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Vanguard poised to set off ETF price war

INVESTMENT FUNDS REPORTER

Vanguard Group Inc., the world's largest mutual fund company, is poised to open shop in Canada, where it is expected to set off a price war in this country's burgeoning ETF industry.

The U.S. firm, founded by index-investing champion John Bogle, is known for offering rock-bottom fees. It plans to roll out a series of exchange-traded funds in Canada by the end of the year, industry sources say.

ETFs are investment funds that trade on stock exchanges, and have recently been one of the fastest growing areas of the investment business.

Vanguard spokeswoman Rebecca Katz would not confirm or deny the firm's expansion plans, saying that "we've been exploring our options in the Canadian market, and will soon have some news to share."

The company oversees nearly $1.7-trillion (U.S.) in mutual fund and ETF assets in the United States. BlackRock Inc., known for its iShares brand, and State Street Corp., known for its SPDRs, are larger in terms of assets, but Vanguard surpassed both in ETF net sales for the first time last year when it pulled in $40.4-billion.

Investors can expect a "price war" when Vanguard comes here, predicted Dan Hallett, a fund analyst with HighView Financial Group. "They have a really strong brand. ... it's going to be a challenge for some of the players in Canada."

Canada's $41-billion (Canadian) ETF business is dominated by BlackRock's Canadian unit, which has 71 per cent of the market. It is followed by Claymore Investments Inc., BetaPro Management Inc. and Bank of Montreal, according to research firm Investor Economics.

"Vanguard is more than just another ETF provider coming to the [Canadian] market," said John Gabriel, an ETF strategist with Morningstar Inc. "It is really going to put pressure on the entire industry - both mutual funds and ETFs - to lower fees."

Fees on Vanguard's equity ETFs are about 60 per cent lower than iShares equity ETFs sold in the United States, said Mr. Gabriel, who expects the company's Canadian offerings to consist of "plain vanilla" ETFs that track broad market indexes.

The foray into Canada is part of Vanguard's aggressive strategy to expand globally. The company, which began listing its ETFs in Australia in 2009, also plans a rollout in Europe later this year.

More players are jumping into the ETF market in Canada after seeing the industry grow nearly 27 per cent annually over the past five years, said Howard Atkinson, chairman of the recently created Canadian ETF Association and president of BetaPro.

"Vanguard is a formidable competitor" and will be most challenging to players like BlackRock and BMO, whose funds track similar kinds of indexes, he said.

Oliver McMahon, director of product management for iShares ETFs in Canada, said new entrants need to pitch their products at lower fees to gain attention, but added that he doesn't expect his firm's ETFs will have to cut fees to be competitive.

"We have largely pioneered the industry, not just in Canada, but across the world, and continue to bring out innovative products," he said.

Toronto-based XTF Capital Corp., a unit of First Asset Investment Management Inc., became the latest player to enter into the Canadian ETF market with two offerings last week. And mutual fund company Invesco Trimark Ltd., which is affiliated with U.S.-based ETF provider Invesco PowerShares, has filed with Canadian regulators to launch six PowerShares-branded ETFs.

Yen To, a spokeswoman for RBC Global Asset Management, said that Royal Bank's fund unit is also exploring whether to enter the ETF arena. "ETFs have certainly gained in popularity, and we have been monitoring this space for some time," she said.

Claymore Investments chief executive officer Som Seif expects more ETF players will enter the Canadian market, but warns that only those with unique offerings will succeed.

"If you are bringing in value, whether it is the case of Vanguard bringing lower-cost exposure, or access to an asset class or strategy that was not available, then it is fantastic," he said. "Otherwise, I think there are going to be a lot of casualties."

One sign of Vanguard's price advantage is that Claymore's Broad Emerging Markets ETF, which is sold in Canada, invests in the U.S.-listed Vanguard emerging markets ETF, because it costs less than buying the securities in the index.

"If a competitor is putting [a Vanguard ETF] in their product ... it just speaks to ... how cheap [Vanguard products] can be," Morningstar's Mr. Gabriel said.

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COMPANY SNAPSHOT

History: Founded in 1975 by John Bogle. Vanguard is owned by clients of its mutual funds and ETFs, which are run at cost.

Offerings: Introduced index mutual funds in 1976. It also sells actively managed funds, and began rolling out ETFs in 2001.

Total ETF assets: $173-billion (U.S.) in the U.S. and Australia.

Number of U.S.-listed ETFs: 64

Biggest U.S.-listed ETFS: Vanguard MSCI Emerging Markets ETF; Vanguard Total Stock Market ETF and Vanguard Total Bond Market ETF.

© 2007 The Globe and Mail. All rights reserved.

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