Show Transcript
Canadian investors will soon get a wider selection of fixed income ETFs to choose from. Andres Rincon, Head of ETF Sales and Strategy at TD Securities, looks at the arrival of covered call fixed income ETFs, how they work and the implications for investors.
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While there are plenty of different types of equity-focused exchange traded funds, you don't see the same sort of diversity when it comes to ETFs that are focused on fixed income. Well, that is starting to change. Joining us now to discuss, Andres Rincon, head of ETF Sales and Strategy with TD Securities. Great to have you back on the program, Andres.
Thank you. Thank you for having me. It's been a couple of times this year that I've been on your show. And I enjoy myself every time.
All right, we've had some very interesting conversation with the ETF space and some of the trends you're seeing. This one is very interesting, a new covered call bond ETF that is launching in Canada in the coming days. What are they? How do they work? What do we need to know about them?
We're very excited about this launch. And generally speaking, Canada tends to be a leader in innovation when it comes to ETFs. But this time, the US launched the first covered call bond ETF about a year or so ago. It was August last year. But starting this Friday, in Canada, we will have listed the first bond covered call ETF in Canada.
So Hamilton ETFs will launch that ETF. The ticker will be HBND. And basically, it gives you exposure to bonds, in this case, very likely treasuries, and then sells calls over these names.
And it's just the start of it. Shortly after they filed, then you had Harvest ETFs launch or file for their own bond covered call ETF. And the ticker on that was HPYT, I believe. And they're launching soon. So we don't have all the details on that one because it hasn't launched yet.
But they will launch over the next few weeks or so. So soon, we will have two covered call bond ETFs here in Canada. And I know there's many, many more to come because this is a very exciting area.
And you want to ask like, why is it exciting? Well, it's simple. Investors in Canada want yield. And these ETFs pay more than 10% in yield. And a big chunk of this yields cap is capital gains. So it's tax efficient. So from the investor's perspective, this is very attractive of a product.
So basically, what these products do is they give you exposure to government bonds, which is what we're going to see in Canada to start. But in the US, you also have high yield investment grade. So they give you exposure to an ETF that gives you exposure to these bonds. And then, what they do is that they sell calls on these names. By selling calls--
To generate that extra income to make the extra yield.
Exactly. So they're capping your upside on that specific exposure, that specific ETF. And by doing so, they're generating yield. So basically, you're exchanging growth for yield in these ETFs.
Is that the big trade-off? I guess, is that the risk? Is someone trying to assess this product? They take a look and say, OK, the yield is better than your regular bond ETF. But the covered call portion means that if the bond market does start to recover in a way that's been expected for a while, if those cuts come from central banks, you're going to lose some of that upside.
100%. People tend to own-- especially on the government bond side, they will own-- these ETFs to start, in Canada, will own long-term government bonds. And generally speaking, right now, investors own these as a hedge against a recession. Markets going lower, the markets going lower, then interest rates go up and these-- sorry, interest rates go down.
And these ETFs do fairly well. So the moment you sell a call on these specific exposures, then you're capping some of that. Now, while you wait for the recession to happen, this is a good moment then to look at these names. And that's why they are now launching these ETFs because people see it as an opportunity to get some yield while they're waiting for, let's say, a recession, if there's going to be one, for example.
Versus an ETF, I imagine that it's a liquid market.
Exactly. You can--
An investor can get in and out of these investments as they read the market.
Yeah, exactly. So the underlying is treasuries, US treasuries. You can buy and sell that very, very easily in the US. So you can get out of that into your traditional long federal bond ETF or long Treasury ETF. And you know what's interesting?
On the other side of that is that you-- it's very hard to get any more than 5% in an ETF, in a bond ETF, without really going up the credit curve or the risk curve. So the average high-yield ETF in Canada pays about 6.8%, let's say. Now you're getting over 10%, very likely, in these ETFs. But you don't have to go up the credit curve. All you're doing is basically capping your upside on these ETFs.
A very interesting development. You always bring a lot of interesting developments to our conversations. We have seen, obviously, by the very nature of the fact that central banks have hiked aggressively, yields have moved higher in fixed income. We see interest there, in that's space. Let's talk about some of the potentials in that market, more broadly.
Yeah, you know what's interesting? I recently hosted the Global Head of iShares in our podcast, Buyside Views. And one of the key things that were mentioned in that podcast is that, right now, the fixed income market is about-- on the ETF side, it's about $2 trillion.
So it's a big number. But it's 2% of the bond market in total. So it's a tiny part of the bond market. We do expect-- or he, sorry. In this case, Salim expects the bond market to go to $6 trillion, so it's triple, in this decade alone. So that's how the prospects of this specific part of the ETF space are massive, really.
So what we're seeing in Canada today, for example, is a lot of the money is going into safety and yield. And so we either go into cash management ETFs or government bond ETFs. 43% of the yields this year are in these two specific areas. And if you look at the overall fixed income bucket, just over 60% of all the dollars going into TS are going into fixed income.
And just bear in mind that the ETFs, part of the-- sorry, the fixed income part of the ETF world is much smaller than the equity part. You mentioned it earlier.
Yeah.
So it is really pulling above its weight.
Model portfolio ETFs, asset allocation ETFs, we've been hearing about this. You and I may have even-- had touched on it the last time we had a discussion. What's the role here? I think advisors both have an eye on this kind of thing, but also do it yourself investors.
100%. This is becoming-- for starters, this is huge in the US. Model portfolios are a huge driver of flows in US ETFs. A little bit less in Canada. Model portfolios really are-- start with advisors. They need an easy way to allocate assets to different regions, different markets and asset classes.
And model portfolios produce just that. So a lot of the issuers provide their own model portfolios. And they basically team up with different channels to be able to offer these models.
Now, for mom and pop on the retail side, it's a bit harder to get exposure to a model portfolio because they are generally in partnership with a specific channel. But what the issuers have done to address this and to get exposure to the retail channel is produce asset allocation ETFs, which in Canada are very big. So it's interesting. Model portfolios are very big in the US. Asset allocation ETFs are very big in Canada.
And this is really a story about mom and pop getting exposure to a complete portfolio. These asset allocation ETFs give you exposure to, let's say, a balanced portfolio, a conservative portfolio, all the way from pure equity to pure fixed income. So the whole spectrum of risk, you get exposure to that through one ticket solution.
So through one ticket, you get exposure to several ETFs. And in Canada, it's a very big area. We have many issuers in that space, like the Vanguards, the iShares, the BMOs of this world. And what's interesting is that in Canada, and Salim mentioned this on the video, they just launched their first model portfolios in Canada. And obviously, they already have a fairly sizable lineup of asset allocation ETFs.
Yeah, of course, this was on your Buyside Views program. And this was a fairly notable person in this space. The Global Head of iShares, Salim Ramji, was-- and I think we have a clip of it that we can listen to the audience. Then we'll talk about it on the other side of it.
What bond ETFs are doing is that they're really taking the bond market from the analog age to the digital age. It's really hard to buy an individual bond. And that's true if you're an individual investor and you're trying to find a particular CUSIP online.
It's really difficult to-- near impossible depending on the country you live in. It's also really hard if you're a financial advisor to sort through the thousands of different options and variants of bonds. And I think what bond ETFs are doing is that they're making it just as easy to buy a bond as it is to buy an equity.
All right. Salim Ramji, Global Head of iShares and Index Investing at BlackRock. As we say in the business, pretty big get in terms of getting a guest for your program, Buyside Views. What else did you guys discuss?
So we discussed fixed income. We discussed model portfolios. Most importantly, we discussed the evolution of ETFs. So look, what's interesting about Salim is he's at the top of the food chain when it comes to ETFs. He has a global perspective on what's happening in the world, flows from regions, asset classes.
So it was great to have him on our show and to obviously have his insights from all the different perspectives of what they're seeing on their-- in their ETF specifically. I do want to remind the listeners, obviously, if they want to listen to Buyside Views, the extended version, they can do so on our website, on Spotify, Google Podcasts, or Apple Podcasts. And make sure to subscribe there. [AUDIO LOGO]
[MUSIC PLAYING]
While there are plenty of different types of equity-focused exchange traded funds, you don't see the same sort of diversity when it comes to ETFs that are focused on fixed income. Well, that is starting to change. Joining us now to discuss, Andres Rincon, head of ETF Sales and Strategy with TD Securities. Great to have you back on the program, Andres.
Thank you. Thank you for having me. It's been a couple of times this year that I've been on your show. And I enjoy myself every time.
All right, we've had some very interesting conversation with the ETF space and some of the trends you're seeing. This one is very interesting, a new covered call bond ETF that is launching in Canada in the coming days. What are they? How do they work? What do we need to know about them?
We're very excited about this launch. And generally speaking, Canada tends to be a leader in innovation when it comes to ETFs. But this time, the US launched the first covered call bond ETF about a year or so ago. It was August last year. But starting this Friday, in Canada, we will have listed the first bond covered call ETF in Canada.
So Hamilton ETFs will launch that ETF. The ticker will be HBND. And basically, it gives you exposure to bonds, in this case, very likely treasuries, and then sells calls over these names.
And it's just the start of it. Shortly after they filed, then you had Harvest ETFs launch or file for their own bond covered call ETF. And the ticker on that was HPYT, I believe. And they're launching soon. So we don't have all the details on that one because it hasn't launched yet.
But they will launch over the next few weeks or so. So soon, we will have two covered call bond ETFs here in Canada. And I know there's many, many more to come because this is a very exciting area.
And you want to ask like, why is it exciting? Well, it's simple. Investors in Canada want yield. And these ETFs pay more than 10% in yield. And a big chunk of this yields cap is capital gains. So it's tax efficient. So from the investor's perspective, this is very attractive of a product.
So basically, what these products do is they give you exposure to government bonds, which is what we're going to see in Canada to start. But in the US, you also have high yield investment grade. So they give you exposure to an ETF that gives you exposure to these bonds. And then, what they do is that they sell calls on these names. By selling calls--
To generate that extra income to make the extra yield.
Exactly. So they're capping your upside on that specific exposure, that specific ETF. And by doing so, they're generating yield. So basically, you're exchanging growth for yield in these ETFs.
Is that the big trade-off? I guess, is that the risk? Is someone trying to assess this product? They take a look and say, OK, the yield is better than your regular bond ETF. But the covered call portion means that if the bond market does start to recover in a way that's been expected for a while, if those cuts come from central banks, you're going to lose some of that upside.
100%. People tend to own-- especially on the government bond side, they will own-- these ETFs to start, in Canada, will own long-term government bonds. And generally speaking, right now, investors own these as a hedge against a recession. Markets going lower, the markets going lower, then interest rates go up and these-- sorry, interest rates go down.
And these ETFs do fairly well. So the moment you sell a call on these specific exposures, then you're capping some of that. Now, while you wait for the recession to happen, this is a good moment then to look at these names. And that's why they are now launching these ETFs because people see it as an opportunity to get some yield while they're waiting for, let's say, a recession, if there's going to be one, for example.
Versus an ETF, I imagine that it's a liquid market.
Exactly. You can--
An investor can get in and out of these investments as they read the market.
Yeah, exactly. So the underlying is treasuries, US treasuries. You can buy and sell that very, very easily in the US. So you can get out of that into your traditional long federal bond ETF or long Treasury ETF. And you know what's interesting?
On the other side of that is that you-- it's very hard to get any more than 5% in an ETF, in a bond ETF, without really going up the credit curve or the risk curve. So the average high-yield ETF in Canada pays about 6.8%, let's say. Now you're getting over 10%, very likely, in these ETFs. But you don't have to go up the credit curve. All you're doing is basically capping your upside on these ETFs.
A very interesting development. You always bring a lot of interesting developments to our conversations. We have seen, obviously, by the very nature of the fact that central banks have hiked aggressively, yields have moved higher in fixed income. We see interest there, in that's space. Let's talk about some of the potentials in that market, more broadly.
Yeah, you know what's interesting? I recently hosted the Global Head of iShares in our podcast, Buyside Views. And one of the key things that were mentioned in that podcast is that, right now, the fixed income market is about-- on the ETF side, it's about $2 trillion.
So it's a big number. But it's 2% of the bond market in total. So it's a tiny part of the bond market. We do expect-- or he, sorry. In this case, Salim expects the bond market to go to $6 trillion, so it's triple, in this decade alone. So that's how the prospects of this specific part of the ETF space are massive, really.
So what we're seeing in Canada today, for example, is a lot of the money is going into safety and yield. And so we either go into cash management ETFs or government bond ETFs. 43% of the yields this year are in these two specific areas. And if you look at the overall fixed income bucket, just over 60% of all the dollars going into TS are going into fixed income.
And just bear in mind that the ETFs, part of the-- sorry, the fixed income part of the ETF world is much smaller than the equity part. You mentioned it earlier.
Yeah.
So it is really pulling above its weight.
Model portfolio ETFs, asset allocation ETFs, we've been hearing about this. You and I may have even-- had touched on it the last time we had a discussion. What's the role here? I think advisors both have an eye on this kind of thing, but also do it yourself investors.
100%. This is becoming-- for starters, this is huge in the US. Model portfolios are a huge driver of flows in US ETFs. A little bit less in Canada. Model portfolios really are-- start with advisors. They need an easy way to allocate assets to different regions, different markets and asset classes.
And model portfolios produce just that. So a lot of the issuers provide their own model portfolios. And they basically team up with different channels to be able to offer these models.
Now, for mom and pop on the retail side, it's a bit harder to get exposure to a model portfolio because they are generally in partnership with a specific channel. But what the issuers have done to address this and to get exposure to the retail channel is produce asset allocation ETFs, which in Canada are very big. So it's interesting. Model portfolios are very big in the US. Asset allocation ETFs are very big in Canada.
And this is really a story about mom and pop getting exposure to a complete portfolio. These asset allocation ETFs give you exposure to, let's say, a balanced portfolio, a conservative portfolio, all the way from pure equity to pure fixed income. So the whole spectrum of risk, you get exposure to that through one ticket solution.
So through one ticket, you get exposure to several ETFs. And in Canada, it's a very big area. We have many issuers in that space, like the Vanguards, the iShares, the BMOs of this world. And what's interesting is that in Canada, and Salim mentioned this on the video, they just launched their first model portfolios in Canada. And obviously, they already have a fairly sizable lineup of asset allocation ETFs.
Yeah, of course, this was on your Buyside Views program. And this was a fairly notable person in this space. The Global Head of iShares, Salim Ramji, was-- and I think we have a clip of it that we can listen to the audience. Then we'll talk about it on the other side of it.
What bond ETFs are doing is that they're really taking the bond market from the analog age to the digital age. It's really hard to buy an individual bond. And that's true if you're an individual investor and you're trying to find a particular CUSIP online.
It's really difficult to-- near impossible depending on the country you live in. It's also really hard if you're a financial advisor to sort through the thousands of different options and variants of bonds. And I think what bond ETFs are doing is that they're making it just as easy to buy a bond as it is to buy an equity.
All right. Salim Ramji, Global Head of iShares and Index Investing at BlackRock. As we say in the business, pretty big get in terms of getting a guest for your program, Buyside Views. What else did you guys discuss?
So we discussed fixed income. We discussed model portfolios. Most importantly, we discussed the evolution of ETFs. So look, what's interesting about Salim is he's at the top of the food chain when it comes to ETFs. He has a global perspective on what's happening in the world, flows from regions, asset classes.
So it was great to have him on our show and to obviously have his insights from all the different perspectives of what they're seeing on their-- in their ETF specifically. I do want to remind the listeners, obviously, if they want to listen to Buyside Views, the extended version, they can do so on our website, on Spotify, Google Podcasts, or Apple Podcasts. And make sure to subscribe there. [AUDIO LOGO]
[MUSIC PLAYING]
