Q4 Q2. Vanguard Quarterly. A guide to our ETFs and model portfolios in Canada October 2017

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1 Vanguard Quarterly A guide to our ETFs and model portfolios in Canada October 2017 Q3 Q4 Q2 Q1 For financial advisor use only. Not for public distribution.

2 You can t control market performance, but you can control how much you pay for your investments. All else being equal, investments with consistently low MERs can give you a head start in achieving competitive returns. Atul Tiwari, managing director of Vanguard Investments Canada Inc. Contents 1 Introduction 14 Model portfolios 32 Vanguard equity index ETFs 54 Vanguard fixed income index ETFs 65 Vanguard active equity ETFs

3 ETFs and the changing advice landscape The investment environment in Canada presents both challenges and opportunities for advisors. Competition has grown keener. Regulators are requiring greater fee transparency. Technology is reshaping how clients interact with their advisors. And investment products are proliferating. Among the newer products are exchangetraded funds (ETFs), which have become an increasingly popular choice for both investors and advisors. One reason for ETFs popularity is that their ongoing ownership costs tend to be lower than mutual funds. ETFs are benefiting from investors heightened focus on cost and transparency as well as the growing acceptance of ETFs among advisors who are moving toward a fee-based practice model. New regulations designed to benefit investors have also provided momentum for ETFs. Client Relationship Model (CRM) reforms in Canada require advisors to provide greater fee-transparency to clients. Beyond CRM, regulators are mulling possible limitations or an outright ban on commissions paid to advisors, especially trailer fees. Such a move would likely prompt more advisors to switch their practice model to a fee-based approach. Our own global survey of advisors found 83% of Canadian advisors surveyed indicated a fee-based model was better for their practices than a commission-based model. 1 Figure 1 shows the gap between commission-based and fee-based assets has narrowed significantly since This quarterly guide is designed to help you learn more about the features of ETFs, our model portfolios and our lineup of Vanguard ETFs. Figure 1: Practice models converge Percentage of commission-based assets and fee-based brokerage assets in Canada 90% 60% 30% 0% Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Commission based Fee based Source: Strategic Commission Insight as of based December 31, Source: Ipsos survey of more than 900 advisors around the world, including 164 in Canada, on behalf of The Vanguard Group, Inc., and Vanguard Investments Canada Inc. Online quantitative surveys were conducted from July 16 to September 1,

4 Explaining ETFs and how they work What is an ETF? An ETF is an investment that s built like a mutual fund potentially holding hundreds, sometimes thousands of individual securities but trades on an exchange throughout the day like a stock. What are the features of ETFs? ETFs are pooled investments that trade on an exchange throughout the day. They either track an index or execute an active strategy. Vanguard active ETFs do not track benchmark indexes. Rather, they use a transparent, rules-based approach. Still, both index and active ETFs share certain characteristics: Low costs. ETFs generally have lower management expense ratios (annual operating costs as a percentage of average net assets) than actively managed mutual funds. In many cases, they have lower MERs than index mutual funds. Trading flexibility. ETFs are traded on a stock exchange, so they can be bought and sold through an advisor or brokerage account any time the exchange is open. Investors can use stock-trading techniques, such as stop and limit orders and short-selling, and ETFs can be bought on margin. Like stocks, ETFs are subject to the traditional risks and potential rewards of the markets. The value of ETF units will rise and fall as markets fluctuate, so an ETF can gain or lose value over short or long periods. The following are characteristics of index ETFs only: Diversification. A broad-based index ETF might contain hundreds or thousands of securities more than many actively managed funds. Vanguard index ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, but any given ETF may not be a diversified investment. 2 Potential for tax efficiency. Index ETFs can provide tax advantages relative to actively managed funds over longer holding periods because they tend to involve less portfolio turnover. Transparency. Index ETFs hold the same securities as, or a representative sample of, their benchmark indexes, so you ll always know what you re investing in. Low manager risk. Index ETFs virtually eliminate exposure to manager risk. That s because they seek to track, not outperform, a market index. They may underperform their benchmarks, but typically by narrow margins once operating costs are factored in. 2 Diversification doesn t ensure a profit or protect against a loss in a declining market, and it s not possible to invest directly in an index. 2

5 How do ETFs work? ETFs gather money from many investors and use it to acquire stocks, bonds or other assets. Most ETFs use an indexing approach. They re built so that their value can be expected to move in line with the index they seek to track. For example, a 2% rise or fall in the index should result in approximately a 2% rise or fall for an ETF that tracks that index (before fees and expenses). Investors and their financial advisors must trade ETFs through a brokerage firm. ETFs can be bought and sold at the current market price whenever the stock exchange is open. Unit prices typically reflect the approximate value of an ETF s underlying securities at any given point in the day. How are ETFs regulated? Like mutual funds and other investments, ETFs in Canada are regulated by the securities commissions within each province or territory. Securities commissions regulate the sale and distribution of ETFs in line with the investor protections set out in the various National Instruments, including National Instrument , and those within the broader provincial Securities Act. These protections include requirements for disclosing investment information and pricing, ethical standards for investment professionals, and other regulations that help ensure fair and transparent access to Canadian financial markets. In addition to governmental oversight, dealers who sell ETFs are regulated by the Investment Industry Regulatory Organization of Canada (IIROC). As a self-regulatory organization, IIROC is subject to oversight and regular operational reviews by the securities commission in each province or territory. IIROC regulates its member dealers by setting education standards, investigating complaints, auditing for compliance and taking enforcement action when necessary. The Mutual Fund Dealers Association of Canada (MFDA) granted its licensed advisors permission to sell ETFs in However, because of the absence of a technological platform to trade ETFs and ensure advisors fulfill certain proficiency requirements, adoption has been limited. A number of initiatives are under way that may prompt an increase in ETF adoption in this channel over the next couple of years, enabling greater access to ETFs. What are the costs of ETFs? Operating expenses. ETFs charge fees to cover ongoing operating expenses, such as advisory services, administration and recordkeeping, among other things. These fees are expressed as a percentage of fund assets and are commonly known as the management expense ratio. Commissions and trading fees. When ETFs are bought and sold there are charges in the form of a flat transaction fee or a fee assessed on an investor s total account balance. Some mutual funds charge sales loads, which are similar to brokerage commissions in that they compensate the broker who sold the fund. Bid-ask spread. When buying or selling ETF units on an exchange, there s a difference between the price a dealer is willing to pay for an ETF unit (the bid ) and the somewhat higher price the dealer will accept to sell that ETF unit (the ask ). As a result, an investor will typically buy ETF units for slightly more than market price and sell for slightly less. Bid-ask spreads are typically lower for ETFs that are heavily traded or that own securities that are highly liquid. Trading expense ratio. This measures portfolio commissions and trading expenses that aren t shown in the MER. Foreign withholding taxes. These are taxes paid on the underlying international equities in the portfolio. 3

6 Understanding the liquidity of ETFs ETFs get most of their liquidity from sources other than their trading activity on a stock exchange. The most important of these is the liquidity from an ETF s underlying portfolio of securities. The key to ETF liquidity lies in ETFs openended structure. Unlike single stocks, which have a fixed supply of shares, new ETF units can be created and existing units redeemed based on investor demand. This unique process allows ETFs to access the liquidity of their underlying securities. As a result, investors can often trade ETFs in amounts that far exceed an ETF s average daily volume (ADV), without significantly affecting the ETF s price. ETFs have a dual existence in the marketplace. They live in both what is known as the primary market, where certain institutional investors create and redeem them, and in the secondary market, where individual investors buy and sell them. Most ETF investors will likely trade only in the secondary market. However, the primary market can play a critical role in providing investors the best possible price for an ETF trade, especially for large orders. Participants in the primary market create ETFs to trade on a stock exchange. As shown in Figure 2, primary-market participants include: ETF sponsors (fund managers such as Vanguard). Dealers, which are brokerage houses or other institutions authorized to create and redeem ETFs. Market makers, which provide liquidity and may also function as dealers. Figure 2: The creation and redemption process Basket of securities Hold units ETF sponsor One creation unit (e.g. 50,000 units of ETF) Dealer (Certain institutional investors, such as brokerage houses) Trade on Toronto Stock Exchange Individual investors 4

7 Figure 3: Trading ETFs in the secondary market Investor A Works with advisor to create an investment mix that s right for him or her. Works with advisor to create an investment mix that s right for him or her. Investor B Advisor A Broker A Stock exchange Broker B Advisor B Places buy order for ETF units on behalf of Investor A. Initiates transaction with stock exchange. Completes transaction with brokers. Unit ownership changes from Investor B to Investor A. Initiates transaction with stock exchange. Places sell order for ETF units on behalf of Investor B. To create new units of an ETF, a dealer typically gives the ETF sponsor specific quantities of the securities that make up the ETF and, in return, receives ETF units. Similarly, when these institutions redeem their ETF units, the ETF sponsor provides them with securities, not cash. Through these in-kind creation and redemption transactions, the ETF incurs minimal transaction costs and doesn t realize capital gains. Information about the securities basket is published each day and reflects the value of cash or the securities that the dealer will need to provide to the ETF sponsor in exchange for ETF units. Once dealers create ETF units, they sell them to individual investors in the secondary market the stock exchange. These individual investors may then sell their units to other investors. As shown in Figure 3, investors and advisors buy and sell ETFs through a brokerage firm or discount brokerage account. ETFs can be bought and sold at the current market price whenever the stock exchange is open. Prices typically reflect the approximate value of an ETF s underlying securities at any given point in the day. These market trades, however, have little effect on the ETF itself no cash flows into or out of the ETF that would require it to buy or sell portfolio securities, pay brokerage commissions or realize capital gains. Of course, individual unitholders are subject to any brokerage commissions and capital gains triggered by their own trades. The secondary-market price of ETF units may be more or less than the net asset value (NAV) of the underlying securities. Several factors influence an ETF s price in the secondary market, including the share-price movement of the underlying securities, currency exchange rate movements (for international investments) and investors demand for the ETF. Market makers provide liquidity by facilitating trades in the secondary market. Through adjusting for continuous market movements in the ETF s underlying securities, market makers set intra-day bid and ask prices for the ETF. 5

8 ETF trading best practices Before executing an ETF transaction, we recommend advisors remember to limit, block and call the financial version of stop, drop and roll. Here s what we mean: Use limit orders, not market orders. A limit order lets you set the price at which you buy or sell an ETF. If you use a market order instead, you may pay more or receive less than you would have liked. If execution is a priority, use a marketable limit order. Engage the services of your block desk when your trade size is greater than an ETF s posted liquidity. Call your Vanguard sales executive or capital markets professional with any questions before or after your ETF trade. To be sure you get an accurate quote for your trade, there are other considerations. Avoid trading early in the trading day because some of an ETF s underlying securities may not have begun trading, which means a market maker can t price the ETF with certainty. Similarly, avoid trading near the market close because fewer firms may make markets in an ETF and thus fewer units may be listed for purchase and sale than at other times of the day. Exercise caution when the market for underlying securities is closed when trading fixed income, international or wrapped ETFs. For example, when the bond market is closed and the stock market is open, spreads on bond ETFs tend to be wider. Finally, always ask your trader to confirm the bid-ask spread for your ETF transaction. Market conditions can affect bid-ask spreads. During volatile periods, fewer units may be listed at best-bid and best-ask prices, increasing the importance of using the appropriate order type and monitoring your trades. 6

9 Why low costs should matter to you and clients At Vanguard, we believe in a fee-based model of advisor pay. When you use low-cost Vanguard ETFs in clients portfolios, everyone wins. You get flexibility in how you set your fees. Your clients get to keep more of their investment returns. Figure 4 illustrates the difference in the average client all-in costs between the traditional F Class mutual fund fee model and a fee-based model using Vanguard ETFs. Figure 4: Fee flexibility 0.98% Industry fund MER average % Average client all-in cost 1.25% Advisory program % Average client all-in cost 0.15% 1.25% Vanguard ETF MER average 5 Advisory program 4 Traditional mutual fund fee model Fee-based model 3 Source: Strategic Insight. Series F asset-weighted average management expense ratio (MER) for Canadian Investment Funds Standards Committee (CIFSC) categories as of December 31, Calculation excludes ETFs, funds with performance fees, money market funds, funds with management fees charged at account level, hedge funds, index funds and LSVCC funds. 4 Assumed advisory program fee for illustrative purposes only. 5 Source: Vanguard. Asset-weighted average MER as of December 31, 2016, using data compiled from management reports of fund performance. Without waivers and absorptions, the average MER 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. 7

10 Lower costs, greater returns Everything else being equal, a lower-cost investment will outperform a higher-cost investment. As Figure 5 shows, a lower-cost investment can make a big difference for your clients over time. Figure 5 provides an idea of how much more money your clients could have over 30 years. Figure 5: The low-cost effect $1,500,000 1,000,000 After 30 years, low-cost Fund A provides $215,025 more than Fund B. $1,312,465 $1,097, , Fund A (management expense ratio 0.30%) Fund B (management expense ratio 0.90%) Note: This hypothetical example does not represent the return of any particular investment. Assumptions include a 6% compound annual return and an initial investment of $250,000. Distributions are included, but transaction costs, bid-ask spreads, inflation and income taxes payable by any unitholder, are not included. Actual investment results will vary upward or downward, and the example does not factor risks associated with market volatility or short-term events. 8

11 Our tools and resources Portfolio analytics Build, analyze and compare portfolios to see how ETFs can fill gaps and add diversification. View a portfolio s sector breakdown, weighting by world regions, credit quality, degree of correlation and risk exposure. Generate and save custom reports. Return probabilities See return projections for Vanguard model portfolios. Customize asset allocations, anticipated all-in costs and holding periods. Set reasonable return expectations for your clients. Cost simulation Compare the costs of thousands of Canadian mutual funds and ETFs. You can view and compare investments side by side to see the benefit that low-cost investments can provide over time. Fund comparison View a side-by-side comparison of returns, top 10 holdings, expenses and more about funds from Vanguard and other fund families. Investor questionnaire Start a conversation about asset allocation by having your clients answer some simple questions. Review our sample asset allocation results. Vanguard Advisor s Alpha Learn how you can add value or alpha through relationship-oriented services rather than trying to beat the market. ETF education centre Find information on exchange-traded funds, whether you re brushing up on the basics or researching strategic and tactical portfolio options. Index fund Stock ETF Updates via social media Follow us on LinkedIn and Twitter and keep current with Vanguard research, our insights into market and economic trends as well as upcoming events. 9

12 Vanguard and ETFs through the years Milestones for The Vanguard Group, Inc Founded in the United States with a lineup of 11 actively managed funds 1976 Launches first index mutual fund for individual investors in the U.S. ETF industry milestones Milestones for Vanguard Canada 1986 Creates the first bond index fund for individual investors in the U.S Creates the first international stock index mutual funds in the U.S Opens its first office outside the U.S., in Australia 1998 Launches its European business 1990 World s first ETF introduced in Canada 1993 First ETF in the United States launched 2000 Opens office in Japan 2003 Opens office in Singapore Launches Vanguard Target Retirement Funds in the U.S Global AUM surpasses $1 trillion* 2009 Opens office in London 2001 Vanguard launches its first ETFs in the United States 2009 Global ETF assets surpass $1 trillion* ETF launches in Canada 70s 80s 90s 2000s * Figures in U.S. dollars ** Figures in Canadian dollars 10

13 Why Vanguard? We believe investment companies should make money for investors, not from them. We re committed to keeping costs low, and since we re not publicly traded or owned by a small circle of individuals focused on their own interests, we re in a position to do just that. And the more returns investors keep, the more they can earn over time. One of the world s largest investment companies, Vanguard entered the Canadian market in December Vanguard Investments Canada Inc., a wholly owned subsidiary of The Vanguard Group, Inc., offered 33 ETFs in Canada with assets under management of $12.5 billion as of September 30, Opens offices in Toronto and Hong Kong 2012 Global AUM surpasses $2 trillion* 2014 Opens office in Beijing Global AUM surpasses $3 trillion* 2017 Global AUM surpasses $4 trillion* Opens office in Shanghai 2014 Global ETF assets surpass $2 trillion* 2016 Global ETF assets surpass $3 trillion*/ Canadian ETF assets surpass $100 billion** December 2011 Lists its first six index ETFs on TSX July 2013 ETF AUM surpasses $1 billion** July 2014 Launches the first all-world ex-canada ETF May 2015 ETF AUM surpasses $5 billion** March 2016 Launches six pooled index funds January 2017 ETF AUM surpasses $10 billion** VCE VUS VEF VDY VRE VFV VCN VUN VGG VXC VE VA VIU VI VVO VVL VEH VGV VCB VEE VAB VSB VSP VSC VGH VDU VBU VBG VMO VLQ VAH VSG VLB Equity index ETFs Fixed income index ETFs Active equity ETFs 11

14 12 Notes

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16 Vanguard model portfolios 1 Asset-weighted management expense ratio 2 Asset allocation All-cap core Traditional core Traditional core (hedged equity) Page 100% equity 0.21% 0.15% 0.15% 19 90% equity 10% fixed income 80% equity 20% fixed income 70% equity 30% fixed income 60% equity 40% fixed income 50% equity 50% fixed income 40% equity 60% fixed income 30% equity 70% fixed income 20% equity 80% fixed income 10% equity 90% fixed income 0.21% 0.16% 0.16% % 0.16% 0.16% % 0.17% 0.17% % 0.17% 0.17% % 0.18% 0.18% % 0.18% 0.18% % 0.19% 0.19% % 0.19% 0.19% % 0.20% 0.20% % fixed income 0.20% Portfolios are market-capitalization weighted. 2 Asset-weighted management expense ratio is calculated using the management expense ratio (MER) of each ETF multiplied by the weight of each ETF in the model portfolio. Please see page 30 for other important information about Vanguard model portfolios.

17 Vanguard model portfolios About our model portfolios At Vanguard, we believe investors have the best chance for investment success when they re mindful of four fundamental principles. We believe investors should: Create clear, appropriate investment goals. Develop a suitable asset allocation using broadly diversified funds. Minimize cost. Maintain perspective and long-term discipline. By following these four principles, financial advisors and their clients can focus on what they can control, which can be an effective way to achieve long-term results. As a champion of low-cost investing, The Vanguard Group, Inc., has conducted research that shows that well-managed index ETFs have generally offered long-term outperformance relative to higher-cost investments. 3 By seeking to track benchmarks that mirror broad stock and bond markets, index ETFs can provide diversification, a valuable risk management tool. To help advisors present the option best-suited for a particular client, The Vanguard Group, Inc. s Investment Strategy Group (ISG) has developed model portfolios that illustrate how our ETFs might form the core of a client s investment portfolio. ISG is led by Vanguard Chief Economist Joseph H. Davis, PhD, and includes more than 30 strategists and analysts who develop and maintain our investment methodology, including our model portfolios. Every Vanguard model portfolio reflects our conviction that investment success hinges on asset allocation, broad diversification and low costs. Our model portfolios seek to provide broad exposure to Canadian, U.S. and international equities and Canadian and global investment-grade taxable bonds in an asset allocation framework. Vanguard s model portfolios are strategic and indexcentric by nature. Within the broad asset classes (Canadian, U.S. and international equities as well as fixed income), the portfolios are weighted by market capitalization and will reflect the investment styles and security size exposures of their benchmarks. Research shows that investors across the globe tend to overweight domestic securities at the expense of international securities. We recognize that Canadian investors have historically demonstrated a significant home bias when investing in stocks and bonds. 4 Although historical analysis strongly supports the benefits of increasing global diversification, it also demonstrates that the theoretically optimal portfolio often was not the actual optimal portfolio over a given period. Therefore, we also take into consideration other factors such as investors home-country preference, costs, liquidity, concentration and regulatory constraints. While these factors can be reasonably balanced against greater diversification, we believe further movement toward market-cap weights may be prudent. 5 3 The case for low-cost index-fund investing for Canadian investors, a Vanguard research paper by Garrett L. Harbron et al. (July 2016). 4 The global case for strategic asset allocation and an examination of home bias, a Vanguard research paper by Brian J. Scott et al. (August 2016). 5 Vanguard s approach to Canadian target-date funds, a Vanguard research paper by Scott J. Donaldson et al. (November 2015). 15

18 Vanguard model portfolios Our model portfolios use a 30%/70% ratio of Canadian and non-canadian equities, as well as a 60%/40% ratio of Canadian and non-canadian fixed income, representing a conscious home bias relative to global market-cap-weighted benchmarks. There are no intentional tactical overlays or factor bets (size or style) within the asset classes of the portfolios. Some of our models use multiple ETFs to capture the beta of a single asset class (for example, non-canadian equities as represented by Vanguard U.S. Total Market Index ETF, Vanguard FTSE Developed All Cap ex North America Index ETF and Vanguard FTSE Emerging Markets All Cap Index ETF). However, the risk and return characteristics should not meaningfully deviate from those of the asset-class benchmarks. We offer three types of model portfolios, which we describe as: All-cap core Using five ETFs to provide global diversification. Traditional core Using seven ETFs to offer more flexibility with the same global reach. Traditional core (hedged equity) Using seven ETFs, including two equity ETFs that are CAD hedged. We believe advisors can help clients determine whether hedged or unhedged equity ETFs are most appropriate based on their investment profiles. Vanguard offers only currency-hedged versions of its U.S. and international fixed income ETFs. Hedged ETFs reflect more closely the performance of international bonds in their local currencies, without the daily ups and downs of exchange rates that would be associated with converting that performance into Canadian dollars. In our model portfolios, risk is primarily determined and managed through asset allocation and extremely broad diversification. There is no active management or security selection involved. As the underlying ETFs are index ETFs and the portfolios do not incorporate active or tactical allocation shifts, the returns from each portfolio should very closely approximate those for the benchmarks. Index-oriented, strategically allocated strategies historically have been very tax-efficient, which may enhance a taxable investor s after-tax returns. These strategies have also tended to be lower-cost, relative to comparable actively managed investment alternatives. Research has shown a negative correlation between cost and returns, whereby lower-cost funds have tended to deliver higher longer-term returns relative to higher-cost funds. 6 This potential for higher returns due to the models low relative cost may benefit both taxable and tax-exempt investors. We provide a single asset-weighted management expense ratio for each of these model portfolios so that you can show clients the low cost associated with achieving broad diversification. 7 Data for each model portfolio will be updated monthly at vanguardcanada.ca. All data shown here are as of September 30, 2017, unless otherwise noted. ETF allocations in these model portfolios may not equal 100% due to rounding. 6 Vanguard s Principles for Investing Success, a Vanguard research paper. (2017). 7 Please see page 30 for other important information about Vanguard model portfolios. 16

19 Vanguard model portfolios Model portfolio commentary Market overview Markets outside of Canada Canadian equities bounced back from a challenging second quarter with the FTSE Canada All Cap Index returning 3.6% in the third quarter, the highest quarterly return this year. This rebound was driven by renewed strength in the energy and financial sectors, along with positive returns for natural resources. Consistent with this positive track, Canada s economy featured very strong annualized growth of 4.5% in the second quarter of the year, the strongest pace of growth in over five years. The Canadian dollar continued to gain strength relative to the U.S. dollar during the third quarter, rising 3 cents to USD Strong economic growth throughout the year, positive employment data and two interest rate hikes in the third quarter by the Bank of Canada (BOC) contributed to a stronger loonie. Canadian bond yields increased during the third quarter, most significantly in short-term bonds, as the yield curve continued flattening in response to the continued tightening of monetary policy by the BOC. The Canadian 2-year government bond yield rose to 1.5%, while the Canadian 10-year note yield increased over the quarter to 2.1%. The Bloomberg Barclays Global Aggregate Canadian Float Adjusted Bond Index returned 1.8% during the third quarter, reversing the positive return of the first two quarters of the year. For investors who may be considering shortening duration in anticipation of continued rising interest rates, it s important to keep in mind that the market is expecting the gradual tightening of monetary policy. This means that longer-term bonds are already pricing in the impact of rising interest rates over their maturities. In the United States, stock markets continued to climb higher in the third quarter, as the CRSP US Total Market Index returned 4.5% in the quarter (+0.6% in CAD terms). Increasing tensions between the United States and North Korea, along with terrorist attacks in Spain, coincided with rising stock market volatility in August. For a broader perspective on markets outside the U.S. and Canada, the FTSE Developed All Cap ex North America Index returned 1.6% in CAD terms. This was driven in part by strong performance from European markets, which are starting to yield higher returns after underperforming Canada and the U.S. in recent years. The FTSE Developed Europe All Cap Index returned 6.7% in the quarter (USD). This strong performance in Europe comes despite significant political and economic headwinds, with the United Kingdom entering into negotiations to exit the European Union and weakness in the European banking sector. China has experienced a long-running decrease in productivity growth, but has exhibited positive signs recently, as it revised its second-quarter GDP growth higher to 6.9%. The FTSE Emerging Markets All Cap China A Inclusion Index and the broad-based FTSE Global All Cap ex Canada China A Inclusion Index returned 3.6% and 1.2%, respectively. Amid these positive signs of stabilization for China s economy, challenges like the decreasing efficiencies of state-owned enterprises continue to serve as a drag on productivity. China has the capability to lift productivity through market-driven reforms while encouraging innovation. Sources: Bloomberg, Bank of Canada, Statistics Canada, Morningstar Direct. 17

20 Vanguard model portfolios U.S. crude oil prices rose to USD 51 per barrel in the third quarter, an increase from USD 46 per barrel over the second quarter, reversing what had been a downward trend. Oil prices have declined 9% for the year. By contrast, gold rose 11% for the year, to USD 1,280 an ounce. The Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index (CAD Hedged) returned 0.68%, lower than the previous quarter but still continuing a positive trend for the year. Outside of the U.S., bond returns were moderately weaker as the Bloomberg Barclays Global Aggregate ex-usd Float Adjusted RIC Capped Index (CAD Hedged) returned 0.58%. The U.S. bond market remained relatively flat, due in part to investor uncertainty over the impact that the U.S. Federal Reserve s balance sheet reduction will have on interest rates. The 2-year U.S. Treasury note yield increased 11 basis points to 1.49%, while the 10-year U.S. Treasury note yield increased very slightly by 2 basis points, to 2.33%. The Vanguard view With the BOC moving toward monetary policy normalization, it is important to note that higher interest rates can be positive for long-term investors as they allow the reinvestment of maturing bonds and cash flows at higher rates. While central bank movements make for lots of headlines and discussion, we encourage investors to maintain discipline in their investment approach and try to avoid making any large changes to their portfolio that are not consistent with their longterm investing strategy and objectives. Looking globally, the uptick in performance for the European markets speaks to Vanguard s belief in a broadly diversified, well balanced and low-cost portfolio that offers some international exposure. Research has shown that having even a modest allocation to international securities can help lower portfolio volatility. 1 Sources: Bloomberg, Bank of Canada, Statistics Canada, Morningstar Direct. 1 Christopher B. Philips, et al., Global equities: Balancing home bias and diversification A Canadian investor s perspective: The Vanguard Group. 18

21 Vanguard model portfolios 100% equity / 0% fixed income This model portfolio holds 100% of its assets in stocks, a portion of which may be allocated to international stocks. All-cap core Asset-weighted management expense ratio 0.21% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 30.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 70.0% Total 100% Traditional core Asset-weighted management expense ratio 0.15% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 30.0% Vanguard U.S. Total Market Index ETF VUN 37.6% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 25.2% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 7.2% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.15% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 30.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 37.6% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 25.2% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 7.2% Total 100% Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 19

22 Vanguard model portfolios 90% equity / 10% fixed income This model portfolio holds 90% of its assets in stocks, a portion of which may be allocated to international stocks, and 10% in bonds, a portion of which may be allocated to international bonds. All-cap core Asset-weighted management expense ratio 0.21% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 27.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 63.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 6.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 1.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 2.3% Total 100% Traditional core Asset-weighted management expense ratio 0.16% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 27.0% Vanguard U.S. Total Market Index ETF VUN 33.9% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 22.7% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 6.4% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 6.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 1.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 2.3% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.16% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 27.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 33.9% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 22.7% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 6.4% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 6.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 1.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 2.3% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 20

23 Vanguard model portfolios 80% equity / 20% fixed income This model portfolio holds 80% of its assets in stocks, a portion of which may be allocated to international stocks, and 20% in bonds, a portion of which may be allocated to international bonds. All-cap core Asset-weighted management expense ratio 0.21% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 24.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 56.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 12.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 3.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 4.5% Total 100% Traditional core Asset-weighted management expense ratio 0.16% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 24.0% Vanguard U.S. Total Market Index ETF VUN 30.1% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 20.2% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 5.7% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 12.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 3.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 4.5% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.16% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 24.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 30.1% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 20.2% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 5.7% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 12.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 3.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 4.5% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 21

24 Vanguard model portfolios 70% equity / 30% fixed income This model portfolio holds 70% of its assets in stocks, a portion of which may be allocated to international stocks, and 30% in bonds, a portion of which may be allocated to international bonds. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 21.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 49.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 18.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 5.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 6.8% Total 100% Traditional core Asset-weighted management expense ratio 0.17% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 21.0% Vanguard U.S. Total Market Index ETF VUN 26.3% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 17.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 5.1% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 18.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 5.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 6.8% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.17% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 21.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 26.3% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 17.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 5.1% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 18.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 5.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 6.8% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 22

25 Vanguard model portfolios 60% equity / 40% fixed income This model portfolio holds 60% in stocks, a portion of which may be allocated to international stocks and 40% of its assets in bonds, a portion of which may be allocated to international bonds. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 18.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 42.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 24.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 7.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 9.0% Total 100% Traditional core Asset-weighted management expense ratio 0.17% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 18.0% Vanguard U.S. Total Market Index ETF VUN 22.6% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 15.1% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 4.3% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 24.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 7.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 9.0% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.17% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 18.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 22.6% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 15.1% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 4.3% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 24.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 7.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 9.0% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 23

26 Vanguard model portfolios 50% equity / 50% fixed income This model portfolio holds 50% of its assets in bonds, a portion of which may be allocated to international bonds, and 50% in stocks, a portion of which may be allocated to international stocks. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 15.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 35.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 30.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 8.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 11.3% Total 100% Traditional core Asset-weighted management expense ratio 0.18% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 15.0% Vanguard U.S. Total Market Index ETF VUN 18.8% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 12.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 3.6% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 30.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 8.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 11.3% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.18% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 15.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 18.8% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 12.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 3.6% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 30.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 8.7% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 11.3% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 24

27 Vanguard model portfolios 40% equity / 60% fixed income This model portfolio holds 60% in bonds, a portion of which may be allocated to international bonds and 40% of its assets in stocks, a portion of which may be allocated to international stocks. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 12.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 28.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 36.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 10.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 13.5% Total 100% Traditional core Asset-weighted management expense ratio 0.18% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 12.0% Vanguard U.S. Total Market Index ETF VUN 15.1% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 10.1% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 2.8% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 36.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 10.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 13.5% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.18% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 12.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 15.1% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 10.1% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 2.8% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 36.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 10.5% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 13.5% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 25

28 Vanguard model portfolios 30% equity / 70% fixed income This model portfolio holds 70% in bonds, a portion of which may be allocated to international bonds and 30% of its assets in stocks, a portion of which may be allocated to international stocks. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 9.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 21.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 42.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 12.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 15.8% Total 100% Traditional core Asset-weighted management expense ratio 0.19% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 9.0% Vanguard U.S. Total Market Index ETF VUN 11.3% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 7.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 2.1% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 42.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 12.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 15.8% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.19% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 9.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 11.3% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 7.6% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 2.1% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 42.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 12.2% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 15.8% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 26

29 Vanguard model portfolios 20% equity / 80% fixed income This model portfolio holds 80% of its assets in bonds, a portion of which may be allocated to international bonds, and 20% in stocks, a portion of which may be allocated to international stocks. All-cap core Asset-weighted management expense ratio 0.20% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 6.0% Vanguard FTSE Global All Cap ex Canada Index ETF VXC 14.0% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 48.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 14.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 18.0% Total 100% Traditional core Asset-weighted management expense ratio 0.19% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 6.0% Vanguard U.S. Total Market Index ETF VUN 7.5% Vanguard FTSE Developed All Cap ex North America Index ETF VIU 5.0% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 1.5% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 48.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 14.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 18.0% Total 100% Traditional core (hedged equity) Asset-weighted management expense ratio 0.19% Ticker symbol Asset allocation Equity ETFs Vanguard FTSE Canada All Cap Index ETF VCN 6.0% Vanguard U.S. Total Market Index ETF (CAD-hedged) VUS 7.5% Vanguard FTSE Developed All Cap ex North America Index ETF (CAD-hedged) VI 5.0% Vanguard FTSE Emerging Markets All Cap Index ETF VEE 1.5% Fixed income ETFs Vanguard Canadian Aggregate Bond Index ETF VAB 48.0% Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) VBU 14.0% Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) VBG 18.0% Total 100% Note: Canadian bonds are included in Vanguard Global ex-u.s. Aggregate Bond Index ETF (CAD-hedged) at their current global market-cap weighting. Please see page 30 for other important information about Vanguard model portfolios including the asset-weighted management expense ratio. 27