Franklin Templeton Wades Into ETFs

November 19, 2013

Fund firm joins the ETF world, yet the future path is anything but clear.

The recent launch of Franklin Templeton (BEN)’s very first exchange-traded fund, as well as the rollout of sector ETFs from Fidelity, are milestones in the world of ETFs.

Notwithstanding the launch of Franklin Templeton’s short-dated bond (FTSD), I doubt they herald a new era of big mutual fund companies aggressively entering the ETF space.

After all, boatloads of these storied firms, such as Alliance Bernstein, Janus, and others, have lined up their ducks at the Securities and Exchange Commission in the past few years, each asking for permission to market their own ETFs, many of them hoping to offer actively managed strategies.

But precious few—save for Franklin Templeton, and of course Fidelity and Pimco—have actually taken the plunge.

The takeaway here is that investors shouldn’t hold their breath, particularly regarding the torrent of active product so many analysts think is coming soon. They’ll just have to wait for other firms already in the ETF space to serve up the product.

In a way, you can’t blame these mutual fund firms for being so reluctant to jump into ETFs.

It’s almost guaranteed that any new ETFs they bring to market will end up poaching market share from their very own mutual funds, chipping away at the vast success they’ve had in the past 30 years.

To minimize competing with themselves, they’re looking at minimizing the self-competition by targeting areas of the market where they don’t have much of a presence.

For example, while Fidelity launched 10 index-based sector ETFs that will compete with its lineup of actively managed sector-focused open-end mutual funds, the fact that they are index funds does distinguish the new products from the existing active ones. (That said, things will get interesting when Fidelity rolls out five active fixed-income ETFs that are now in registration—probably early next year.)

Because Franklin Templeton is considered a pioneer in the world of emerging market investing, its choosing a short-dated fixed-income strategy for its first ETF launch made perfect sense in terms of limiting any cannibalization.

Moreover, the Franklin Short Duration U.S. Government ETF is arguably a timely product. After all, investors these days are shifting their bond holdings to shorter-dated securities to help weather the rise in yields that will come when the Federal Reserve truly begins to raise borrowing costs as the financial crisis fades into history.

The Franklin launch also recalls the launch of the money-market-fund proxy, the Pimco Enhanced Short Maturity Strategy Fund (MINT | A). The Pimco rollout was a thoughtful gesture that targeted the very short end of the yield curve and opened the door to using ETFs as money-market-fund-type vehicles.

Those nuances may have paid off: MINT is currently the biggest active ETF in the world, with upward of $4 billion in assets under management.


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