Rules-based investing

Q1: What is rules-based ETF investing? Rules-based investing is the idea that we’re looking for companies that meet certain criteria, certain fundamental financial ratios.  So we screen a list of companies down to a list of companies that meet those rules.  And that’s very different than passive investing.  Passive investing doesn’t really have any rules; it’s simply usually a cap-weighted index where you’re not looking for companies with any particular financial criteria.

Q2: What’s the stock selection criteria in the RBC Quant Dividend Leaders ETFs?      
Well the first thing, we’re looking for income, and in an equity-oriented solution, we look to dividends to provide us that income orientation within an equity solution.  So our first, our screen, if you will, is to look for companies that have a decent level of dividends, usually market-like level of dividend yields to meet that first criteria.

The second thing we’re looking for is companies within that income orientation that actually have decent financial strength, so high-quality balance sheets, high growth orientation, the ability to sustain and produce dividends, and potentially grow dividends, because oftentimes when you just do a simple income screen, you may end up with the situation that that company can’t sustain those dividends.  So our, our work in the fundamentals and the financial strength of these companies is to make sure that these companies can maintain and grow their dividends.

An Innovative Weighting Method

Q3: What are the disadvantages of using a traditional market cap weighting?         
One of the innovations we’ve done with these products is actually the weighting method to improve upon what you might have done traditionally, which you might have just simply taken those list of companies and market cap weighted them.  That’s what our standard indices look like today.  You look at the S&P 500, you look at the TSX, you look at the various MSCI indices, these are all market cap-weighted indices.  One of the difficulties with market cap weighting is it’s always rearview mirror-looking.         

A great example of that today is Apple.  Apple, today, is the biggest company on the S&P 500 but due to competition, its weight in the index has been declining.  So as we think forward on Apple and the competitive threats over the last couple of years, the market cap weighted index didn’t help us.         

We see this time and time again with market cap weighting.  The tech bubble of the late ‘90s, the nifty 50 of the ‘70s, we get these events all the time.  So what we’ve done is we’ve recognized the economic threat, if you will, of competition and we’ve adjusted, or modified, the market cap weighting in our mechanism to give you an innovative and more forward-looking weighting mechanism within the portfolio.

Final Thoughts

Q4: What sets the RBC Quant Dividend Leaders ETFs apart?
I think our biggest advantage is our long and great experience in being active money management during the history and the tradition of RBC Global Asset Management. Plus, on my team alone, we’re looking at five decades of successful active money management, in a combined team experience. That brings an incredible level of strength to rules-based ETF solutions. So we argue that if you’re building a rules-based solution, who would you rather have?         

We would argue that active money management provides you a great leg up. Many of our peers come from a passive tradition, and so our experience and knowledge in active space will provide a good experience to these rules-based ETF solutions.