In the Mutual Funds vs. ETF Benchmarks series, we compare the past performance of mutual funds to the performance of ETF portfolios composed of the mutual funds’ stated benchmarks. The aim is to assess the investing experience of popular Canadian mutual funds in contrast to investing in index ETFs that track the benchmark the mutual fund is trying to outperform.
With $29.9 billion in assets RBC Select Balanced Portfolio is the largest mutual fund in the country, followed by RBC Select Conservative Portfolio ($27.9 billion). The five RBC Select asset allocation fund of funds total $82.1 billion in assets (all three figures from RBC GAM as of 4/30/2018). For comparison and perspective, Canadian ETFs as a whole tally $153.2 billion (CETFA as of 4/30/2018). The mammoth size of the product makes it a natural starting point for the Mutual Funds vs. ETF Benchmarks series.
The RBC Select product predates ETFs, with the Conservative, Balanced, and Growth Portfolios having launched in late 1986. The funds have broad appeal because it is easier to choose an appropriate fund between the Very Conservative Portfolio and the Aggressive Portfolio rather than to piece together a group of mutual funds into a portfolio. As a result, the product has captured a huge amount of assets over the years (side note: RBC has quickly established itself as a player in ETFs as well, ranking 5th among ETF providers by AUM according to the CETFA Monthly Report as of April 30, 2018).
RBC Select is managed by Sarah Riopelle, CFA – Vice President & Senior Portfolio Manager at RBC Global Asset Management (RBC GAM) and her team. They publish a useful quarterly newsletter with insights on markets, portfolio performance and positioning, and outlook. In the Spring 2018 newsletter, she notes “For a global, balanced portfolio, we took advantage of the recent increase in yields to reduce our underweight position in fixed income by one percentage point sourced from cash.” reminding us of the active management her team employs.
Benchmark information was gathered from the relevant Monthly Update reports on RBCGAM.com. The following tables lay out the ETFs we will be using and the breakdown of each ETF benchmark:
The following return presentation consists of the last 3 full calendar years and a year to date figure for 2018:
RBC Select had the superior performance in only 2 of 20 periods. On average, the ETF Portfolio consisting of the respective benchmark components was ahead by 0.7%. This data brings two findings:
- Better returns would have been realized by investing in the ETF version of RBC Select benchmarks rather than the RBC Select mutual funds themselves.
- However, the portfolio management team of RBC Select performed well on a gross of fees basis. This is clear since the difference in returns is less than the difference in MERs. Unfortunately, investors cannot get gross of fees returns. While a fee cut would be encouraging, it is unlikely they could be lowered to a level comparable to the passive ETFs we are using as a comparison given the active management at both the underlying and top fund levels. In other words, the ETF Portfolios came out ahead due to the fee advantage, but they did not capture the entire fee advantage because of the value added by the active management of RBC Select.
How much better off would investors have been to invest in the ETF portfolios instead of RBC Select? To assess the investor experience, we compare what a lump sum invested in either alternative would have grown to. For this exercise, we are looking at the growth of $10,000 invested over the most recent 3 year period.
The difference is substantial, especially for the Aggressive Growth comparison. Should this performance gap continue, ETF investors would come out well ahead. Sticking with the Aggressive Growth example, $10,000 invested at 6.4% for 30 years would become $64,306, and at 8.0% would become $100,627!
Note this analysis does not address risk, largely due to the limited length of the performance period and the fact that it is during a bull market. The 2018 YTD figures give some sense of performance in a negative environment, and here the ETF portfolios came out ahead in all five instances. Also interesting is that Growth and Aggressive Growth investors would have avoided a year to date loss by investing in the ETF portfolio.
It would be interesting to look back further, but this analysis was limited to 3 years in order to:
- allow for the fact that the asset mix and benchmark may have been significantly different in the past
- recognize that the more recent period has greater relevance today when ETFs are more mainstream and have greater acceptance in forming the basis of a portfolio
Should every investor in RBC Select rush to sell their mutual fund and buy an ETF portfolio of the benchmark components? Not so fast. There are valid reasons for staying put. For starters, past outperformance for the ETFs does not guarantee future outperformance and it is possible (albeit unlikely, especially for longer time periods) that RBC Select will overcome the fee disadvantage and outperform the ETF portfolios going forward. As well, some investors may enjoy the convenience of contributing regularly to a mutual fund and not having to worry about making multiple trades and rebalancing. Even so, these investors may benefit from considering the findings of this analysis carefully and reassessing their plans.
For those already interested in managing their own portfolios, this comparison illustrates the value of ETFs when tested head to head against a top mutual fund product. Lower fees are a real and lasting advantage of the ETF route and over time should compound into a significant reward. Active management has value too, but unlike a fee advantage, it can be a negative as well as a positive. Had the RBC Select team underperformed on a gross basis, the advantage of the ETF portfolios would have been that much greater.
As for RBC GAM, given that they have built up an ETF business, an opportunity to give investors the best of both worlds is within reach. They could launch an ETF of ETFs with the same team and process that manages the RBC Select product, but using RBC ETFs and where needed, ETFs from other providers. If they could come out with a management fee below 1% (or ideally, below 0.50%), they could make a compelling case as one of the better offerings in the country.
Such an idea would cannibalize more profitable mutual funds but in launching the ETF suite, RBC GAM has recognized the realities of the marketplace and shown a willingness to adapt with the times.
Vanguard has recently done something similar with their asset allocation ETFs.
This post is not meant to be taken as investment advice. Please conduct due diligence on any ETF investment you are considering, including but not limited to a review of the prospectus, underlying benchmark methodology (if applicable), portfolio characteristics, holdings, performance since inception, role in your existing portfolio, and outlook for future performance.