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Helen Hayes, head of iShares Canada, at her Toronto office on July 11.JENNIFER ROBERTS/The Globe and Mail

As shaky markets steer investors toward safe-haven investments, Canada’s largest exchange-traded fund duo, BlackRock Inc. and Royal Bank of Canada RY-T, are seeing growing demand for fixed-income products, as well as sustainable funds with an ESG focus.

Since joining forces in 2019, the collaboration between RBC Global Asset Management and BlackRock’s Canadian arm – under the brand RBC iShares – has brought in $40-billion in assets while investors have had to navigate unpredictable markets affected by pandemic lockdowns, the war in Ukraine and rising inflation.

Almost $21-billion of that sits in RBC iShares fixed-income ETFs, up $605-million over the past four months alone, said Helen Hayes, BlackRock’s head of iShares Canada.

“We have seen investors turning much more defensive in recent months, moving from equities to fixed income,” Ms. Hayes told The Globe and Mail in an interview. “As soon as we saw that 50-basis-point rate hike in April, we started to see the flows shift. Now, the message about how fixed income fits into a portfolio is one of the biggest conversations we are having right now.”

Why big investors aren’t giving up on ESG

The alliance between Canada’s largest bank and the world’s largest money manager is rare in the asset management business. In 2019, BlackRock needed a path to a larger distribution network, while RBC was lagging behind competitor Bank of Montreal BMO-T in overall ETF assets.

Executives at both companies stress that RBC iShares is not a joint venture or legal partnership, but rather an arrangement that allows the two asset managers to remain separate legal entities while operating a co-branded ETF business.

Now, the alliance is paying off. RBC iShares is Canada’s leading ETF company, with almost $100-billion in assets in more than 170 ETFs – up from $60-billion in 120 ETFs when they joined forces in 2019.

Today, there are 42 ETF providers in Canada, managing a total of $304-billion in assets, according to research by National Bank Financial. While there has been some consolidation in the industry, there has never been a similar alliance or partnership between competitors.

“It’s been three years, and we hope to be together three decades from now,” said Doug Coulter, the president of RBC Global Asset Management, in an interview. “There is no time stamp on the agreement, but if we were to go separate ways, all of a sudden we don’t have a product shelf and BlackRock doesn’t have distribution.”

When ETFs first launched in Canada in the late 1990s, there were fewer than a handful of independent providers in the market. As investor demand forced the banks to take notice, larger global asset managers such as BlackRock and the Vanguard group were already industry leaders in the Canadian ETF market, with product lineups that largely consisted of low-cost index-tracking funds.

RBC entered the market in 2011; in order to catch up, it needed a partner.

“When we had the ETF business on our own – before the alliance – the thing we were always challenged with was liquidity,” Mr. Coulter said.

“Liquidity was a big factor for investment advisers and probably continues to be more of a factor right now with where markets are. But when you are a $100-billion business – with over 170 products – that provides investors with peace of mind, because we have a lot of assets in those products.”

The alliance has bumped RBC into the No. 1 spot for ETF assets from fifth place in 2019. And BlackRock – which has been operating in Canada since 2009, when it acquired Barclays Global Investors – has maintained its leading market share, which had begun to quickly dilute as more companies entered the ETF fray in Canada.

Between 2013 and 2018, BlackRock’s market share declined from 66 per cent to 38.6 per cent, according to National Bank Financial.

Daniel Straus, the director of ETFs and financial products research at National Bank Financial, said that while the overall market share for RBC iShares has now fallen to 29.1 per cent, the alliance has accomplished what it set out to do.

“Before the alliance, we saw iShares losing market share at a rate of 5 per cent per year, but after the alliance with RBC, this rate arrested somewhat and has slowed down to roughly 2 per cent a year market share decline, suggesting the alliance has been a success,” Mr. Straus said.

In order to maintain its position, RBC iShares has branched out from the traditional plain vanilla index funds that have dominated the ETF industry. The partnership has added more complex products such as sustainable ETFs and a series of five “megatrend” ETFs – investments that provide access to indices of popular trends such as medical breakthroughs, infrastructure, renewables and climate change mitigation.

The alliance has allowed RBC iShares to streamline services and cut down on costs, merge duplicate funds, combine wholesale teams and ETF specialists and add to its lineup of ESG–focused index funds, which currently manage about $1.3-billion in 20 ETFs, up from six in 2019.

BlackRock chief executive Larry Fink has been vocal throughout the pandemic that “climate risk is investment risk.” He expects companies to disclose their plans for transitioning to a low-carbon economy.

“Globally, ESG is a really big focus for BlackRock to be leading in this area with more than 180 products,” Ms. Hayes said. “And that innovation will also come to Canada as it continues to expand.”

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