RBC expands its ETF line-up

When RBC entered the ETF marketplace back in 2011, it tested the waters with a family of specialized bond ETFs. Since then they’ve created a number of equity ETFs, all with active strategies. However, RBC recently filed a preliminary prospectus for a new family of plain old index ETFs covering the core asset classes you’ll find in a classic Couch Potato portfolio.

Normally the appearance of more “me too” ETFs wouldn’t be newsworthy, but RBC’s entry is interesting for a couple of reasons. First, the new lineup will include at least one unique product: a global bond ETF. And second, it will significantly improve the bank’s lineup of index mutual funds.

I’ll explain the how this affects RBC’s mutual funds in a moment. For now let’s look at RBC’s seven new ETFs, which will hit the market in early September. The four equity ETFs are traditional cap-weighted funds of large and midcap stocks:

All of the new funds track indexes from FTSE, the same index provider used by many ETFs from Vanguard Canada. However, the specific benchmarks used by RBC and Vanguard are slightly different. (You can find the factsheets for each index here.)

For Canadian equities, the differences are trivial: RCAN’s index is almost identical to that of Vanguard’s VCN. However, for U.S. equities, RBC’s benchmark includes some 600 large and midcap stocks, as opposed to VUN, which tracks a (non-FTSE) total-market index of more than 3,500 companies. One would expect RBC’s new fund to behave more like an S&P 500 fund, with no small-cap exposure.

For international equities, RINT’s index is similar to the one tracked by Vanguard’s VIU: both benchmarks cover developed markets in Europe, Asia and Australia. The RBC index includes less than half as many stocks (about 1,400, compared with more than 3,200 in VIU), so again there’s no small-cap component.

In emerging markets, while RBC and Vanguard use the same index provider for their ETFs, the benchmarks are quite different. REEM’s index includes just under 1,000 companies, while VEE is packed with more than 4,500, which includes not only thousands of small-cap stocks but also significantly more exposure to China.

These days it’s common for fund providers to offer currency-hedged options for US and international equities. Perhaps surprisingly, though, RBC has chosen not to do this—at least not in the initial lineup.

Maple-dipped bond funds

The new RBC fixed income lineup will look like this:

The two Canadian bond ETFs diverge only slightly from short-term and broad-market funds offered by Vanguard, iShares and BMO. The only significant difference is the inclusion of maple bonds, which are issued by foreign companies in Canadian dollars.

Jonathan Hartman, ‎vice president and head of investment solutions at RBC Global Asset Management, told me that maple bonds represent some 2.5% of the market in Canada, and they made up about 10% to 12% of new issues in 2016, so it’s a significant part of the bond universe. Hartman also suggested maple bonds add diversification with more exposure to non-financial companies, since the Canadian corporate bond market is dominated by banks.

RCSB will include government and corporate bonds with maturities of less than five years, making it similar to iShares’ XSB and Vanguard’s VSB. It may also draw comparisons to the iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH), but this older fund includes corporate bonds only.

RCUB is a broad-market fund that should be similar to competitors such as XBB, VAB and ZAG. All these funds have an average maturity of about 10 years and contain 60% to 80% government bonds, with the remainder issued by corporations.

The only unique fund in the new lineup from RBC is the global bond ETF. Vanguard currently offers a pair of non-Canadian fixed income ETFs, one covering the US and the other focused on international bonds. But RGGB will be the only ETF that includes both in a single fund.

The Citi World Government Bond Index is a widely followed benchmark that includes more than 20 countries, with roughly one-third in the US, a slightly higher share in Europe and the UK, and about 20% in Japan. Its average maturity is currently about nine years, while its yield to maturity is barley 1%. If you thought interest rates were discouraging in North America, they’re even lower overseas. (Read about how to get Taylor Swift Vancouver tickets with RBC Avion.)

The feelings are mutual

Back in March, I wrote about how TD now uses its new ETFs as underlying holdings for its Managed Index Portfolios, a series of balanced mutual funds. Turns out RBC is planning to do something similar: once their ETFs hit the street in September, they’ll become the underlying holdings for some of their index mutual funds as well.