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").
Exchange-traded funds (ETFs) have become increasingly popular with investors and advisors, with assets under management in Canadian ETFs exceeding $400 billion1. Majority of the new dollars are flowing in core ETFs – the building blocks of equity and fixed income funds that are a must-have in a portfolio for many investors2.
What’s driving more capital into these core ETFs? There are three key trends, says Daniel Prince, CFA, head of iShares Product Consulting at BlackRock.
First, financial advisors are shifting to fee-based compensation, freeing them up to recommend low-fee products for their clients, which often means ETFs. Second, a growing number of advisors are adopting a models-based approach to portfolio construction. And third, the volatile markets of the past few years caused many investors to park money in cash. Investors are seeking tactical opportunities to put cash to work again. Core ETFs can be appropriate for these types of portfolios.
A solid foundation
Core ETFs, which Prince defines as “broad market index ETFs tracking high-quality benchmarks,” may be used for creating resilient portfolios that can help weather market conditions. Core ETFs like the iShares Core Canadian Universe Bond Index ETF (XBB) are also cost competitive, while offering competitive performance potential and can be used alongside with active funds, says Prince.
He likens these funds to a home’s foundation. “Every house is customized, from fixtures to laundry rooms to guest suites, but what remains constant, is the foundation of an underlying home. In every neighbourhood, it’s strong, it’s similar, it’s scalable,” he explains. “We take that view, that index can be used alongside active. Investors can consider constructing the house using a strong foundation of low-cost asset allocation pieces in core ETFs.”
Choosing the right ETFs
Still, with just under 1,400 ETFs now trading on Canadian exchanges3, investors and advisors have their work cut out for them when it comes to choosing options – both core and the “rooms” that complement the foundation.
A key part of the due diligence process should be identifying funds with the right exposure and tracking the index that are consistent with your goals and risk tolerance. When constructing a portfolio, make sure the core pieces fit together without overlap. Working with ETFs from a single fund company can help because they’re often built with that goal in mind.
Choosing highly liquid funds may be another important consideration if you want to use them tactically and trade more often. And as always, be mindful of costs, whether in the form of management expense ratios, trading expense ratios, or trading commissions on ETF purchases.
A model-based approach
Many advisors, whether choosing individual ETFs or purchasing asset allocation funds, are using ETFs to get targeted, diversified and low-cost exposure to core allocations to pursue long-term growth with limited volatility. Prince notes there’s also a “huge trend” toward models-based portfolios, an offering from BlackRock that makes it easy for advisors to create a portfolio of ETFs that suit their clients’ specific needs.
This approach helps advisors design flexible portfolios with core fixed income and equity ETFs. These strategies are expected to become more popular because they give advisors an easier way to move in and out of asset classes as needed.
Getting tactical with core ETFs
“Many investors see ETFs as buy-and-hold vehicles. They’re not thinking about being tactical,” he says. “We see a lot of core use being tactical.” With core index ETFs, advisors can tactically reallocate between stocks and bonds, foreign and domestic holdings and short or long duration as market conditions evolve.
For example, “As central banks ending their hiking cycles, getting back to benchmark duration makes a lot of sense to us,” Prince says. Core ETFs like the iShares Core Canadian Universe Bond Index ETF (XBB) may offer a good trade-off between current yield and potential upside valuation gains as rates fall. Since Jan 2023, XBB has seen net inflows of over C$2 billion as investors shift back to bonds to gain exposure to higher yields and position for potential price appreciation in a falling rate environment4.
On the equity side, we have observed a more growth-oriented approach. Alongside the rise of bond funds, close to $2 billion flowed into the iShares Core Equity ETF (XEQT), a globally diversified stock fund5.