Learn about

why costs matter

Investor education

Theres a real advantage to keeping your investment costs low: All else being
equal, a lower-cost investment provides a greater net return than a higher-cost
investment. This advantage becomes more pronounced over time. Use this
guide to understand how costs affect your long-term investment plan.

Typical costs MERs, which apply to both mutual funds and exchange-
traded funds (ETFs), incorporate management fees and
You incur costs with any investment. Knowing what you
operating expenses. Management fees, a subset of MERs,
pay is important because every dollar that you pay in fees
cover expenses such as portfolio management and fund
is a dollar less of potential return.
oversight. Operating expenses include administrative,
Three of the most notable investing costs are sales marketing and legal costs. Asset-weighted average MERs
charges, management expense ratios and trailer fees. industry-wide in Canada range from less than 1% to more
than 2.5% of a funds value. Investors dont pay MERs
Front-end sales charges, typically associated with mutual directly. Rather, MERs reduce a funds investment return.
funds, can amount to as much as 5% of your initial
investment. You can also incur costs when you sell a Trailer fees are annual commissions paid by a fund
fund, such as back-end and low-load sales charges. While company to an advisory firm to cover the costs of an
you may not pay these fees out-of-pocket, back-end and advisors services and expertise. Trailer fees are reflected
low-load sales charges are typically associated with higher in a funds management fee, so they drive up a funds
management expense ratios (MERs), and you might have MER and reduce investment returns.
to pay additional costs if you redeem assets before a
While all mutual funds and ETFs in Canada have MERs,
certain period of time after purchase. These fees go
not all have sales charges or trailer fees.
toward paying the advisor who recommended the
fund in question.
 How advisors are paid Some investors believe they can buy superior investment
performance through paying high fees for actively managed
Some advisors receive a commission based on the dollar
funds, through picking hot stocks, and through timing
value of clients transactions. A few receive a salary from
the market. But they fail to realize that investing is a
the bank or investment firm for which they work. Some
zero-sum game. All investors make up the market, so
are paid directly or indirectly by the asset management
every instance of outperformance is offset by an instance
companies whose products they purchase for clients.
of underperformance.
Some advisors are paid directly by investors like you,
When investment costs are then figured in, more
through either a flat fee or a percentage of an investors
investments will underperform than will outperform.
assets that they manage. Some are paid in a combination
Higher fees create greater performance hurdles.
of these ways.

At Vanguard, we believe in a fee-based model of advisor Low-cost investments in your portfolio

pay. With a fee-based model, investors know how much
Your advisor understands that you benefit by keeping costs
theyre paying. Advisors can focus on clients needs
low. So your advisor may recommend that low-cost ETFs
without having to generate income through transactions
that seek to track broad stock or bond indexes make up a
and payments from fund companies.
portion of your portfolio.

What your advisor will do As the illustrations on the next page suggest, the financial
benefits of low-cost index investments, even after you
The fee you pay directly to your advisor covers the
pay an advisors fee, can add up over time compared
advisors services and expertise, including financial and
with an investment in several types of mutual funds.
retirement planning, behavioural coaching, research and
portfolio construction, rebalancing and review. Your advisor
will in essence be your guide for your entire financial life. What Vanguard offers
Vanguard offers low-cost index ETFs built for the long
Your advisor knows that the biggest challenge you may
term that can serve as the core of your portfolio. Ask your
face as an investor is sticking with your carefully chosen
financial advisor about the benefits of including Vanguard
investment plan when the economic winds change.
ETFs among your investments.
Markets and market cycles are notoriously difficult to
predict. So your advisor will help you create a portfolio
intended to help you reach your long-term investment
goals. And your advisor will help you avoid the short-term
thinking that can be an investors worst enemy.

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Figure 1. L
 ow costs win out
The hypothetical examples below illustrate the ten-year growth of an initial $500,000 of investments in low-cost ETFs in a
fee-based advice model versus a fee-based account holding mutual funds in five different investment categories.

Fee-based with ETFs

Fee-based with several series of mutual funds

$900,000 Canadian fixed income $900,000 Canadian equity

785,448 790,719
Difference of $44,613
740,834 Difference of $94,228
696,490

500,000 500,000
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Years Years

$900,000 International equity $900,000 Global equity

778,717 783,947

Difference of $99,548 Difference of $94,833

679,169 689,114

500,000 500,000
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Years Years

$900,000 Emerging markets equity

777,228

Difference of $163,535

613,693

500,000
0 1 2 3 4 5 6 7 8 9 10
Years

Source: Strategic Insight Straight average management expense ratios (MERs) as of December 31, 2015 using data compiled from management reports of fund performance. The average MER for
index mutual funds includes only A-, ADV-, T-, F-, HNW- and D-series index index mutual funds and excludes ETFs, funds with performance fees, money market funds, funds with management fees
charged at account level. The hypothetical examples do not represent the return of any particular investment. All examples assume a 6% annual return of the underlying investments. Growth in
fee-based scenarios assumes a 1.25% advisors fee plus an ETFs MER. For the ETF MERs we used the following MERs of the Vanguard ETFs as of December 31, 2015: For Canadian equity, 0.06%,
Vanguard FTSE Canada Index ETF; for Canadian fixed income, 0.13%, Vanguard Canadian Aggregate Bond Index ETF; for emerging markets equity, 0.24%, Vanguard FTSE Emerging Markets All Cap
Index ETF; for global equity, 0.15%, average of MERs for Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) and Vanguard S&P 500 Index ETF (CAD-hedged); for international
equity, 0.22%, Vanguard FTSE Developed All Cap ex North America Index ETF. Growth in fee-based model assumes a 1.25% advisor fee plus the Morningstar category average MERs of 1.38% for
Canadian equity; 0.74% for Canadian fixed income; 2.68% for emerging markets equity; 1.49% for global equity; and 1.64% for international equity. The rate of return is used only to illustrate the
effects of the compound growth rate and is not intended to reflect future values of a Vanguard ETF or returns on investment in a Vanguard ETF. MERs for the Vanguard ETFs are as of December 31, 2015,
and are based upon actual audited expenses including waivers and absorptions. Without waivers and absorptions, MERs would have been higher. Vanguard Investments Canada Inc. expects to
continue absorbing or waiving certain fees indefinitely, but may, in its discretion, discontinue this practice at any time. For more detailed information visit, vanguardcanada.ca.

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 Vanguard Investments Canada Inc.

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Commissions, management fees, and expenses all While this information has been compiled from proprietary and non-
may be associated with investments in a Vanguard proprietary sources believed to be reliable, no representation or
ETF. Investment objectives, risks, fees, expenses, warranty, express or implied, is made by The Vanguard Group, Inc., its
and other important information are contained in the subsidiaries or affiliates, or any other person (collectively, The
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past performance may not be repeated. Vanguard and omissions contained herein and accepts no liability whatsoever
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Inc., an indirect wholly owned subsidiary of The
Information, figures and charts are summarized for illustrative
Vanguard Group, Inc., and are available across
purposes only and are subject to change without notice.
Canada through registered dealers.
This material does not constitute an offer or solicitation and may not
Date of publication: December 2016
be treated as an offer or solicitation in any jurisdiction where such an
This material is for informational purposes only. This material is not offer or solicitation is against the law, or to anyone to whom it is
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is not an implied or express recommendation, offer or solicitation to the offer or solicitation is not qualified to do so.
buy or sell any security or to adopt any particular investment or
All investments, including those that seek to track indexes, are subject
portfolio strategy. Any views and opinions expressed do not take into
to risk, including the possible loss of principal. Diversification does not
account the particular investment objectives, needs, restrictions and
ensure a profit or protect against a loss in a declining market. While
circumstances of a specific investor and, thus, should not be used as
ETFs are designed to be as diversified as the original indexes they
the basis of any specific investment recommendation. Please consult
seek to track and can provide greater diversification than an individual
your financial and/or tax advisor for financial and/or tax information
investor may achieve independently, any given ETF may not be a
applicable to your specific situation.
diversified investment.

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