As the Bank of Canada continues its easing cycle, managing interest rate risk is top of mind for investors. One way to do this is through tailoring duration within their fixed income portfolios.

Target maturity bond (TMB) ETFs make this approach easy, and are a solution that investors are turning to. In the 12 months to June 2024, assets in TMB ETFs grew by more than 40% to $40 billion, according to Morningstar. TMB ETFs mature like a bond, trade like a stock, and are diversified like a fund. Stephen Hoffman, Managing Director, Exchange Traded Funds, at RBC Global Asset Management Inc. (RBC GAM), outlines the benefits of adding these funds to client portfolios.

“TMB ETFs mature like a bond, trade like a stock
and are diversified like a fund.”

Why are TMB ETFs an efficient solution in today’s market?

Stephen Hoffman: I believe TMB ETFs are a suitable solution in all markets. But looking at today’s market specifically, there are a few things happening. First, the selection and availability of corporate bonds at dealers across the country are limited, so advisors may not have access to a broadly diversified supply of bonds.

Also, in a market where interest rates are beginning to ease, a lot of advisors and investors have found that having a known maturity date can help them manage interest rate risk versus a more traditional bond fund/ETF. TMB ETFs provide a diversified portfolio of bonds that all mature in the same calendar year, offering some certainty in a changing interest rate environment. This helps advisors to manage interest rate risk by tailoring portfolio duration.

What are their benefits?

SH: These ETFs trade on the stock exchange, like stocks, and offer exposure to a diversified basket of bonds based on the desired exposure – we offer Canadian corporate bond, Canadian government bond and U.S. corporate bond TMBs. They enable advisors to build a customized portfolio that’s tailored to an investor’s specific maturity profile, liquidity needs, and investment goals. In addition, they also pay out income monthly, and provide daily price transparency. When the ETF matures, investors receive the net asset value.

They also provide an easy way to build bond ladders. Rather than purchasing individual bonds with various maturity dates, each TMB ETF will hold between 20 and 50 bonds. So, a five-year bond ladder could have exposure to as many as 250 bonds, which provides impressive diversification.

Why is RBC GAM’s suite of TMB ETFs unique?

SH: RBC GAM actually created this category in Canada in 2011 when we launched our first suite of TMB ETFs. They were initially introduced to solve a significant advisor need to easily transact in bonds with liquidity and price transparency, while maintaining the maturity feature individual bonds offer. We’re the only issuer that publishes expected maturity value and have years of experience managing the ETF maturities; we have matured 11 TMB ETFs to date. Our suite has assets totalling $3.5 billion across the largest maturity range in the Canadian market (2025-2030).

How can advisors benefit from adding TMB ETFs to their practice?

SH: TMB ETFs are great time savers. Instead of managing individual bonds/GIC maturities, advisors can manage a single solution with a set maturity date and a known maturity value. In addition, they offer advisors many efficiencies that help them in their practice; they provide broadly diversified exposure, the convenience of a single ticker trade, the flexibility to choose a range of maturity dates that best suits a variety of investment portfolios, simplified monthly cash management and the ability to bulk-trade versus trading a series of individual bonds.

How can advisors implement TMB ETFs in client portfolios?

SH: Advisors can use TMB ETFs to replace individual bonds and GICs in their client portfolios, which can simplify the management of their fixed income book. These ETFs provide their clients with regular monthly income and flexibility. Advisors have the ability to bulk-trade a broad portfolio of bonds through a single trade, which is huge from a business-efficiency perspective. Whether advisors are looking to build bond ladders or implement other strategies, they can do it in less time and with more precision with TMB ETFs.

This article does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. RBC iShares ETFs are comprised of RBC ETFs and ETF Series of RBC Funds managed by RBC Global Asset Management Inc. and iShares ETFs managed by BlackRock Asset Management Canada Limited (“BlackRock Canada”). Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus or ETF Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. RBC ETFs are managed by RBC Global Asset Management Inc., which is a member of the RBC GAM group of companies and an indirect wholly owned subsidiary of Royal Bank of Canada.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence. iSHARES is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used under licence. © 2024 RBC Global Asset Management Inc. and BlackRock Asset Management Canada Limited. All rights reserved.

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Generating income is a perennial challenge for investors and financial advisors alike. How can bond, dividend and other kinds of ETFs provide solutions?

In this virtual roundtable replay, hosted by Advisor.ca and Investment Executive, which aired live Thursday, October 17, 2024 at 1:00 PM ET, we’ll dig into the role ETFs can play in providing income for clients and the issues advisors need to consider when constructing portfolios.

Presented by:
Charles Lebel, Senior Manager, Investment Solutions, National Bank Investments
Jonathan Needham, Vice President & Director, TD Asset Management Inc.
Jacqueline Tung, Vice President, ETF Leader, BlackRock
Robert Wernic, Head of Specialists, Manulife Investment Management

Moderated by:
Stephanie Wolfe, Co-Head Marketing, Women in ETFs Canada

About the presenters

About the moderator