This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
In a year that has seen yield-hungry ETF investors flock to fixed income, the expanded RBC target-maturity product line has surged in popularity at an even faster pace than the fixed-income and money-market categories. In late October, assets had surpassed $2 billion, doubling in size during the year to date.
Because of the funds’ limited lifespan, RBC’s target-maturity suite has no direct competition among Canadian ETFs. Each of the 12 RBC ETFs has a specified maturity date when the final net asset value is returned to unitholders. That’s unlike traditional bond index ETFs, which have no termination date and whose duration — a measure of sensitivity to interest-rate changes — remains stable.
Durations for target-date ETFs, as for directly held bonds, decrease over time as they approach maturity.
“These mature like a bond, they trade like a stock and they’re diversified like a fund,” said Stephen Hoffman, vice-president, ETFs, with Toronto-based RBC Global Asset Management Inc. “Regardless of the ups and downs in the marketplace, you know that there’s a maturity time and a maturity value.”
The most recent to mature, on Sept. 15, was the RBC Target 2023 Corporate Bond Index ETF.
The suite launched in September 2011 with eight ETFs that had maturity dates ranging from 2013 to 2020. Although the original eight are long gone and RBC GAM has cut back on longer maturities, the target-maturity suite is larger than ever. In May, the firm launched six RBC target government bond ETFs, with maturity dates ranging from 2024 to 2029, mirroring the six ETFs that hold corporate bonds.
The new government offerings are managed internally by RBC GAM. At 0.15%, their management fees are mostly five basis points lower — and in one case, 10 basis points lower — than that of their six corporate-bond counterparts, which are based on FTSE Canada indexes. So far, assets under management (AUM) for the target-maturity government ETFs are only $140 million, and the higher-yielding corporate mandates are more popular choices.
Outweighing the higher fees on the corporate bond ETFs are current yields that range from 55 basis points to well over a full percentage point higher than the government-bond ETFs with the same maturity dates.
Hoffman said it’s more appropriate to compare RBC target-maturity ETFs to individual bonds rather than to traditional bond funds that have no wind-up date. The ETFs are meant to provide flexibility, liquidity and transparency, along with “some of the certainty and some of the similar characteristics that you can get by investing in a bond.”
The challenge for financial advisors and their clients who wish to invest directly in securities is obtaining access to individual bonds from their brokerages, where supply is limited and minimum purchase amounts may apply.
Hoffman said another disadvantage of direct bond holdings, particularly for discretionary advisors who tend to work with internal asset-allocation models, is the inability to obtain the same bonds for multiple client accounts.
“The bonds that are available today at the bond desk are going to be different than the bonds that are available next week or next month,” he said.
With ETFs, by contrast, the same exposure can be placed in multiple client portfolios by an advisor. And the ETFs’ monthly distributions, Hoffman said, provide regular cash flow into the accounts that can be distributed to clients or help pay for service fees.
Unlike conventional GICs, which can’t be cashed in before maturity, RBC’s target-maturity ETFs have full trading liquidity. However, selling early is not necessarily advantageous because the ETFs may be trading below their par value that will be payable at maturity.
Consider, for example, the RBC Target 2026 Corporate Bond Index ETF, which has almost three years remaining until its maturity date. In late October, the ETF’s price per unit was $17.55. That was about 8% below its par value of $18.94, as published by RBC GAM on its website.
The par-value calculation is based on a weighted average of the ETF’s almost 40 bond holdings, divided by the number of units outstanding. That value is not a guarantee, Hoffman said, but “it’s our best guess as to what you can expect at maturity.”
If the par value at maturity exceeds the price at which the ETF was bought by the investor, a portion of the termination proceeds will be in the form of a tax-advantaged capital gain.
Other passively managed ETFs that address duration risk — the risk of incurring losses if market interest rates go up — are ETFs that employ ladder strategies. These types of strategies are available from CI Global Asset Management, Desjardins, Invesco Ltd., BlackRock Asset Management Canada Ltd. and TD Asset Management Inc., as well as from RBC GAM.
Laddered bond ETFs, like GIC ladders, diversify by maturity dates. The largest of the former is BlackRock’s $714-million iShares 1-5 Year Laddered Corporate Bond Index ETF, which tracks a FTSE Canada laddered index. This iShares ETF maintains a duration of about three years, which is only modestly higher than that of the iShares Core Canadian Short Term Bond Index ETF.
Laddered bond ETFs are essentially just another way of obtaining exposure to a particular level of interest-risk sensitivity. They’re a different proposition from the gradually decreasing duration and specific maturity dates of the RBC target-maturity products. More than a decade after their debut, RBC’s target-maturity suite remains a unique ETF offering in Canada.