Investment manager Franklin Templeton has marked eight years as an ETF issuer in the U.S. market. Primarily known as an active manager of mutual funds, the firm also offers active, quasi-active and passively managed strategies within the ETF wrapper. Franklin’s U.S. lineup of more than 70 domestically listed ETFs has grown to almost $25 billion in assets under management, and the firm is setting its sights even higher.
VettaFi spoke recently with Nate Williams, a vice president and ETF specialist with the firm, about the growth of Franklin’s ETF business and the unique aspects of its lineup.
Franklin is known primarily as an active shop. How does that manifest in its current ETF offering?
Well, what we've done is build out a multi-manager ETF platform with that strength in active — that's been key.
First, it's diversified. Our 72 U.S.-listed ETFs and ETPs span quite a breadth of asset classes, including core equity and fixed income, thematics, alternatives, multi-asset, single countries and regions, and even gold and digital assets1. That’s a robust set of tools to serve wealth managers and their clients in a variety of ways across an entire portfolio.
What’s most differentiated about our active ETF component is that it's multi-manager in nature — bringing 11 different specialist investment managers together under the Franklin Templeton umbrella. That includes the various components of Franklin Templeton itself, along with the likes of Putnam, ClearBridge, Brandywine, Royce, and others. In other words, we are not a third-party sub-advisory; rather, we consider these various active core competencies as our own cooking, all under one house. It’s unique in this industry.
Sticking with the “home cooking” theme, what does Franklin see as the ingredients of a successful, actively managed ETF?
The ingredients would be to deliver, first and foremost, a product that represents a core competency of the portfolio team. Perhaps that is a subset of an existing strategy currently managed in a different vehicle, or a new strategy that fills a gap in the marketplace that utilizes a particular team’s expertise. From there, it’s determining what the client may want from that team, seeing how that can best be structured in the ETF, and then ultimately, pricing it effectively.
What funds in Franklin's U.S. lineup are resonating with investors right now?
We’re seeing client interest across our entire spectrum, but I think it's important to maybe start with where we're seeing a lot of volume lately — large-cap value. The Putnam Focused Large Cap Value ETF (PVAL) covers an asset class that most investors own, but our clients often tell us they lack conviction in how best to own it right now. We believe PVAL really shines in this space as a high-conviction stock picker’s ETF based on relative value, seeking capital growth and current income. The managers assess future cash flows and individual security risks as they aim to build a portfolio consisting of 35 to 45 holdings. There's a real strength in the team’s active story, and the ETF is competitive among its peers.
Moving down in market cap to mid-size companies, our ETF in this space is the Franklin U.S. Mid Cap Multifactor Index ETF (FLQM), a rules-based, outcome-oriented fund. It's built on four factors, with the bulk of the security selection process weighted toward quality and value to determine which securities make it into the portfolio. Our screening process ultimately helps build a portfolio comprised of stocks with high-quality balance sheets and attractive valuations. That's outcome-oriented, like I said, with the objective of a smoother ride with lower-than-benchmark standard deviations and a focus on risk-adjusted returns. FLQM has really been resonating with clients for that often-underrepresented mid-cap space.
On the topic of index equity, we’ve had tremendous interest in a couple of our single-country ETFs, with strong flows into Japan and India in particular. They're both pretty cost-effective. The Franklin FTSE Japan ETF (FLJP) is offered at just 9 basis points, and the Franklin FTSE India ETF (FLIN) for just 19 basis points. These types of single-country and regional ETFs can be used as international building blocks, not just for country rotation strategies, but also for more precise geographic asset allocation.
And last — but certainly not least — in fixed income, the Franklin Core Bond ETF (FLCB) is a great way to own core bonds through a research-driven manager at a cost-effective 15 basis points. While active, the portfolio remains benchmark-aware and focuses on risk management through security selection, sector selection and duration. It can be a good alternative to indexed core bond strategies for folks with asset allocation needs.
How does Franklin Templeton approach mutual-fund-to-ETF conversions?
We've used a very selective approach. Initially, we did a couple conversions where we saw funds that were perhaps overlooked in the mutual fund space despite excellent performance. In other words, we weren't looking to rescue something that had been underperforming, but rather find a new arena for strategies with strong track records and talented investment teams that might get a fresh look as an ETF.
The Franklin Focused Growth ETF (FFOG) is a great example of this. It’s a thoughtfully designed equity growth strategy that taps into multiple areas of innovation and is managed by a long-standing team led by Matt Moberg. We’re excited about FFOG’s prospects.
Two years ago, Franklin Templeton’s CEO Jenny Johnson said that the firm aims to hit $50 billion in global ETF assets under management by the end of 2025. Currently, you’re at around $30 billion. What makes your AUM goal a reasonable expectation?
We have experienced some good momentum with strong performers in big bucket asset classes, particularly in the U.S. It's not just one or two home runs driving our success. We have a number of ETFs crossing the $1 billion and $2 billion AUM thresholds and we think that breadth will go a long way in serving our clients more broadly and seeing our business grow and develop. That $50 billion is coming closer into view. It’s an exciting time for us!
For more news, information, and strategy, visit ETF Trends.
- The Exchange Traded Product (ETP) is a category of investment vehicle that is generally backed by an asset such as gold, a commodity or a crypto token.
What are the Risks?
All investments involve risks, including possible loss of principal.
Equity: Equity securities are subject to price fluctuation and possible loss of principal.
- FLQM: Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that the fund's multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Performance of the fund may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.
- FLIN: International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. To the extent the fund invests in companies in a specific country or region, the fund may experience greater volatility than a fund that is more broadly diversified geographically. The portfolio is non-diversified and may invest in a relatively small number of issuers, which may negatively impact the fund's performance and result in greater fluctuation in the value of the fund's shares. These and other risks are discussed in the fund’s prospectus.
- FLJP: International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. To the extent the fund invests in companies in a specific country or region, the fund may experience greater volatility than a fund that is more broadly diversified geographically. These and other risks are discussed in the fund’s prospectus.
PVAL: The investment style may become out of favor, which may have a negative impact on performance. To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility. Active management does not ensure gains or protect against market declines. The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated. These and other risks are discussed in the fund’s prospectus.
FLCB: Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated. These and other risks are discussed in the fund’s prospectus.
FFOG: To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility. The investment style may become out of favor, which may have a negative impact on performance. Active management does not ensure gains or protect against market declines. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks could be magnified in Emerging Markets. Because the Fund is non-diversified, it may be more sensitive to economic, business, political or other changes affecting individual issuers or investments than a diversified fund. The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated. These and other risks are discussed in the fund's prospectus.
Important Information Relating to PVAL:
This ETF (exchange-traded fund) is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:
- You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.
- The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.
- These additional risks may be even greater in bad or uncertain market conditions.
- The ETF will publish on its website each day a “Tracking Basket” designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance.
For additional information regarding the unique attributes and risks of the ETF, see the Principal Investment Risks section of the prospectus
ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price (MP), not their Net Asset Value (NAV), on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market.
Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, or summary prospectus, if available, at www.franklintempleton.com. Please read it carefully.
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