Welcome to Financial Advisor IQ

‘Late to Party’ Franklin Templeton Eyes More ETFs

By Murray Coleman January 8, 2018

For most of its 70-plus years as an American asset manager, Franklin Templeton Investments has been known as a provider of mutual funds. But in 2017 a strategic shift into ETFs moved into high gear, according to executives at the firm.

The launch of 16 index-based single country Franklin LibertyShares in November pushed the ETF family’s assets under management past $1 billion by year’s end, data compiled by independent market researcher ETF.com reveals.

“It’s been a busy two years, and now with our passive suite of products in place, we’ve set a foundation for clients who want a wide range of choice in ETFs,” says Patrick O’Connor, head of global ETFs at Franklin Templeton.

Besides its country-specific ETFs brought to market last year, Franklin Templeton launched three more smart-beta funds in April. Together, Franklin’s 23 passive funds attracted nearly $315 million in net inflow in 2017, ETF.com estimates.

The combination of benchmark-bound funds and smart-beta strategies, which are also categorized by Morningstar and FactSet as passively managed, accounted for slightly more than $922 million of Franklin Templeton’s 2017 ETF assets.

Meanwhile six active LibertyShares ETFs had almost $37 million in net outflow. "Advisors continue to ask to see more of our passive strategies," O’Connor says. "But stepping back and taking a longer-term view, we still think they’ll tend to gravitate to active and smart-beta strategies.”

Along with 29 U.S.-run ETFs, the funds complex last year launched another nine portfolios for investors in Canada and Europe.

While surpassing $1 billion in assets is a notable high-water mark, analyst Todd Rosenbluth notes ETFs still represent a new and rather nascent product for a funds manufacturer which managed more than $753 billion through November.

But strong initial investment flows into index-based and smart-beta ETFs, he suggests, indicate Franklin Templeton is tapping into an even bigger revenue stream. Indeed, the largely passive domestic ETFs marketplace last year garnered an estimated $3.4 trillion in assets and generated $476 billion in net inflow.

“We see this recent expansion into passive ETFs as a significant move by Franklin Templeton – it’s going to allow them to leverage a well-known brand in mutual funds to take advantage of growing interest in low-cost index investing," says Rosenbluth, director of ETF and mutual fund research at CFRA, which acquired S&P Global Market Intelligence’s fund business in 2016.

“This company has based its growth over the years on building long-term relationships in wealth management. That already-established affinity with advisors should serve their expansion into ETFs very well.”
Todd Rosenbluth

Still, Franklin Templeton is “relatively late to the party,” he points out. That could prove problematic since today’s crowded ETF market is dominated by a handful of big players, Rosenbluth observes. "Any new competitor is going to find it challenging to claim a significant share in an already highly competitive field," he says.

A key to Franklin Templeton’s success with ETFs over time is likely to come down to how much advisors take to such a product push, according to Rosenbluth. “This company has based its growth over the years on building long-term relationships in wealth management,” he says. “That already-established affinity with advisors should serve their expansion into ETFs very well.”

Expected out later this year are four more LibertyShares index-based ETFs. Franklin Templeton has filed for funds covering Switzerland, India, Russia and Asia (excluding Japan). “We’ll be adding more passive building blocks based on what advisors, pension fund managers and ETF strategists tell us they’d like to see,” O’Connor says.

Jeremy Davis, a partner at Kerrigan Davis in Valdosta, Ga., is one independent advisor who has already started to wade into Franklin Templeton’s smart-beta ETFs.

Jeremy Davis

As a Franklin Templeton mutual fund investor for more than a decade, he and his colleagues at the firm — which manages $194 million — are putting client assets into the Franklin LibertyQ International Equity Hedged ETF. The fund buys a wide swath of foreign stocks and hedges those returns back into the U.S. dollar.

“We like this ETF because it doesn’t subject our clients to overseas currency risks associated with international investing,” Davis says. “It also helps filter returns by focusing on stocks based on a company’s quality of its balance sheet, the stock’s relative value, market momentum factors and low-volatility in prices over time.”

The number of smart-beta ETFs on the market these days has exploded, he notes. And like most fiduciaries, Davis makes a point of not tying his investment strategy to any particular outside asset manager. Instead, his decisions are based on funds that help limit market risks and are competitively priced.

“When we make allocation decisions it’s based on what is best for each individual investor,” Davis says. “But our past relationship with Franklin Templeton means that if all things are equal, we’re more likely to go with one of their ETFs."