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Royal Bank of Canada and BlackRock Inc. are joining forces to sell exchange-traded funds, forming a rare partnership between Canada’s largest bank and the world’s largest asset-management firm.

Under the brand RBC iShares, the firms will create and market ETFs, which are passive investments that track major indexes at lower fees than most mutual funds. The new brand will be the biggest in Canada, based on assets under management.

For RBC, the partnership with the country’s biggest ETF provider is a way to bolster its competitive position in the race to gather ETF assets. Save for Bank of Montreal, Canadian lenders have been slow to embrace ETFs.

By teaming up with RBC, BlackRock’s Canadian arm will gain better access to a distribution network. Despite a wave of digital disruption in financial services that has helped ETFs emerge as a popular product for do-it-yourself investors, the vast majority of investment funds are still sold through advisers in Canada – and RBC manages one of the largest adviser networks.

“There is an industrial revolution happening in asset management,” Martin Small, the head of iShares in Canada and the United States, said in an interview. “The modern portfolio is going to be different than the portfolio of yesteryear.”

The partnership is BlackRock’s attempt to keep up with all of the change. Beyond the distribution network, RBC also runs the country’s largest asset-management business, with $369-billion under its watch in Canada, and BlackRock will lean on RBC’s expertise to create strategies for developing more complex ETFs. The iShares brand is known for simple index investing, but the traditional ETF market has become crowded. To stand out, fund providers are creating more complex products that cost investors a little more money.

Because the two companies are already so dominant, the joint venture can raise competitive concerns. “Canadian investors will be big losers as competition in Canada becomes even more concentrated with the big banks than it already is. Bad all around, unless you are a bank shareholder,” Norman Levine, portfolio manager with Toronto-based Portfolio Management Corp., wrote in an e-mail.

In the joint interview, Damon Williams, head of RBC Global Asset Management, said the partnership is a function of changing investor preferences. “ETFs, there’s no question, have become a growing part of the Canadian investor landscape,” he said. “We want to make sure we continue to be relevant to those investors.”

Mr. Williams also said that ETFs are different from many investment products because their barriers to entry are low. The most basic versions of these funds simply track indexes, allowing scores of ETF providers to launch in the past few years.

RBC and BlackRock added that they are adapting to a changing market, with both firms at risk of losing their leading market positions.

While BlackRock manages US$6.3-trillion globally, and iShares is the ETF market leader in Canada with $57-billion in assets, in recent years BlackRock has battled a growing number of competitors, such as AGF Investments and the banks. BlackRock used to control more than 80 per cent of Canada’s ETF market, but its position dwindled to 36 per cent, as of Dec. 31, 2018, according to a report by National Bank Financial.

BlackRock and RBC are also in a global fight. Even though each has scale, allowing them to spread fund management costs across billions of dollars in assets, fund giants are starting to innovate. Fidelity Investments, for one, recently launched no-fee funds as a way to bring new investors in the door. Because of this shift, both RBC and BlackRock were trying to decide whether to build their own capacity or buy another company’s, Mr. Small said. They began talks in mid-2018 and realized a joint venture would produce the fastest results.

BlackRock could have hired more people or acquired an asset manager to create new complex, in-demand ETFs, “but it would take years to build that business in Canada,” Mr. Small said.

Meanwhile, RBC had the opposite need – but the same time constraint. Canadian investors and financial advisers are pouring more money into ETFs, which were set to outpace mutual funds sales in 2018. With $18.7-billion in net sales during the first 11 months of 2018, ETFs easily beat mutual fund investments, which only sold $7.8-billion, according to data provided by Strategic Insight.

RBC was also navigating a competitive landscape unique to banks. Canadian lenders saw their earnings soar over the past decade as interest rates fell to near-zero, spurring a lending boom. Lately, however, rates have been rising, which makes borrowing more expensive. At the same time, baby boomers are hitting retirement age and this demographic bulge is seeking investment and wealth advice. Across the Big Six lenders, wealth management is seen as the next big potential profit driver.

While the new partnership is the first of its kind for ETFs in Canada, joint ventures are common for mutual funds. BlackRock has also announced a partnership in Canada in the past – albeit in a much smaller capacity. In 2017, the firm teamed up with Bank of Nova Scotia’s Dynamic Funds arm to launch five actively managed funds sold directly through advisers. (These funds remain separate from RBC iShares and are not affected by partnership.)

Although the new RBC partnership has elements of a full-blown merger, the two firms will remain separate legal entities, but operate a combined business branded as RBC iShares. It will include 106 iShares funds and 44 RBC ETFs. The partnership will be overseen by a joint executive steering committee, with an equal number of representatives from BlackRock and RBC.

Under the new brand, the majority of the iShares ETFs and RBC ETFs will remain as is, with no formal changes to either name or ticker symbols. But most will be marketed as “RBC iShares," and the new entity plans to launch additional co-branded ETFs in the near future. Revenues from all of the ETFs will be split between the two asset managers, with the cut to each varying from fund to fund.