Counsel Views – Power couple

Stu Morrow:

Hello, everyone. Welcome to Counsel Views.

Exchange-traded funds, or ETFs, have gained in popularity over the last few decades, in some cases attracting investor flows away from actively managed solutions. Innovation has occurred at a rapid pace in the industry, as ETFs evolve beyond the traditional role as passive investment vehicles.

At RBC PH&N Investment Counsel, our investment counselors work with our clients to understand their goals and objectives as they build and manage their portfolios. And in doing so, we may choose to use ETFs in our portfolios depending on client and market circumstances.

With me here to discuss what’s been happening in the ETF industry is someone I’ve known for quite some time. Helen Hayes, Managing Director and Head of iShares Canada at BlackRock.

In her role, Helen is responsible for leading the iShares business across Canadian institutional wealth and direct segments, and the strategic alliance with RBC. She is a member of the iShares America Executive Committee, sits on the BlackRock Canada Board of Directors, and chairs the RBC Alliance Steering Committee.

Previously she was Managing Director and Head of International Equity Sales and Trading at CIBC, where she was responsible for all non-Canadian equity distribution. She has a proven track record of global institutional investor mandates, with over 1,000 public companies marketed in Canada, the UK, Europe, and in Asia.

She has seven years of Board and Trustee experience on industry-related nonprofits, including three years of experience on CIBC’s Pension Governance Committee. And she is a member of the Advisory Committee of 100 Women in Finance, Toronto.

Helen, welcome to Counsel Views.

Helen Hayes:

Hi, Stu. Thanks so much for having me. This is great. A lot of fun to be able to connect with you like this in my new role.

Stu Morrow:

Yes. We’re very excited to have this conversation with you. It’s been some time coming for sure.

As I kind of went through the introduction, I talked about a couple of things, but one was this BlackRock-RBC alliance. So some of our clients may not be so familiar with BlackRock and the RBC iShares ETF. So can you provide our clients with a brief introduction of the RBC iShares growth story?

Helen Hayes:

Absolutely, Stu. And I think that’s a great place to start.

So RBC iShares really is a long-term strategic alliance. And it was created to benefit both the Canadian investors and advisors. And it’s all about that commitment to exceptional client service, top investment advice, and a breadth of solutions really.

And you talked about ETFs and the growing popularity, and I know we’ll get through that, but if we look at RBC Global Asset Management’s deep relationships with financial advisors and the industry-leading lineup of local ETFs that really allows the financial advisors to access the rich menu of ETF solutions, both benefitting from a high-touch service and as well support from a team that are specialists, which live here at BlackRock.

We’ve just, Stu, hit that three-year anniversary on the RBC iShares alliance this past January. And when we look at the path, the growth has been outstanding. RBC iShares just surpassed $100 billion in AUM. And if we look back three years past, that compares with about $60 billion. So there’s been really great growth. And we’re really excited. We’re excited about the continued growth of ETF adoption among Canadian investors, and really appreciate the deep relationships that the alliance brings us.

If you look at our offering right now, Stu, we have about 140 ETFs listed in Canada and managed by iShares, and a combined total of 170 ETFs listed in Canada under the RBC alliance. So when you put that in context of the Canadian retail market being over $2 trillion in assets under advisements distributed through the bank channels, believe it or not we’re hitting about 70% of Canadian retail distribution is happening at those bank channels, including RBC.

And RBC iShares has the largest advisor support and support team in Canada. There’s over 100 service professionals, and the joint sales team is covering 6,000 of the top advisory relationships in Canada. So when you put that in context, that’s actually four people assigned to support every relationship.

So the alliance has been an absolute game changer for clients here in Canada. And when you look at RBC’s Global Asset Management rich, active, and smart beta strategies, along with iShares broad suite of high-quality, liquid, cost-competitive index solutions, it’s really bringing together that strong, well-recognized expertise of the two market leaders at RBC Global Asset Management and BlackRock.

Stu Morrow:

Great background, Helen. And, I guess, kind of going from what you were just describing, if you want to talk about how does BlackRock position the role of ETFs or an ETF within a portfolio?

Helen Hayes:

Yeah. You know, when I think about BlackRock—and again, I’m all of four months in my new seat, Stu, so I’m learning every day as I come in. And at BlackRock we crossed the $3 trillion mark in ETF assets under management and are the market leader.

The acceleration and the growth certainly over the past year has been phenomenal. Within iShares itself at BlackRock, we manage more than 1,200 ETFs globally, the most of any ETF provider.

And when you think about ETFs, the interesting thing around portfolio construction is you get access, you get liquidity, and it’s all at a low cost. So really what we’re starting to see, and I think what’s fueled the growth, is that we’ve got more and more investors understanding the benefits of using ETFs as a core part of a portfolio.

It took BlackRock 15 years for iShares to get to U.S.$1 trillion in assets under management, five years to get to U.S.$2 trillion, and in the last two years we’ve quickly grown to U.S.$3 trillion under management. So the growth has really accelerated, Stu. It’s been phenomenal to see.

And again, I think it goes back to what we brought up earlier that ETFs are becoming viewed as essential building blocks within the portfolios. And I think whether we look at wealth clients or we look at institutional clients, more and more clients just generally are using ETFs, whether it’s strategic allocation, tactical allocation, liquidity management, or derivative substitution.

So all in all, if we continue to deliver for clients, we think that we’re really just at the beginning of the growth.

Stu Morrow:

Yeah. It’s amazing the amount of flows. And, I mean, it’s happening in Canada, certainly U.S., globally, we’ve seen the pickup. And certainly that’s some of that from an active solution partially to a passive solution, but also the innovation in the ETF space that just, beyond just passive as we’re talking about.

Kind of an interesting next question would be, inflation is one of the major stories so far this year, perhaps a bit towards the end of last year as well, unfortunately. How have some investors—institutional, direct, private—how have they been using iShares to potentially hedge inflation?

Helen Hayes:

Yeah. Stu, it’s funny. We can’t look at the news, pick up a newspaper, or online, and not see the word inflation and people being concerned. Obviously, as you mentioned, just a major headline at the moment.

And the return of inflation has certainly been top-of-mind from a standpoint when we think about iShares. And we look at it really in two main categories. The first one is on the real asset front. So from an iShares broader portfolio, we’ve got ETFs that cover commodities, commodity-related equities, materials, energy, gold, base metals, and REITS.

And commodities are real assets, as you know, Stu, that are vital to the economy, and include raw materials, energy, base metals, whether we’re thinking about the inflation we’re seeing in manufacturing and production or the agricultural sector supporting our global population.

On the precious metals side, such as gold and silver, we’re thinking about inflation and iShares from a standpoint of investment and portfolio hedges. And if I talk about precious metals in a little more detail because I know within PH&N you’ve got the CGL, or the iShares gold bullion ETF. When we think about precious metals, it’s long been used as a store of value and a hedge against inflation and depreciating currencies.

So, unfortunately, you and I both don’t have a crystal ball to know what’s going to happen, but gold has historically acted as that safe haven asset during that time and what we’re in right now of market volatility, while offering a similar historic risk return to equities over the long run.

So when you think about using an ETF like CGL and incorporating it into the portfolio, we’re answering a lot of investor questions about how do you build that resilience into the portfolio? How do you add building blocks as we talked about earlier?

And again, historically gold and gold-related equities have experienced low or even negative correlation to broader equities or fixed income. So the potential for gold to absorb those shocks means that incorporating an ETF, or gold generally, whether it’s on the equities side into broader equity portfolios, can really help lower that volatility, and I think enhance that risk-adjusted return profile of the overall portfolio.

So the benefit can be seen again using an ETF like what we talked about, CGL. And what’s interesting about CGL is it’s hedged back to the Canadian dollar, it provides you that exposure to physical gold bullion, which we hold in custody. And again, a great product that can be used to help diversify your portfolio and help protect against that inflation.

We talked about it earlier, but when we think about ETFs, the growth and the ability to look for that solution is really transparent. And I think for inflation you’ve got those easy products that you can be plugging in as part of your building blocks in your portfolio.

Stu Morrow:

Yep. Most definitely. We’ve looked at, and we have the guidelines for investment counselors to look at gold in the portfolio, and always talked about it as if it was included it’d certainly be a strategic position.

And in time like we are today, gold prices are on an absolute basis, on a relative basis, doing much better than other parts of the market, cognizant of not trying to time anything of course.

Helen Hayes:

Right.

Stu Morrow:

But definitely have a room in the portfolios you’re talking about from an inflation hedge perspective, a store of value as well. So yeah, no, that’s all great points.

The other side of the asset classes we talk about in inflation is fixed income traditionally has had difficulty in some periods of inflation. And some periods meaning some like we actually don’t have many periods of hyper or high inflation to speak of. So from a statistical perspective, we’re out there with few data points.

But nonetheless, ETFs in fixed income, can you talk about the benefits of fixed income ETFs? What are clients using them for today?

Helen Hayes:

Yeah, it’s been interesting. And the pandemic really changed the whole landscape in terms of ETF adoption, and really grew people utilizing them within their portfolios. And I’ll talk a little bit why.

So bond ETFs. When a fixed income portfolio manager looks to construct a bond portfolio and manage risks, what we’re starting to really see is a liquidity from a standpoint of using an ETF. And we certainly view fixed income as having three roles in a portfolio and you know this: the income, capital preservation, equity diversification.

And when you look at bond ETFs, you get liquidity. So the use of bond ETFs can enhance the liquidity of components of the portfolio. Trading costs. So the round-trip transaction cost for bond ETFs can be much lower than that of individual bonds or that of bond portfolio at trades itself. And investors can access tens of thousands of bonds really in a single trade.

The other thing is flexibility. Managers can trade bond ETFs in a far nimbler manner than individual bonds, which really enable them to capture that dislocation in the market or alter their risk profiles. So for us, whether again you’re looking for the income within a building block within your portfolio, that capital preservation, or equity diversification, iShares fixed income ETFs gives you that efficient, transparent, and easy way really to empower investors to construct these bond portfolios.

And so I won’t run through all the products, but for those we’ve got short, medium, long-term duration. So there’s a whole litany of products that clients can use to fill their income role and fill those different roles. XIG or XHY helps fill the income role. XRF and XSB can help fill the role of capital preservation. And XBB can help fill the role of equity diversification.

And again, there’s a wide range of products that we don’t have time to go through today, but it really has been amazing over the last few years to see this asset class grow in ETFs.

Stu Morrow:

Yep. The innovation continues to come. And it is exciting, all of these sort of additional tools that our investment counselors can use to create and manage portfolios. It’s certainly great to have this relationship we do have with RBC at BlackRock.

Helen, another question: what is BlackRock’s strategic vision on sustainable investment and ESG? And maybe talk about how RBC iShares have helped clients transition to sustainable portfolios.

Helen Hayes:

Yeah. You know, Stu, this is such an important topic, both for BlackRock and RBC.

Clients are now looking at sustainability as integral to their investment solution design. I think we’ve seen investors evolve from viewing sustainable as a satellite strategy to their portfolio, to now viewing their whole portfolio through a sustainable lens.

We’ve seen tremendous momentum in sustainable. Again through that transition as investors are looking at overall strategy in their portfolio and starting to ask their advisors questions about that sustainability within the portfolio and how to integrate it.

In 2021, globally, BlackRock crossed U.S.$120 billion in sustainable assets. And we are looking to grow that category to over a trillion dollars by 2030, both in ETF and index funds.

And investors are more climate aware, and certainly I think we’re all experiencing disruption in climate globally, and they’re asking for that ESG investment as more and more market participants recognize that climate risk is essentially investment risk too.

BlackRock has built a framework, a sustainability framework, to help clients navigate their transition. And that was published earlier this year. Navigate, drive, and invent. So the firm has very much been focused on building and delivering the industry’s most sophisticated transition tools, offering analytics and portfolio advice, and really being market leading in terms of offering a set of investment vehicles.

So iShares has had the most sustainable ETFs on the market, with more than 180 products globally. And our RBC iShares ESG lineup consists of about 20 ETFs, spanning both equities and fixed income. And with most of the ETFs launching less than three years ago, that product segment has really grown quickly. Last year we saw it double in AUM. And in Canada alone, we’ve surpassed $1 billion in ESG ETFs.

So when I think about the alliance and RBC iShares, we really are focused on designing the solution to address advisors’ needs for that whole portfolio solution. So we don’t want to look at it like a niche exposure. Rather, we want to integrate RBC iShares ETFs as being foundational portfolio building blocks.

And when we look at it, really looking at evaluating securities broadly across ES&G, and then diversifying as they’re built from traditional indexes. And again, that low cost, offering end clients that low-cost solutions but that’s really suitable to be held for long term and to be core of any portfolio.

And I’ll just mention one thing because just most recently joining BlackRock what was really interesting at the end of last year is we published the MSCI-implied temperature rise for ETFs or ITR. And we included as well in our index mutual funds.

So the ITR metric is a forward-looking metric that can be used along with any other sustainability data and analytics really to estimate how portfolios are aligned to the climate goal of the Paris Agreement, and their transition to a low-carbon economy.

So all in all when we look at the transparency of choice, the customization, and innovation, really as an alliance we believe that RBC has an excellent suite of products, providing clients with a solution.

Stu Morrow:

Thank you. Yes. Absolute pleasure always speaking with you, Helen. Thanks for speaking directly to our clients and providing us with your insights into the ETF industry in Canada, globally, and how investors are, of course, using them in the portfolios today.

Helen Hayes:

That’s great, Stu. Thanks so much. I look forward to seeing you soon—in person I hope.

Stu Morrow:

Yeah. Exactly. We’re not too far away now, so those days are coming.

To our clients, thank you for taking the time to listen to this podcast. If you have any questions, as always, please reach out to your investment counselor at any time.

Take care, everyone.