Franklin Templeton Aims At iShares

Relative newcomer to ETFs comes in with ultra-low-cost single-country offerings.

Franklin Templeton is set to more than double the size of its ETF offering on Monday while taking aim at iShares’ venerable lineup of country ETFs. The firm has planned a lineup of 16 funds that severely undercut the pricing on the existing and well-established iShares that track the same country markets and represent a total of nearly $60 billion in assets under management.

The funds, their tickers and their expense ratios are as follows:

• Franklin FTSE Australia ETF (FLAU), 0.09%
• Franklin FTSE Canada ETF (FLCA), 0.09%
• Franklin FTSE France ETF (FLFR), 0.09%
• Franklin FTSE Germany ETF (FLGR),  0.09%
• Franklin FTSE Hong Kong ETF (FLHK), 0.09%
• Franklin FTSE Italy ETF (FLIY), 0.09%
• Franklin FTSE Japan ETF (FLJP), 0.09%
• Franklin FTSE United Kingdom ETF (FLGB), 0.09%
• Franklin FTSE Europe ETF (FLEE), 0.09%
• Franklin FTSE Europe Hedged ETF (FLEH), 0.09%
• Franklin FTSE Japan Hedged ETF (FLJH), 0.09%
• Franklin FTSE South Korea ETF (FLKR)
• Franklin FTSE Brazil ETF (FLBR), 0.19%
• Franklin FTSE China ETF (FLCH), 0.19%
• Franklin FTSE Mexico ETF (FLMX), 0.19%
• Franklin FTSE Taiwan ETF (FLTW), 0.19%

These are not the first ETFs to challenge the iShares juggernaut in the country-specific space. Back in 2008, well before the advent of its current FlexShares brand, Northern Trust rolled out the ill-fated NETS family of ETFs, which mainly tracked the local-market indexes of individual countries.

However, the NETS didn’t last long or gather much in the way of assets; Northern Trust shut down all 17 of its funds in February 2009, less than a year after their launch. Although the NETS were generally cheaper than their iShares competitors, for the most part, they did not offer dramatic cost savings. The Franklin launch will be another story.

“Our motivation was really conversations with our clients who are building portfolios across active, smart-beta and passive strategies. From a fund perspective, we didn’t really have good tools within that last bucket,” said Franklin Templeton’s David Mann, the firm’s head of capital markets, global ETFs.

“These are going to allow investors to get exposure to a lot of countries and regions. There’s been a growing trend of all types of investors using those funds in more active ways. Just from a high level, we think getting passive market exposure, getting beta, should be inexpensive, and that’s why they were priced as such,” he added.

Lower Price Points

Most notably, the eight developed-country ETFs all come with expense ratios of 0.09%, while their counterparts in the iShares lineup, which launched in 1996 and have billions of dollars in AUM each, charge 0.48%.

With the exception of its “Core” family, iShares has never been known for its low expense ratios, but while investors may not care much about a few basis points here and there, an ETF that is less than one-fifth the cost of a similar product is inevitably going to draw attention—and assets.

The five emerging market country ETFs have a similarly dramatically lower price point of 0.19%. The prices on the corresponding iShares range from 0.48% for the iShares MSCI Mexico Capped ETF (EWW) to 0.64% for the iShares MSCI South Korea Capped ETF (EWY), the iShares MSCI Taiwan Capped ETF (EWT) and the iShares MSCI China ETF (MCHI).

FLEE is perhaps the closest in price to its comparable fund, charging 0.09% versus the iShares Core MSCI Europe ETF (IEUR)’s 0.10%.

Interestingly, the two currency-hedged funds in the launch are priced the same as their unhedged counterparts, at 0.09%. That’s again far cheaper than the iShares Currency Hedged MSCI Eurozone ETF (HEZU), which charges 0.51%, or the 0.49% charged by the iShares Currency Hedged MSCI Japan ETF (HEWJ).

Different Indexes

Franklin Templeton is using modified market-capitalization-weighted versions of the FTSE Russell Indexes for its funds. All of the underlying indexes limit the weight of any single issuer to 25% of the index and limit the aggregate weight of issuers with weights over 5% to 50% of the index. These limits are reset on a quarterly basis. The methodology is consistent across the country ETFs.

Although the firm is known for being a strong proponent of active management, these are also not Franklin’s first index-based ETFs, as it has a full lineup of multifactor smart-beta funds in addition to its active offering. However, these are the first plain-vanilla passive ETFs the firm has brought out.

“We’re trying to provide the investors with the flexibility to construct across active, across smart beta, across passive. This allows us to acknowledge that investors want to gain exposure to various markets and they want to do it in a cost-effective manner,” Mann said.

The 16 funds are set to launch on Monday, Nov. 6 on the NYSE Arca.

Contact Heather Bell at [email protected].