Vanguard Canadian Quarterly

13 MINUTE READ

Vanguard Canadian Quarterly Overview & Outlook: July, 2020

Bilal Hasanjee provides a mid-year update of Vanguard's views on the Canadian, US, and international economies; expected returns for bonds and equities; and the future impact of COVID-19-related government debt.

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The ‘Great Fall’

7 MINUTE READ

The ‘Great Fall’ and the road to recovery

The COVID-19 pandemic has unleashed economic effects unlike any the world has seen before. Among the most disruptive events of our lifetimes, it defies conventional labels. Here’s how we’ll move forward.

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Helping you through uncertain times

4 MINUTE VIDEO

A message from our CEO: Helping you through uncertain times

Vanguard Chief Executive Officer Tim Buckley offers support to investors during unprecedented times.

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Black and white picture of Tim Buckley with a Vanguard V superimposed over top of him.

Impact of Coronavirus

3 MINUTE VIDEO

Impact of coronavirus on economic growth

Vanguard's Global Chief Economist shares his outlook for global growth during the coronavirus pandemic.

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The enduring role of bonds

2 MINUTE VIDEO

The enduring role of bonds in a diversified portfolio

Bring balance to your portfolio during a downturn

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Frequently asked questions

Were the Asset Allocation ETFs premium/discounts materially impacted by dislocations in markets, particularly in fixed income, in March 2020?

The spreads between the NAV and the market price of the AA ETFs remained relatively tight throughout the period of market volatility. While some of the building blocks experienced dislocations (explained in another Q&A), the NAVs of the Asset Allocation ETFs are derived from the market price of the underlying building blocks. The portfolios are monitored daily and rebalanced regularly to keep them in line with their strategic asset allocation mix (explained in another Q&A).

Important information

Information as of April 13, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

What explains the lower income distributions for some ETFs in the first half of 2020 relative to previous periods?

Many companies have cut or suspended dividends payments to shore up cash as they deal with the fallout of the COVID-19 pandemic on their businesses. In addition, certain regulatory bodies have imposed restrictions on companies. For example, in early April 2020, the Bank of England pressured financial institutions to hold off on shareholder payouts, and buybacks for 2019 and throughout 2020. As a result, some of the largest banks in the UK have agreed to cancel upcoming dividend payments. Many of these companies are holdings in a number of our equity ETFs.

Important information

Information as of April 13, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

What is Vanguard’s perspective on the bond market?

Overall, we would describe credit market conditions as fragile but functional. Credit spreads have widened sharply across credit sectors from historically low levels. The speed and intensity of the correction has been unprecedented. In our view, this is not a result of broad-based deterioration of credit-worthiness in the market, but a reflection of a scramble for liquidity (specifically for cash).

Important information

Information as of March 27, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

Over the last several years, the weight of BBB-rated bonds has increased in investment-grade benchmarks. How does a fixed-income ETF approach a BBB-rated bond that is downgraded and removed from the index?

Vanguard has flexibility around the implementation of index changes as a result of our optimization strategies. Our portfolio managers can begin making trades a month or more ahead of time, or we can delay making moves, depending on the market environment. We have a long track record of successfully trading credit downgrades and upgrades while continuing to demonstrate tight tracking to funds’ benchmarks.

Important information

Information as of March 27, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

Will buying a CAD-hedged ETF perform exactly the same as the index it seeks to track, in local currency terms. For example, will a CAD-hedged S&P 500 Index fund provide investors the same return as the S&P 500 Index fund available to U.S. investors in USD? What are some reasons for any differences?

The short answer is not exactly. There will be some differences between a CAD-Hedged fund’s return and a fund with similar exposure in local currency. Differential in returns can be explained by a number of factors including fee differentials and foreign withholding taxes. More importantly, the question can be best understood by examining the currency hedging methodology we follow. The approach involves the use of one-month rolling forward contracts following benchmark providers’ hedging methodology.

It is virtually impossible to achieve the 'perfect' hedge - we agree to exchange rate with the counterparty at the end of the month for a certain amount of assets. However, as the value of this fund increases / decreases due to market activity such as price movements, the amount to which it has changed will not be hedged. Vanguard’s FX desk nets all possible orders globally at the company level. Therefore, these netting opportunities in netting result in smaller amount actually traded in the market, which results in lower trading costs for you.

Important information

Information as of March 27, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

Why have bond ETFs been traded at a discount to NAV?

Fixed Income ETFs are acting as a source of liquidity and price discovery. Along with heightened market volatility in the bond market, there has been a tightening of liquidity of many types of individual bonds. These occurrences have been industry wide and global in nature. Although there has been a significant reduction in the liquidity of underlying bonds, Fixed Income ETFs have continued to trade on the secondary market, providing liquidity for investors looking to buy or sell, and also helping facilitate price discovery in the underlying markets. As a side effect, this has created substantial discounts of market prices of Fixed Income ETFs to Net Asset Value (NAV).

A fund’s NAV is calculated by pricing specialists using both actual trades and an adjustment factor based on bid/ask spreads for bonds, especially for bonds that haven’t traded recently. Market prices, in contrast, are collectively determined by ETF investors and “market-makers” that are pricing the ‘fair value’ of bonds in real-time. If, as happened in mid-March 2020, bond trading is fairly diminished in the underlying market, NAV calculations will have fewer inputs and thus there is an increased chance for differences from market prices. However, despite this pricing divergence, Fixed Income ETFs have continued to provide these liquidity and price discovery benefits over the underlying bonds themselves.

Important information

Information as of March 25, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

How are your Asset Allocation Portfolios rebalanced? How does market volatility impact portfolio rebalancing?

The Vanguard Portfolio Management Team rebalances the AA portfolios to adhere to the target strategic asset allocation, but do not tactically alter the portfolio exposures across key sub-asset classes. No “optimal” rebalancing frequency or threshold exists. The portfolios target a rebalancing strategy that strikes the right balance between maintaining the target asset allocation without incurring unnecessary transaction costs.

The Portfolio Managers (PMs) first use daily cash flows to maintain portfolio level allocations. If this is insufficient, the portfolios will be rebalanced to bring the exposure back in line with the target asset allocation. During periods of heightened volatility, the PMs may have to actively rebalance the portfolios a few times. Typically, during normal periods, the portfolios daily cash flows allow the portfolios to adhere to the desired asset mix.

Important information

Information as of March 25, 2020.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Any given ETF may not be a diversified investment.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

In this material, certain statements may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.


A little hope & perspective

A history of market volatility

Click each year below to see how markets have recovered over time

1929

The days known infamously ever after as "Black Thursday" and "Black Monday" kicked off a run on banks that ultimately led to the Great Depression. Americans fled to gold, depleting reserves. In response, the Federal Reserve increased interest rates … which didn't help, to say the least.

On the bright side, future economists and policymakers learned what not to do during downturns.

Loss: 90%
Time to recover: 22 years

1962

In the original "Flash Crash," markets endured the largest daily loss since 1929—and it came near the end of a 6-month drop in stocks. But after reassuring words from well-known businessmen like oil tycoon J. Paul Getty, investors were rewarded with the biggest single-day rally since 1929.

Loss: 19%
Time to recover: 1 year

1987

In the second coming of Black Monday, the Dow Jones Industrial Average suffered its largest single-day percentage loss ever. Traders feared new government regulations around corporate takeovers and the falling value of the dollar, causing the slide. But the markets began to stabilize quickly, regaining 15% in just a few days.

Loss: 31%
Time to recover: 2 years

2000

It may be hard to believe, but the future of e-commerce was in question at one point. Overvalued dot-com companies began crashing to the ground, and the collective value of tech companies plunged nearly 75%. The downturn was accelerated by the September 11 attacks in 2001, until it reached its lowest point in 2002—but in 2003, markets rose over 20%.

Loss: 33%
Time to recover: 4 years

2008

In the worst downturn since the Great Depression, stocks lost about half their value over 18 months thanks to a reckoning that began with bad mortgage loans. Millennials who came of age during the global financial crisis of 2008 learned an important lesson about investing—it's not always a straight line up—but anyone who stuck it out was well rewarded, as the markets regained all losses by 2012 and returned a total of 60% in the following 5 years.

Loss: 50%
Time to recover: 4 years

2018

After shrugging off a variety of concerns for months—Brexit, a trade war with China, and political uncertainty—the markets finally spooked late in the year. Over a matter of weeks, stocks gave up all gains (and then some) from what had been a good year. But as the new year arrived, markets rebounded with their best quarterly returns in a decade.

Loss: 12%
Time to recover: 7 months

Future

One thing's certain—the markets will continue to move up and down. Expecting occasional rounds of volatility can help you keep cool!

We’re on a mission to provide 100% of Canadians highly effective, affordable investment products.

Market return data is based on the Dow Jones Industrial Average daily price. "Loss" is the total drop from the previous market high to its low point. "Time to recover" is from the lowest point until it regained the previous market high.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

All investing is subject to risk, including the possible loss of the money you invest.