IMI Index ETF (XEF) 0.23% 0.33% 0.55% 0.23%
Weighted Average Cost 0.13% 0.26% 0.13%

*  Balanced ETF Portfolio is comprised of 40% Canadian bonds, 20% Canadian stocks, 20% U.S. stocks and 20% international stocks.

Sources:  BlackRock, BMO ETFs, TD Mutual Funds, Vanguard

 

Assumptions

Index Expense Ratio (US) Index Dividend Yield Level I Tax Rate Level II Tax Rate
Vanguard S&P 500 ETF (VFV) 0.05% 2.0% 15.0%
BMO S&P 500 Index ETF (VSP) 2.0% 15.0%
iShares Core S&P 500 Index ETF (XUS) 0.07% 2.0% 15.0%
Vanguard FTSE Developed ex North America Index ETF (VDU) 0.09% 2.9% 6.4%1 15.0%
BMO MSCI EAFE Index ETF (ZEA) 3.1% 10.9%2
iShares Core MSCI EAFE IMI Index ETF (XEF) 3.0% 10.9%2

The 2013 annual foreign withholding tax rate paid by the Vanguard FTSE Developed Markets ETF (VEA)

The 2013 annual foreign withholding tax rate paid by the TD International Index Fund e-Series (TDB911)