Yesterday, I was helping out somebody who was looking to invest in REITs. I’d personally just pick one or two that I liked and go with them, but for a lot of people who don’t have the ability to pick individual stocks, an ETF is the obvious choice.

So I did a quick comparison of Canada’s only two REIT ETFs, ones issued by Vanguard and iShares. Let’s put the results in a table, because we all know how unreasonably excited I get about making basic web graphics.

Attribute Vanguard (VRE) iShares (XRE)
Market Cap $40.3M $1.29B
MER 0.39% 0.60%
Distribution (last year) 58.05 cents 79.11 cents
Yield 2.2% 4.87%
DRIP Yes Yes
Price $27.00 $16.62
Net Asset Value $26.98 $16.62
Number of holdings 18 15
Largest holding Riocan (18.4%) Riocan (19.9%)

Astute readers can already figure out what I’m going to focus on. They’re virtually identical, except for two really important things – the management fees and yields. Vanguard’s fees are a full third cheaper than iShares’, but get absolutely creamed on the yield. How does Vanguard’s product only have a 2.2% yield? The holdings for these two funds aren’t identical, but are close enough that it shouldn’t make much of a difference.

I asked the question on Twitter, but wasn’t really expecting a response. It was Sunday morning of a long weekend, and most of you have lives and friends, two things that are foreign and weird to me. But I got a response. Andrew from Avrex Money pointed me towards this, from an investing forum:

Screen Shot 2014-05-18 at 11.34.05 AM

(Click to embiggen)

Nice to see Andrew has no life too. Geez Andrew. Go outside or something.

For those of you who don’t read investing or corporate BS, what Vanguard is doing is taking some of the dividends it would normally pay back to investors and use them to create more units in the fund. This means the net asset value of the fund is going up at the same pace as the value of the dividends plus the capital gains of the underlying stocks.

Essentially, Vanguard is forcing investors to take their distributions in the form of more shares.

(Edit: It has more to do the growth of the fund than anything. It’s like the fund is growing so quickly that the yield can’t catch up. As money enters the fund, more units are created faster than the underlying shares can pay dividends)

For people under 40, this isn’t such a big deal. But what about people who buy REITs for retirement income? Or say you only want 5% of your portfolio in REITs, and you’re looking to invest your dividends into some other sector? You’d have to sell the additional shares (which is really cheap if you use Questrade, FYI, sign up now) to free up the dividends.

We’ve already established there isn’t any difference between doing that and getting dividends the old fashioned way, but the fact remains most investors don’t want to sell a few shares a year to get their dividends, even if it’s really easy and costs next to nothing. Vanguard is interested in growing their fund and is willing to inconvenience individual investors to do so. It’s a puzzling move for a company that says it’s all about the needs of individual investors.

It’s like this for more of Vanguard’s funds too. Vanguard’s bond fund yields 3.06%. The equivalent fund from iShares yields 3.22%. The expense ratio difference in these funds is just 10 basis points.

There’s a bigger difference between the two company’s offerings in the Canadian dividend space – including tracking different benchmarks – but Vanguard’s dividend is just 2.68%, much lower than iShares 3.99%. Again, different funds, but the iShares investor looking for yield does much better. It’s hard to compare apples to apples when the funds are different.

But still, for dividend focused investors, Vanguard is consistently a poorer choice than iShares.

Before Andrew pointed me towards the answer, I figured I’d contact Vanguard and see if they could explain it to me. I went to the website and poked around. And then poked around a little more. And a little more. Finally, after going from the individual investor part of the site to the financial advisor part of the site, I found some email addresses for Vanguard’s sales force.

There was no place where an individual investor could email Vanguard Canada with questions. That’s terrible service. It’s almost like it’s an intentional slight to the retail investor. Yes, I realize retail investors can be a pain in the ass, but the fact remains they are the backbone of Vanguard’s entire business. Vanguard Canada’s funds don’t have the liquidity to attract anybody but the retail crowd.

The bottom line? Vanguard Canada gives investors lower fees, but doesn’t have nearly the customer service, choice of funds, or dividend yields that iShares is offering. It’s simple – many investors would be better off to go with iShares and its bigger fees. They’re worth it.

Edit: A response, from David Hoffman, who is in charge of public relations for Vanguard.

Hi Nelson, 

I just read your post about Vanguard’s ETFs.  First, I’d like to explain why there’s no contact info for retail investors.  Because of the way in which we are registered in Canada, Vanguard can only make its ETFs available through investment advisors or directly through brokerages.  At the moment, we are prohibited from dealing directly with individual investors. 

Second, at Vanguard our goal is to give investors the best opportunity to achieve investing success.  All our products are designed with this in mind.  I would suggest you take a look at the following article to get a better understanding of the issues surrounding VRE:


Fair enough, except there was nothing on the website that said this. A disclosure somewhere on the retail side of the website would be helpful for investors, I think.

As for David’s second point, I still say that Vanguard’s ETFs are consistently a poor choice for income investors, especially VRE. But feel free to check out the Couch Potato post.


Tell everyone, yo!