Your Complete Guide to Index Investing with Dan Bortolotti

RBC Revamps Its Index Fund Lineup

2018-05-28T22:47:28+00:00July 7th, 2017|Categories: Index funds, New products|Tags: |64 Comments

In my last post, I reviewed RBC’s forthcoming lineup of traditional ETFs, which will appear later this summer. The launch of these ETFs will also spark some changes in RBC’s index mutual funds: they’ll be getting new benchmark indexes and lower fees, and in some cases they’ll use the new ETFs as their underlying holdings. It’s good news for investors who want to use index mutual funds rather than ETFs, so let’s take a closer look.

We’ll start with the two equity funds that will see only a new benchmark, with no change to their structure.

The RBC Canadian Index Fund (RBF556) currently tracks the S&P/TSX Composite Index, but as of September it will be pegged to the FTSE Canada All Cap Domestic Index. (You can find the factsheets for all of FTSE’s indexes here.) These two indexes are very similar, so this is not a terribly meaningful change. The FTSE index is the same one tracked by the soon-to-be-launched RBC Canadian Equity Index ETF (RCAN), but the mutual fund will not use this ETF as its underlying holding—at least not yet.

Here’s why: the mutual fund has built up large unrealized capital gains (equal to about 24% of the fund’s net asset value as of May 19), so selling the stocks and replacing them with ETF units would mean realizing these gains and passing them along to the fund’s investors. To spare unitholders this tax bill, RBC has decided to hold off on the transition indefinitely.

The RBC U.S. Index Fund (RBF557) will be affected in a similar way: it will change its benchmark from the S&P 500 to the FTSE USA Index, the same one used by its corresponding new ETF. But because of the large unrealized gains in the fund, there are currently no plans to transition to use the new ETF as its underlying holding.

Over the hedge

The two currency-hedged equity funds in RBC’s lineup will not only see their indexes changed, but they’ll also change their structure entirely.

The RBC U.S. Index Currency Neutral Fund (RBF558) and the RBC International Index Currency Neutral Fund (RBF559) are unusual in that they don’t actually hold any stocks directly: instead, they get their exposure using index futures. This strategy is a holdover from the days when Canadians were limited in the amount of foreign investments they could hold in RRSPs. Since futures are not considered foreign investments, using them to get exposure to US an international stocks was a way of getting around that rule, which was finally scrapped in 2005.

As of September, these two mutual funds will stop using futures and instead use the corresponding new ETFs as their underling holdings: the RBC U.S. Equity Index ETF (RUSA) and the RBC International Equity Index ETF (RINT). Neither of these ETFs uses currency hedging, however, so the mutual funds will add that separately. Unfortunately, there will be no unhedged mutual fund option for international equities.

If you happen to hold either of these funds in a taxable account today, this is good news. Index futures are notoriously tax-inefficient, because any increase in their value is taxable as income rather than as capital gains. Going forward, fund investors will be able to enjoy the same tax-efficiency as ETF investors.

 Strike up the bonds

Finally, here’s how RBC’s lineup of bond mutual funds will evolve.

The most significant change is the creation of the RBC Canadian Bond Index Fund (RBF700). This is a rebranding of what used to be the RBC Advisor Canadian Bond Fund, which was essentially a closet index fund. In advance of the launch of the RBC Canadian Bond Index ETF (RCUB), the mutual fund changed its name and its mandate on June 30. Starting in September it will use the new ETF as its underlying holding.

The RBC Canadian Government Bond Index Fund (RBF563) won’t change at all, except to lower its fee slightly. The fund will continue to track the FTSE TMX Canada Federal Bond Index, which, as the name suggests includes only federal government bonds. This makes it quite different from broad-market bond index funds—including RBF700—which also include provincial, municipal and agency bonds, as well as 20% to 40% corporate bonds. Holding all federal bonds is slightly less risky, but also brings a significantly lower yield.

Best of the rest

For the last few years, Option 2 of my model portfolios—for investors who use individual index mutual funds, as opposed to ETFs or a single-fund solution—has included only the TD e-Series. These are much cheaper than any other option, but unfortunately they’re available only to clients of TD Mutual Funds and TD Direct Investing. If you use any other brokerage, the choices foe index mutual funds are pretty poor. These recent changes to the RBC lineup improves the situation, though only modestly.

RBC has announced that all of their index funds will see fee reductions effective immediately. Here’s a summary of the changes to the Series A version of the funds, which are ones available to retail investors through any online brokerage:

Index Fund (Series A) Old MER New MER
RBC Canadian Index Fund 0.72% 0.66%
RBC U.S. Index Fund 0.72% 0.66%
RBC U.S. Index Currency Neutral Fund 0.72% 0.61%
RBC International Index Currency Neutral Fund 0.71% 0.61%
RBC Canadian Bond Index Fund † 0.92% 0.76%
RBC Canadian Government Bond Index Fund 0.66% 0.61%

† = formerly the RBC Advisor Canadian Bond Fund

You’ve probably noticed the fee reductions are quite minor: an investor with a $50,000 portfolio of RBC equity index funds would pay roughly $50 less in annual fees. (The newly branded RBC Canadian Bond Index Fund seems particularly expensive at 0.76% in an era when the yield to maturity is only about 2%.) The fee reductions are much greater for the Series F versions, but these are available only through fee-based advisors.

That said, for those who do not have access to the TD e-Series funds, RBC’s new lineup appears to be the next best option thanks to these lower fees, improved tax efficiency, and broader indexes. A traditional balanced portfolio built from these new funds would look like this:

Index Fund (Series A) Allocation MER
RBC Canadian Index Fund 20% 0.66%
RBC U.S. Index Fund 20% 0.66%
RBC International Index Currency Neutral Fund 20% 0.61%
RBC Canadian Bond Index Fund 40% 0.76%
100% 0.69%

 

64 Comments

  1. Julien October 20, 2017 at 10:39 am

    @Dan: Thanks for your response and the link to your previous post – this is most helpful. These ratings can be misleading for new investors (like me). I am glad to know I should essentially just disregard them.

  2. Eric November 9, 2017 at 5:13 pm

    Hey there, you mentioned previously that the lower MERS won’t appear for the series A index funds from RBC for several months. I just opened a new RBC direct investing account and am wondering if I should just go ahead and purchase the 4 index funds you have outlined even with the higher MERs now, knowing that they will be lowered in several months. Thanks for your help!

  3. Canadian Couch Potato November 10, 2017 at 10:21 am

    @Eric: You should be fine to use the new funds right away. The lower fees should already be in effect: it’s just that the published MERs won’t change until the funds’ next audited financial statements are prepared.

  4. Robyn November 10, 2017 at 9:59 pm

    Great article! I tried buying the RBC index bond fund just now through my discount brokerage and it says that it is a front load fund (RBF700). Would you have the codes of the RBC index funds that you recommend? Wondering if I pulled up the wrong fund.

  5. Canadian Couch Potato November 13, 2017 at 7:38 am

    @Robyn: The brokerage’s information is likely incorrect. Might be worth contacting them to confirm.

  6. Aki January 11, 2018 at 9:43 pm

    I don’t get it, wont D series should be cheap based on this info.

    Retail series (Series A)
    Most “retail investors” (individuals investing their own money) buy these series or classes, as there are typically minimal requirements for an investor to meet and investors receive the advice of an advisor. These series or classes are typically available for purchase under one or more sales charge options. Advisors who sell the fund to investors usually receive commissions
    at the time of sale as well as ongoing trailing commissions for the advice that they provide.
    Discount series (Series D)
    These series or classes are tailored to do-it-yourself investors who purchase mutual funds through a discount brokerage
    . Discount
    brokers that sell these series or classes typically receive a significantly reduced trailing commission since the investor does not receive advice. As a result, a discount series or class generally has a lower management fee
    than a retail series.

  7. JFB March 7, 2018 at 2:32 pm

    Is the RBC Canadian Government Bond Index considered a Short Term Gov. Bond Index per say? Thanks

  8. Marie June 11, 2018 at 9:54 pm

    Is there any word of Scotiabank lowers their fees for their index mutual funds

  9. Dylan July 11, 2018 at 1:22 pm

    Hi Dan,

    I use RBC for a all of my banking and have been using them for direct investing through my TFSA. For the Index Funds you have listed when I go to purchase them through RBC Direct Investing, the MER is still listed at .72%. Did they raise these back up or am I missing something?

    Thanks.

  10. Canadian Couch Potato July 17, 2018 at 11:02 am

    @Dylan: MER is a backward-looking number, i.e. when it is reported by a mutual fund it indicates the expense ratio over the 12 months previous to its last audit. So there may be a delay before the new lower fee is reported.

    Another possibility is that RBC Direct’s data are just wrong, which happens all the time with online brokerages. For the record, the RBC website is currently reporting the MER of the Canadian Equity Index Fund as 0.69%:
    http://fundinfo.rbcgam.com/mutual-funds/rbc-funds/fund-pages/rbf556.fs

  11. Mark July 17, 2018 at 2:57 pm

    I attempted to adjust my Group RRSP to allocate to the 4 Funds listed (25% each). However they mentioned that the RBC Canadian Bond Index Fund was ‘capped’ i.e. it wasn’t accepting any new money (and hadn’t been for a while). So I found that odd. But instead went with the RBC Canadian Government Bond Index Fund.

    They did mention also that I could move over to RBC Direct Investing and get the D Series of all these funds at a lower MER, and continue the automatic contributions funnelling to the correct funds. So that might be something to look into in the future.

  12. Thomas July 23, 2018 at 1:11 pm

    20% invested in Canadian Index in a TFSA doesn’t really make sense, does it? It seems rather home-biased, and does not really take advantage of “favourable tax treatment” (since all gains are already tax free anyway). I also do not see any clear advantage in terms of currency risk or lower cost (especially since it’s already an index fund; it is suppose to be low cost to begin with). I think maybe a 10/30/20/40 splits in terms of Canadian Index/US index/International Index/Canadian Government Bond index makes more sense. Perhaps Dan can shed some light here.

  13. Canadian Couch Potato July 23, 2018 at 4:04 pm

    @Thomas: RE: the home bias issue, this should help:
    https://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

    Taxes are still an issue in a TFSA, in that foreign withholding taxes apply to US and international equities. The fees are generally higher for foreign equities too (although not much). And there is evidence that a weighting between 20% and 40% (of the equity portion) in Canada has produced the lowest historical volatility:
    https://www.vanguardcanada.ca/advisors/articles/research-commentary/investing/home-bias-canadian-investor.htm

    Whether that specific allocation makes sense in a TFSA or not depends on many factors, including what other account types you’re using (i.e. do you also have an RRSP and/or non-registered account).

  14. Thomas July 24, 2018 at 11:49 am

    @Dan: thanks for the link to your article on the topic of home bias. The Vanguard link helps too. I like how it breaks down the topic into simple to understand diagrams. Because I’m quite new to this asset allocation/personal investing, I have another dumb question. When you calculate your allocations, do you base it off the market value of each fund or the book cost of each fund? Thanks again for your help.

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