How RBC GAM's new ETFs answer the call for Canadian retirees

Latest launches tell 'compelling story' for income-seeking advisors and investors, says VP

How RBC GAM's new ETFs answer the call for Canadian retirees

Last week, RBC Global Asset Management bolstered its already-expansive shelf of ETF products with two new active dividend mandates.

The RBC Canadian Dividend Covered Call ETF and the RBC U.S. Dividend Covered Call ETF are now trading under the symbols RCDC and RUDC on the TSX, respectively. For many retired investors, they could provide an answer to two pressing challenges: the need for current income and protection against downside market risk.

“Among our many strengths is our management of Canadian, US, and international dividend strategies,” said Stephen Hoffman, VP ETFs at RBC Global Asset Management. “We've got a tremendous team on our North American equity group led by Stu Kedwell, Doug Raymond, and Brad Willock on the US side.”

RBC GAM’s new ETFs incorporate dividend strategies that have been in existence for well over 10 years; RUDC, Hoffman says, is the first ETF incarnation of a strategy that it’s been offering to select partners via an SMA. The firm is also introducing its active covered-call writing expertise, which it’s employed opportunistically in certain mutual fund products, into its new ETF additions.

“Given our strength in both option writing and dividend investing, we think we've got a very compelling story to tell advisors and investors to help them solve for their income needs,” Hoffman says.

In its annual Canadian ETF Flows report for 2022, National Bank said dividend/income ETFs attracted $2.25 billion in net inflows last year. The category also outperformed the market on average, as its natural defensive positioning proved beneficial amid the downturns and turbulence that rocked many other sectors.

Covered call ETFs have also come into their own as option-based ETFs – which could be appealing to investors seeking income, safety, and more precision in investment outcomes – grow in popularity. According to National Bank, covered-call mandates represent more than 90% of the market for option-based ETFs in Canada, which last year welcomed a record-setting $4.4 billion in annual inflows.

According to Hoffman, inflows into option-based ETFs represented roughly 33% of flows into Canada-listed equity ETFs last year. That strength, he says, demonstrates the demand for such products when markets are likely to go sideways or slightly downward.

“With our strategies, investors can get yield from a portfolio of dividend-paying stocks, which is enhanced with premium income from our option writing. But by their very nature, the covered calls cap the upside of the investment,” he says. “You’re effectively trading off potential future gains for current income, which seems to be a trade a lot of investors today are willing to make.”

For investors, dividends can be an important component of portfolio returns as they provide a buffer against the volatility in a company’s business performance amid different markets. While there’s no telling when markets will go up or down, a company’s ability to deliver consistent or growing dividends over time could provide investors with some reassurance of its strength and ability to grow.

“In Canada, income from dividends received from Canadian companies receives a favourable tax treatment versus income from corporate bonds,” Hoffman says. “If you look at the S&P 500, dividend yield is somewhere south of 2%, while in Canada it’s three-plus per cent. The tax regime for dividends is different in the U.S., which seems to help drive a preference for buybacks over dividends in the States.”

A retired investor in Canada might want to double down on Canadian dividend-paying companies – which include energy and mining firms, as well as banks – because of their relatively heftier payouts. But Hoffman cautions that kind of home bias, if taken too far, could lead to missed opportunities.

“Canada represents around 3% of the global stock market, so diversification is still very important,” he says. “If you’re just invested in Canada, you wouldn’t get exposure to companies in the tech or healthcare space. So you can’t let home bias be the only factor in your investment decisions.”