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RBC launches new income ETFs as talk swirls it will launch its own robo-adviser

A Royal Bank of Canada sign is seen outside of a branch in Ottawa.

Reuters/Chris Wattie

Royal Bank of Canada's asset-management arm launched four new exchange-traded funds that tap into strong demand among investors for regular income – and executives aren't ruling out using the funds to create a bank-owned robo-adviser in the near future.

The new funds, which focus on preferred shares, infrastructure companies and corporate bonds, bring RBC's total offering to 28 different ETFs, all launched within the past five years.

ETFs, which resemble mutual funds but trade throughout the day on exchanges, are popular with investors because fees are typically very low. An added benefit for asset managers is that the funds serve as a crucial ingredient for online portfolio-management services, also known as robo-advisers.

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"I can't say we have any specific knowledge about anything that RBC is planning to do in the robo space," said Mark Neill, head of RBC ETFs. "But having an ETF family certainly gives us some optionality, if a robo-adviser is ever contemplated."

Independent robo-advisers are relatively new to Canada and pose a potential threat to the large asset-management divisions of the biggest banks.

Rather than employing money managers to invest money in mutual funds and stocks, robo-advisers, such as Wealthsimple Inc., use algorithms and construct portfolios using ETFs at a fraction of the price.

Canada's biggest banks have noticed the appeal. Bank of Montreal officially launched its version of a robo-adviser, SmartFolio, in January.

Other banks are keeping their options open. Toronto-Dominion Bank, which has been launching more of its own ETFs, said last year that the bank is watching the new online services. On Tuesday, a TD spokesperson said: "When it comes to robo-advisers, we're well positioned to be able to win in that space. However, we do not currently have any plans for the Canadian market."

For now, RBC is also on the sidelines. But the growth of its ETF suite adds to speculation that the bank doesn't want to be caught off-guard should robo-advisers gain significant market share.

The new funds continue RBC's interest in focusing on ETFs that explore areas beyond core indexes, such as the S&P 500.

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"Our family of ETFs definitely has an orientation towards income," Mr. Neill said, adding that they are a response to the financial needs of aging boomers but also the realities of low interest rates.

The RBC Canadian Preferred Share ETF (RPF) offers a diversified portfolio of Canadian preferred shares. Unlike most ETFs that passively track an underlying index, this fund is the most actively managed fund that RBC has launched to date.

The RBC Quant Global Infrastructure Leaders EFT (RIG) is an equity fund that invests in global utilities, transportation firms, energy companies and communications firms. It, too, is far from passive, employing a quantitative approach toward weighting and reviewing holdings.

Two new RBC target maturity corporate bond index ETFs (RQJ and RQK) hold diversified and laddered portfolios of bonds. Unlike traditional bond funds that have a perpetual life, one fund will mature in 2022, the other in 2023.

Stephen Hoffman, RBC's vice-president of ETFs, said that the new ETFs could attract significant assets, even if their growth is slow at first.

"The investment management process is not as familiar to advisers, so it could take some time to explain that process," he said.

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Mr. Neill noted that the launch – which follows previously launched RBC ETFs that use a series of rules to select U.S., Canadian, European and emerging market stocks – fits with RBC's approach toward offering something new.

"The market didn't necessarily need another S&P 500 index fund," he said. "What it needed was well-designed products that improved upon some of the existing offerings."

Regular income, RBC believes, is one such improvement.

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