Vanguard has made a formal announcement that they will be entering the Canadian investment market, but here are few details yet on what ETF or mutual fund products will be available.
This announcement is initially disappointing because “Vanguard’s initial focus in Canada will be to offer investment products to Canadian investors through investment advisors.” While some investors prefer to get advice from an investment advisor, many of us prefer to save the added cost and make our own choices. Vanguard’s offerings are unlikely to be of much interest to me until I can purchase ETFs directly on a stock exchange.
On the other hand, Vanguard’s U.S. products have been so beneficial to American investors that the prospect of having them do the same for Canada is very exciting. If I were an American, I would likely have all my long-term savings invested in a small number of Vanguard broad index ETFs.
Canadians can buy the American version of these ETFs, but this creates two potential problems: currency conversion costs and U.S. estate taxes. It is challenging for Canadians to invest in ETFs that are bought and sold in U.S. dollars without paying unreasonable fees for converting between U.S. and Canadian dollars. Knowledgeable investors can usually avoid the bulk of such costs with some inconvenience, but many investors simply pay the high currency-conversion costs.
Thoughtful readers might observe that currency conversion is inevitable when buying U.S. equities. If a U.S. stock ETF is bought and sold in Canadian dollars, then a conversion is needed before the fund buys U.S. stocks. However, Vanguard is much more able to convert currencies cheaply than I am.
Note that this currency conversion problem is unrelated to the currency hedging that is done in many ETFs that hold foreign investments. I won’t be interested in any Vanguard products that include currency hedging.
The second problem of U.S. estate taxes applies the larger portfolios. Beyond a certain threshold portfolio size, your estate may have to pay taxes in the U.S. The rules for U.S. estate taxes have changed a few times over the last couple of decades and it’s difficult to predict what will happen in the future. It’s also difficult for me to predict when I’ll die and how much money my estate will have. This makes planning for estate taxes tricky.
I’d be thrilled to have Vanguard bring their investor-friendly products to Canada in a way that do-it-yourself investors can buy directly. Hopefully, they will offer products that minimize currency conversion costs and minimize the likelihood of getting ensnared by U.S. estate taxes. An additional hope is that Vanguard will eventually make it possible for Canadian investors to invest in foreign assets much more cheaply than they can right now.