Royal Bank of Canada deal with BlackRock gives it ETF heft without much cost

Bank jumps to the No. 1 spot in Canada's growing exchange-traded fund market, up from No. 5 previously

Jan 9, 2019 @ 3:46 pm

By Bloomberg News

Royal Bank of Canada is vaulting into the No. 1 spot in Canada's rapidly expanding ETF market without much added cost with its new partnership with BlackRock Inc.

Royal Bank's RBC Global Asset Management division and BlackRock's Canadian asset manager are bringing together their Canadian exchange-traded funds under a new name, RBC iShares, creating a C$60 billion ($45 billion) brand for the index-based investments.

"This is going to strengthen RBC's hold within the retail channel — they're No. 1 in active mutual funds and now they're No. 1 in ETFs — so the combination of that and being the biggest bank and having the best distribution capabilities is going to make them a more well-rounded firm in Canada," Canaccord Genuity analyst Scott Chan said Wednesday.

The alliance gives Royal Bank more ETFs to sell at a time when the low-cost funds are outstripping sales of actively managed mutual funds in Canada. BlackRock, the world's largest ETF provider, gains from access to Royal Bank's distribution platform after facing eroding share of a crowded market in Canada.

Canadian ETFs had C$20 billion of inflows in 2018, lifting assets in the industry to C$156.6 billion and outselling mutual funds for the first time since 2009, according to a Jan. 4 report from National Bank Financial. Mutual funds still take the lion's share of investments, with assets totaling C$1.4 trillion in 2018, according to National Bank.

(More: 10 worst-performing ETFs last year)

Opportunity Cost

"RBC had some skills and capabilities and we had some skills and capabilities and they were really quite synergistic," Pat Chiefalo, head of iShares Canada, said Tuesday in a phone interview. "It just creates an opportunity to better serve investors than we could separately."

BlackRock has established ties with other firms in Canada including Bank of Nova Scotia, whose Dynamic Funds unit offers active ETFs under the branded Dynamic iShares name as an example. Those existing relationships will continue regardless of the RBC partnership, Mr. Chiefalo said.

Royal Bank gets a comprehensive set of in-house investment solutions without its having to incur the expense and opportunity cost associated with building out a fuller passive offering, Scotia Capital analyst Sumit Malhotra said in a Wednesday note.

‘Game-Changing'

The RBC-BlackRock combo will hold about 40% of the industry's assets, according to Mr. Malhotra. Before the deal, BlackRock Canada had C$58.2 billion in assets under management for about 36% market share, while Bank of Montreal's BMO Asset Management ranked second with C$49.4 billion, or 31% market share as of Nov. 30, Mr. Malhotra said in his note. Royal Bank ranked fifth — lagging Vanguard Canada and Horizons ETFs — with C$4.83 billion and 2.8% market share.

The RBC iShares suite includes 150 ETFs, with 106 funds managed by BlackRock Canada and 44 managed by RBC Global Asset Management. There are no changes in the names or ticker symbols of RBC's ETFs or BlackRock Canada's iShares ETFs as a result of the alliance, the companies said in a statement.

The alliance is "game-changing" in terms of that shift to ETFs from mutual funds, Canaccord Genuity's Mr. Chan said.

"This is going to significantly impact the independence of active mutual funds across the board because ETFs is where everything is heading," Mr. Chan said. "This is where the industry is going."

(More: Shift from active to passive approaches tipping point in 2019)

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