Doug & Pat

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On Jan. 8, 2019, two market leaders in the investment industry announced a ground-breaking strategic alliance. RBC Global Asset Management Inc. (RBC GAM Inc.) and BlackRock Asset Management Canada Limited (BlackRock Canada) brought their ETF families together under one new banner: RBC iShares. With a combined total of 150 ETFs and $60 billion in assets under management (as of January 8, 2019), RBC iShares was immediately Canada’s most comprehensive ETF offering.

Combined total of

150
ETFs

$60
Billion in Asset Under Management

However, far from becoming complacent based on RBC iShares’ newly dominant position in the ETF market, Doug Coulter, president of RBC GAM Inc., and Pat Chiefalo, head of iShares Canada, are passionate about continuing to evolve and innovate to grow the market. We asked them to share their perspectives on the Canadian ETF industry’s rapid growth, how the new alliance will benefit advisors and investors, and what’s on the horizon for ETFs in Canada.

ON THE INDUSTRY

Q: ETFs were initially created as a simple liquid way for institutional investors to gain exposure to Canadian markets. How have they evolved and changed the investment experience for retail investors?

Chiefalo: ETFs have had a material impact on the way we invest. In many ways, they’ve democratized investing. Retail investors can now easily buy an ETF on an exchange and get exposure to geographies and asset classes that, historically, would have been very difficult to access. More importantly, they can do this at a price that’s similar to what institutions typically pay. And now this evolution has made its way to more structural areas of portfolios, where investors can acquire core exposures while leveraging ETFs’ ease of access, transparency, and cost-efficiencies.

Q: The Canadian ETF industry has experienced record growth over the last 10 years. What’s driving this demand?

Chiefalo: In my experience, the industry has never evolved this quickly, and that evolution is happening not just in Canada but globally. Changes in regulations, the wealth industry, wealth models, client preferences, and technology are affecting the way portfolios are being constructed and the way advisors are managing those portfolios. Through all of this, ETFs have offered investors a reliable vehicle that can help them navigate these seismic shifts. As a result, ETFs have been fundamental drivers of growth in our industry.

“In my experience, the industry has never evolved this quickly, and that evolution is happening not just in Canada but globally” – Pat Chiefalo

Q: Have you seen a material shift in the way clients are using ETFs now compared to five or 10 years ago?

Chiefalo: Initially, ETFs were used from a sample perspective to provide exposure to a specific geography or asset class that wasn’t as easy to access in other ways—for example, international or emerging market equities. We’ve moved away from that. Now, ETFs are seen as a cornerstone of a portfolio, offering access to more traditional, rather than esoteric, exposures.

Coulter: Yes, ETFs have become integral to portfolios, not add-ons or stand-alones. Today, advisors are using all the tools in the toolbox to accomplish portfolio construction. This includes the broad range of individual securities, stand-alone fixed income, ETFs, mutual funds, alternative investments, and, increasingly, private investments. With the broadest tool kit, advisors are in a better position to create the proper outcome for clients.

CETFA monthly report of assets and %of investment funds

ON THE PARTNERSHIP

Q: The wealth model in Canada has evolved. What did you see in the market that led you to create the RBC iShares alliance?

Coulter: We were looking to make sure we had an at-scale business that brought liquidity and breadth of choice to investors. By bringing RBC iShares ETFs onto one platform, we can provide a single destination for advisors that includes active, index, and factor investments—the whole gamut of choice.

Chiefalo: We believe the capabilities of both firms were required to best serve growing demands of advisors and portfolios, especially those arising from the current market environment. We can provide access, distribution, and platform products better together than we could individually. Combined, I think we have the most compelling offering in the industry.

“ETFs have become integral to portfolios, not add-ons or stand-alones. Today, advisors are using all the tools in the toolbox to accomplish portfolio construction.” – Doug Coulter

Q: How does the RBC iShares alliance help move the Canadian ETF industry forward?

Coulter: We think combining our expertise gives us the “killer app” in the Canadian marketplace. We have people in the field who can offer guidance to advisors through our wholesaling business. We have a breadth of products, advanced technology, digital experiences, and thought leadership that is difficult to match. We also have a brand that brings investors the safety and soundness they’re looking for when they’re investing in Canada. The all-encompassing experience the two firms can bring to the Canadian marketplace will move the Canadian ETF industry forward.

Chiefalo: Absolutely. The breadth and synergies we bring, together, to the Canadian marketplace are unrivalled in the country and make me incredibly excited for the solutions we can offer to advisors and investors—especially at a time when portfolio and outcome needs are constantly evolving. It’s the right time to address those needs, and I believe we have the best capabilities to do that.

Q: How do you see active and index products working together in this alliance?

Chiefalo: In our minds, there has always been a place for both active and index products in portfolios. Ultimately, it’s about the outcome advisors and investors need and want, but blending active and index and other exposures to varying degrees will be critical to achieve investor goals. And, as advisors and investors think more about risk, allocation of alpha, costs, and achieving outcomes, it’s important to consider—as Doug put it—all the tools in the toolbox.

Q: What role will each firm play in the alliance?

Coulter: It’s not so much about “you do this and we do that.” We offer a unified ETF platform to the Canadian marketplace, leveraging each other’s strengths where we can. RBC iShares is powered by RBC GAM Inc. and BlackRock Canada, with our contributions coming together to present a united front. We’re two strong equal partners bringing forward lots of opportunities for Canadian investors.

Q: How will advisors and investors benefit from this alliance?

Chiefalo: Through this alliance, advisors and investors will have better access and service surrounding what both of us believe is the leading ETF product and platform in the industry. This will inevitably put better solutions in the hands of advisors and investors to achieve their financial goals. That’s really what we’re looking to accomplish.

ON THE FUTURE

Q: How will the two firms approach future product development?

Chiefalo: It always has been, and always will be, about client demand. With our combined expertise, we’re focused on bringing innovative products to the Canadian marketplace that satisfy advisor and investor needs. Right now, we have an incredibly robust product offering. We also have a very full pipeline of new products we believe are at the heart of what clients are asking for to meet their needs. Those products will be rolled out over the coming months.

Coulter: We spend a lot of time in-market with our support and sales teams talking to advisors. Part of how we’ll move forward is making sure we’re taking feedback in terms of what the market is looking for and what advisors need to enhance their portfolio construction. That’s an important part of the loop as we make decisions. As one example, we’re introducing an environmental, social, and governance (ESG) solution. We believe ESG is important, and we’ve tested the concept in the marketplace and confirmed that belief.

Q: What steps will you take together to enhance the advisor experience?

Coulter: Our two organizations are fully engaged in putting together the whole package: product development, support models, thought leadership, digital tools, web experience, and easy access—as well as greater awareness, which we believe leads to adoption and advocacy.

Q: What are the key areas to focus on for future growth? Where do you see opportunity?

Chiefalo: When we think about opportunity and growth, how portfolios are going to have to change to meet the evolving needs of investors is really at the heart of it. That’s coupled with our view that ETFs are becoming a fundamental building block—alongside active mutual funds, single securities, and real assets. With increasing demand, our solutions have to be very robust. And we recognize there’s a big opportunity to provide core underlying exposures—whether Canadian equities, U.S. equities, international equities, or fixed income exposures.

These exposures have been a key driver of the market traditionally, and we expect them to continue to be a driver going forward. Next-generation factor-based solutions are emerging as well, providing more tailored exposures that will enable investors to adjust risk or payouts, or tilt portfolios toward value or quality. In addition, active ETFs have played an important role in the growth of Canada’s ETF market, and, as part of our alliance, we expect to have a greater presence in the active ETF space over the coming years.

Q: What strategies or product trends will drive the Canadian investment industry in 2019 and beyond?

Coulter: It all starts with better portfolio construction and having the tools at hand to accomplish that. We’re at a point in time in Canada where interest rates have ticked up, so solutions based on fixed income are attracting a lot of attention. And, as I mentioned earlier, advisors and investors are looking for alternative solutions that incorporate thematic factors more and more, so we are launching products to meet those needs.

Chiefalo: From the perspective of where we are in the cycle and where markets are today, there’s heightened interest in minimum-volatility strategies, where investors continue to gain access to equity markets but dial down the risk. We saw good demand in that space toward the end of 2018, continuing into 2019, and I think it will continue to be an important area for investors. In the late-cycle environment, our quality dividend suite has also been a good place for investors to go. These are products that are screened to assess the quality of the underlying securities, while at the same time offering investors an attractive yield. Finally, touching on Doug’s point with regard to interest rates, we’ve seen investors gravitate toward short-term fixed income products. They offer good income for investors and, at the same time, help to moderate some of the interest rate risk investors could face over the coming years.

3 charts related to who uses ETF most, why and what is future

New environmental, social and governance (ESG) ETF solutions

RBC iShares recently expanded its ETF lineup with the launch of the iShares Sustainable Core, a suite of six ETFs that trades on the Toronto Stock Exchange. This first suite of ESG-oriented index ETFs in Canada enables investors to build diversified, low-cost sustainable portfolios with unprecedented simplicity.

The iShares Sustainable Core includes four ESG equity ETFs and two ESG bond ETFs, offering broad Canadian, U.S., international, and emerging market equity exposure, along with Canadian aggregate and short-term bond exposure. Generally, the indexes that the ETFs currently seek to track are designed to emphasize exposure to issuers with positive ESG characteristics chosen from securities included in their respective parent index, while exhibiting risk and return characteristics similar to those of the relevant parent index for each market segment.

The current indexes apply socially responsible investing screens to exclude securities of companies involved in the business of tobacco, companies involved with controversial weapons, producers and retailers of civilian firearms, and companies involved in very severe business controversies, in each case as determined by the index provider.

IShares Sustainable Core ETFsTicker
iShares ESG MSCI Canada Index ETFXESG
iShares ESG MSCI USA Index ETFXSUS
iShares ESG MSCI EAFE Index ETFXSEA
iShares ESG MSCI Emerging Markets Index ETFXSEM
iShares ESG Canadian Aggregate Bond Index ETFXSAB
iShares ESG Canadian Short Term Bond Index ETFXSTB

MSCI and EAFE are trademarks of MSCI, Inc. (“MSCI”). XESG, XSUS, XSEA and XSEM are permitted to use the MSCI mark and, as applicable, the EAFE mark pursuant to a license agreement between MSCI and BlackRock Institutional Trust Company, N.A., relating to, among other things, the license granted to BlackRock Institutional Trust Company, N.A. to use the indices. BlackRock Institutional Trust Company, N.A. has sublicensed the use of these trademarks to BlackRock Asset Management Canada Limited. XESG, XSUS, XSEA and XSEM are not sponsored, endorsed, sold or promoted by MSCI and MSCI makes no representation, condition or warranty regarding the advisability of investing in XESG, XSUS, XSEA and XSEM.
XSAB and XSTB are not sponsored, endorsed or promoted by MSCI ESG Research, Bloomberg or Barclays, and MSCI ESG Research, Bloomberg and Barclays bear no liability with respect to any such funds or securities or any index on which such funds or securities are based. The Prospectus contains a more detailed description of the limited relationship MSCI ESG Research, Bloomberg, and Barclays have with BlackRock Asset Management Canada Limited and any related funds.

RBC iShares ETFs are comprised of RBC ETFs managed by RBC Global Asset Management Inc. and iShares ETFs managed by BlackRock Asset Management Canada Limited (“BlackRock Canada”). Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
® / TM Trademark(s) of Royal Bank of Canada. Used under licence. iSHARES is a registered trademark of BlackRock, Inc., or its subsidiaries in the
United States and elsewhere. Used under licence. © 2019 RBC Global Asset Management Inc. and BlackRock Asset Management Canada Limited.
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