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Franklin Templeton Eying Smart-Beta ETF Options


Franklin Templeton could be expanding its exchange traded fund lineup with smart-beta index offerings instead of adding more actively managed ETFs.

According to Franklin chief executive Gregory Johnson, the money manager will pause its active ETF expansion to observer how Eaton Vance’s non-transparent NextShares exchange traded managed funds will do, reports Jackie Noblett for Ignites.

The NextShares ETMFs are seen as a competing investment vehicle to the active ETF space, which many managers have shown an interest in due to the ETMFs non-transparent structure. In contrast, many have been loath to reveal their secret sauce through a fully transparent active ETF structure. Franklin, though, has not licensed Eaton vance’s Navigate Fund Solutions subsidiary for an ETMF launch. [SEC Again Rejects Precidian Non-Transparent ETFs, Solidifying Eaton Vance Lead]

Additionally, some have argued that the NextShares ETMFs are not an attractive option from a distribution standpoint. Eaton Vance has been trying to court more brokerages to make trading ETMFs more widespread. [Eaton Vance Partnering with Brokerages to Bring ETMFs to the Masses]

Consequently, Franklin is taking a greater interest in the smart-beta indexing strategy as a way to utilize its active fund expertise and to sell to some high-net-worth clients who would enjoy the lower-cost beta option.

“We don’t think cloning open-end funds in this structure makes a lot of sense for us right now,” Johnson said. “We’re not ruling it out one way or another, but we just don’t think there’s demand.”

The fund manager may be cogitating on a more aggressive push into low-cost ETF options in light of rising redemptions among the company’s mutual fund offerings. Over the past quarter, the firm saw $11.1 billion in net outflows, which pushed overall assets down 1.6% to $866.5 billion as of June 30.

Franklin Templeton currently only has one ETF, the actively managed Franklin Short Duration U.S. Government ETF (FTSD) , which was launched back in November. [Franklin Templeton Enters ETF Arena]

Johnson, though, believes “it needs some friends,” indicating the firms interest in growing its ETF business.

Franklin currently holds an exemptive relief to launch active ETFs but has not received SEC approval to launch index-based products, such as smart-beta funds. Johnson, though, has indicated that the firm is open to acquiring a third party with SEC approval to launch index-based ETFs or developing the capabilities themselves.

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Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.