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 discuss the mutual funds in my next post. 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:
| ETF name | Ticker | Benchmark index |
| RBC Canadian Equity Index ETF | RCAN | FTSE Canada All Cap Domestic Index |
| RBC U.S. Equity Index ETF | RUSA | FTSE USA Index |
| RBC International Equity Index ETF | RINT | FTSE Developed ex North America Index |
| RBC Emerging Markets Equity Index ETF | REEM | FTSE Emerging Index |
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 US 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:
| ETF name | Ticker | Benchmark index |
| RBC Canadian Short Term Bond Index ETF | RCSB | FTSE TMX Canada Universe + Maple Short Term Overall Bond Index |
| RBC Canadian Bond Index ETF | RCUB | FTSE TMX Canada Universe + Maple Bond Index |
| RBC Global Government Bond (CAD Hedged) Index ETF | RGGB | Citi World Government Bond Index (Currency-Hedged in CAD) |
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.
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. Stay tuned for my next blog to learn the details.
I guess overall more competition will help keep fees in check, but I have a hard time believing RBC will be capable of beating Vanguard & iShares in that regard.
It will of course depend on what the MER turn out to be, but one potential factor that may make them attractive is if RBC Direct Investing adds them to their DRIP list. Currently the list of ETFs on RBC Direct’s DRIP list is short, and even shorter on index funds.
I’ve got a LIRA in RBC Direct investing, and the ability to build a portfolio in it with DRIP ETFs would be tempting, even if the MER were slightly higher than Vanguard or iShares.
The fact that I can’t add funds to the account means no load mutual funds are more workable than ETFs with the amount I have in the account, but DRIP ETFs might be a viable solution.
Curious to hear more about RBC’s new index mutual funds and how they compare to TD e-series.
@Adam: RBC has not announced the fees on its new ETFs: that will come closer to the launch date. But it is hard to imagine they will be significantly different from the competition or there would be no point in bringing them to market at all. That said, I think it is fair to say that the main reason banks like TD and RBC are finally getting into the game is to serve their advisors and their clients, not take DIY market share away from Vanguard, iShares and BMO.
@Matt
I don’t think there will be new RBC index mutual funds. I hold several of RBC’s current index mutual funds, and received a notification from them that they want to change the current mutual funds to hold the new index ETFs, rather than holding the securities directly (in cases where the current mutual funds and the new ETFs align).
Part of their sales pitch on this was to reduce the current fees, but there was no indication of by how much if any.
@nbhms
I think part of the reason for these ETFs is just for the DRIP option, to keep current RBC clients.
As a BMO customer I can’t have DRIPs on most non-BMO ETFs and it’s a pain. I would think RBC is simply thinking of taking advantage of their not-very-mobile customer base for these ETFs, moreso if they have to create index mutual funds as well because of customer demand.
Correction: I double-checked, and it seems BMO has expanded their DRIP list, so my argument kind of falls apart. Most Canadian-listed ETFs seem to be on there now. Oops.
RBC has been expanding their DRIP list, just very slowly and with no notification, you have to regularly check the list and see what they’ve snuck in recently. But for the most part it tends to be individual stocks and non-index funds, but does include a few from iShares etc. Hopefully these new ETFs will be on their DRIP list.
Re-reading Dan’s post, maybe there will be new RBC index mutual funds. My initial understanding was they were just going to re-work their current line of index mutual funds to hold the new ETFs rather than direct securities where they lined up and were holding the same/similar index, but maybe they’ll also be adding additional index mutual funds too.
I assume RBC will create all-in-one portfolio funds that hold these ETFs in varying proportions. But I also wonder if they’ll overhaul their existing index fund offerings. (Dan alludes to changes to their existing index funds at the end of the article) Those funds could each hold a single ETF, and they could drop the MER drastically (RBF556 for example, currently charges 0.72% series A – there is no series D – more than twice what TD charges for TDB900). If they wanted to, they could disrupt TD’s e-Series dominance. Not sure if they’d want to or not. I’m rather unsure how the big banks really feel about passive investing – on one hand, it eats their traditional management lunch, but on the other, they surely see it gaining in popularity and don’t want to miss out.
Uhhhh…. Global bonds yields are roughly 1%?! Wow! And I thought ZLC’s yield is low. Haha.
I wouldn’t mind bonds from emerging markets if they’d yield more than 5%. But I have a feeling the MER would be like >0.8%.
The details of the RBC mutual funds fees changes because of the new ETFs can be found in the article titled
RBC Global Asset Management announces unitholder approvals, fee reductions and other changes to certain RBC Funds and PH&N Funds. Published on June 22, 2017
http://www.rbc.com/newsroom/news/2017/20170622-gam-fees.html
ETFS are free on questrade, why cant one should move to questrade and do monthly investing of few hundred $$ instead of lumpsum and spend money on commison
The way to avoid huge lump sum or $9.95 commission is to contribute regularly to mutual funds on a weekly or monthly basis. When you accumulate, say 2,000-4,000$, you transfer it to an ETF in 1 transaction.
The higher MER of the mutual fund is negligible below that amount, while the commission of $9.95 is not too bad for the switch.
@Freedom: This technique is commonly suggested, but it’s more of a nuisance than many people realize. First, you cannot “transfer [money] to an ETF in 1 transaction.” You first need to sell your mutual fund holding, usually wait a day or two, and then purchase the ETF. You cannot sell the whole mutual fund holding or your preauthorized contribution would be cancelled. And you need to make sure you don’t incur early redemption fees from frequently selling mutual funds. This is a lot of work and a bit of risk to save a couple of small commissions.
An abundance of seemingly unique and innovative solutions all designed to replicate the same underlying index, with an undeniable focus on management fees.
This industry is significantly shifting from proactive to reactive, and with a desperate cling to maximizing product revenue.
It’s sad to see the financial industry continue devolving into consumer product warfare relying on marketing to differentiate themselves.
At this rate, I would not be surprised to see “50% off your MER for the first year!!” or “MER Price-Match Guarantee!!” in the near future.
Fund fact sheets for these have started to show up, disappointingly DRIP is not showing as an option.
http://funds.rbcgam.com/pdf/fund-facts/etfs/rint_e.pdf
FYI, RBC just contacted me and stated that these funds will not be added to their DRIP list, since they are not part of the S&P or TSX exchanges (not sure I understand the logic, but whatever). Dan was right, clearly these are not designed for DIYers. Looks like Vanguard keeps my business….
I have about 40% of my money in VSB in my RRSP because I was expecting interest rates to rise. It hasn’t been doing so well lately. Would it be a good idea to switch to something like ZAG?
@Peter: My first response would be to note that making a change because an asset class “hasn’t been doing so well lately” is a red flag. You chose short-term bonds because you expected interest rates to rise. This year, that turned out to be correct. By switching to a broad-based bond fund now you’re implicitly making another call that they won’t continue to rise. Rather than trying to guess interest rate movements, I suggest choosing a bond strategy you’re comfortable with for the long term and sticking to it. This may help:
https://canadiancouchpotato.com/2015/05/18/how-changing-interest-rates-affect-fixed-income/
Regarding the question of DRIP eligibility, I received the following clarification from an RBC representative: “After our first distributions are paid on the ETFs, we arrange for DRIP to be setup through RBC Dominion Securities and RBC Direct Investing on all our ETFs for RBC clients. The first distribution for the equity index ETFs are in December, while fixed-income index ETF distributions started this month. We currently do not offer DRIP across all our dealers hence why the fund facts state DRIP is not available.”
First, I would like to say thank you for this great site for Canadian investors. I have learned so much from the information provided and I believe I have reached a point in my investments where it now makes sense to move from mutual funds to a DIY portfolio using index ETFs.
For someone just starting out with a DIY Index ETF portfolio and most likely using RBC direct investing, would you recommend replacing any of the three index ETF recommendations (ZAG,VCN,XAW) for the model portfolio with any of the new RBC index ETFs?
@Terry: Thanks for the comment. There is no meaningful relationship between your brokerage and the ETFs you use. So while there is nothing wrong with RBC’s new lineup of index ETFs, neither do they offer any advantage over the more established players in the market, and certainly no reason for RBC Direct’s clients to favour them.
@Canadian Couch Potato: Thank you for the reply. That is what I was looking for. Now that the new RBC ETFs have been out for a bit I was wondering if they had lower management fees or anything else which may be a reason to favour any of them over the recommended Model portfolio ETFs.
I’m still trying to determine the best mix of ETFs to move my mutual funds. I am leaning towards the simplicity of the three ETF funds recommended in the model portfolio (ZAG, VCN and XAW). While investigating whether to break up the XAW into three ETF’s (XUU, XEF and XEC), I noticed that the XAW holdings include both ITOT and IVV (total US and S&P 500 ETFs). This is also the case with XUU. Can someone explain what the advantage is to owning multiple index ETFs that seem to overlap? Maybe, I’m misunderstanding something.
@Terry: This is a good question, and I believe the reason for the odd mix in XUU is that the fund used separate holdings for large, mid and small cap US equities when it first launched and then switched to ITOT later. It retained the older holdings to avoid realizing large capital gains in the fund. As for the advantage of using XAW versus a mix of XUU/XEF/XEC, this is an extremely small decision that will likely mean almost nothing over the long term. If the simplicity appeals to you, use the single fund.
@Canadian Couch Potato: Thanks for the reply to my question, that does make sense if that is what they are doing.
I called Blackrock Canada to ask about the XUU asset allocation in hopes that they would confirm this. However, the person I spoke with indicated that the asset mix must be what they felt would cover the total US market. This didn’t make sense to me but I don’t know enough about it to argue and I didn’t really have an option to speak with anyone else. The conversation did make me consider looking harder at the same type of options Vanguard Canada provides even though the MER is a little higher. I can see the individual stocks they are holding rather than a mix of US ETFs.
I was mainly looking at breaking out the XAW into XUU/XEF/XEC because I understood I could save additional amounts on the MER if I was willing to manage it.