has been building out its ETF lineup through product development, mutual fund conversions, and acquisitions. While it had $10 billion in U.S.-listed ETF assets at the end of November, aided by $1 billion of net inflows, the firm has ambitions of being a much larger player in the space. I caught up with Todd Mathias, head of U.S. product strategy & development of Franklin Templeton Investments, to learn more.
Rosenbluth: Your firm is well known for active management, particularly in the mutual fund space. But let’s talk about some of the differentiated active fixed income ETFs like the and the . What makes them different from index-based alternatives?
Mathias: For our active ETFs, we believe the manager — and their track record — matters to clients, and that is what makes our ETFs unique.
The opacity of the fixed income market amplifies opportunities for active managers to express views and avoid potential pitfalls a passive-indexed approach cannot. When you invest in a passive index fund, you are targeting the return of the index, and exposure is based on pre-set rules (such as minimum issue size, issuer debt burden, etc.), expressing no view on duration and credit risk.
FTFI (Franklin Templeton Fixed Income, manager of FLCB and FLHY) has flexibility to invest opportunistically to meet objectives. This is particularly important for FLHY and high yield due to the sheer breadth of what goes into those indices. Active management can be beneficial for shortening toggling duration, avoiding riskier credits, and asset pools that are more sensitive to rate movements (extension risk in mortgage pools, for example).
Rosenbluth: Franklin converted two mutual funds at the end of October into ETFs. What about these funds — the and the — made them more appropriate as ETFs?
Mathias: As a premier active manager, we strive to deliver the most compelling active strategies that represent the best thinking of our investment teams while meeting out client’s evolving objectives. DVAL and MCSE represent a selective decision to bring specific investment capabilities to our ETF platform. Both strategies have delivered attractive long-term top category performance and consistent results. The investment teams for both ETFs are excited about embracing the cornerstone efficiencies of ETFs — mainly daily transparency and tax management.
Rosenbluth: In addition to active ETFs, Franklin offers index-based dividend ETFs like the and the )+. How do these stand out in a crowded field?
Mathias: UDIV, DIVI, and the make up our suite of equity dividend tilt ETFs. They are distinct from other equity income approaches in that they are designed to serve as core portfolio implementation tools that seek to maximize yield per unit of active risk. Other strategies that seek to maximize income as the primary objective often come with security and sector biases which make long-term asset allocation challenging. For example, dividend-oriented strategies that use dividend growth, dividend sustainability, or dividend quality as their primary inputs can lead investors to hold unintended concentrations of economically or interest-rate sensitive industries such as utilities, financials, and industrials. The suite of dividend tilt ETFs offer investors a novel income solution and come at low expense ratios for a collective suite of dividend products.
Rosenbluth: One of your more popular ETFs in 2022 is the , a multi-factor mid-cap ETF. Why do you think advisors are focusing on mid-caps in 2022?
Mathias: Over the last two decades, U.S. mid-cap has generally outperformed large- and small-cap, showing resiliency in bear markets and outperformance in bull markets. If we were to look at the last five major recessions, we can observe that mid-cap stocks have led large-caps stocks during the first year post-recession. Despite these compelling observations, assets in large-cap mutual funds and ETFs are still 7x those of mid-cap funds, potentially warranting further evaluation for the investor underallocated (or not allocated at all) in this space.
FLQM can be considered within a client’s portfolio to mitigate current market volatility within U.S. equity markets. FLQM’s rules-based methodology is rooted in fundamental analysis and seeks to reduce market volatility and deliver a smoother investor experience over the long term. Anchoring the portfolio around four diversifying factors (quality, value, momentum, and low volatility) helps provide exposure to high-quality companies at a reasonable price, while avoiding value traps.
Rosenbluth: Franklin Templeton has publicly said it aims to be a $50 billion ETF business over the next few years. What are some of the key drivers to that being achievable?
Mathias: We have the unique advantage of offering a platform of specialist investment managers, each with deep expertise and specialization, including Brandywine Global, Clearbridge, Martin Currie, Royce, Western Asset, and Franklin Templeton investment teams, who provide transparent active ETF solutions that aim to generate alpha or mitigate risk for clients. We also have a highly experienced index portfolio management team that allows us to provide indexed options that either meet a specific client objective or provide broad market exposure at an extremely low price point. We provide these capabilities and solutions across three global manufacturing hubs — U.S., Europe, and Canada, positioning us well to achieve significant asset growth looking forward!
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