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The ETF Revolution is just getting started

How ETFs continue to transform the financial industry 30 years after launch

It’s been 30 years since exchange-traded funds (ETFs) first hit the market, but, in many ways, the industry is still in the early stages of its transformation. ETFs continue to evolve, with new products and features that make them even more versatile and innovative investment solutions.
Franklin Templeton may be a relatively new entrant into the ETF business, but the company is quickly making a name for itself as one of the top 10 providers in Canada. Patrick O’Connor, Head of Global ETFs at Franklin Templeton, and Ahmed Farooq, VP of ETF Business Development at Franklin Templeton Canada, discuss how ETFs have revolutionized the financial industry and examine the trends that continue to re-shape the market today.

How have ETFs changed the financial industry?

PATRICK O’CONNOR: It’s been a fascinating 30 years being at the epicentre of a financial revolution, although we didn’t know how big an impact ETFs would have in those early years. What I did know was the people who started with me—and I had one of the early seats at the table—were motivated, intelligent people who were in it together to create something meaningful. Looking back, ETFs started with just a handful of products. Today, there are over 6,500 ETF products available, over $5.5 trillion in ETF assets under management and widespread adoption across the industry.

AHMED FAROOQ: When I started in 2007, the biggest provider controlled about 98% of the marketplace and there were only a handful of other providers. Back then, many of the ETFs were still passive or indexing strategies. As recently as 15 years ago, we were travelling all across the country to educate advisors and investors about what an ETF was, and how it was different from traditional investment vehicles.

Franklin Templeton entered the ETF business about three years ago. How has the market responded?

PATRICK O’CONNOR: The market has responded very positively and I think our ability to break into the top 10 provider spot in less than three years is evidence of that. When we were planning on getting into the ETF business globally, we had some pretty audacious plans to be a global player in the U.S., Canada and Europe. We started with almost no assets back in 2016 and finished 2019 with $8.2 billion in AUM globally. In Canada, we started from zero assets to hitting a $1.9 billion milestone. It’s been an amazing journey.

What are some of the biggest trends in ETFs right now?

PATRICK O’CONNOR: One of the largest and most relevant trends in ETFs is active fixed income, which is our core competency. We believe passive fixed income is not the best way to engage in the fixed income market. In our view, those indices are broken.

Passive investing has worked well for equities; why doesn’t it work for fixed income?

PATRICK O’CONNOR: Put simply, you cannot replicate a fixed income index. There are too many issuers and investors don’t have unfettered access to the bond market. It’s a flawed concept. Active portfolio managers who have all the tools and capabilities to select bonds properly can outperform those indices.

Are you seeing the market shift away from passive towards active fixed-income ETFs?

AHMED FAROOQ: From an industry standpoint, fixed income ETFs outsold equity ETFs in 2019. Actively managed fixed income ETFs grew their AUM 56% compared to their passive counterparts that showed only 20% growth over the same period.

What’s driving the growth in active fixed income ETFs?

AHMED FAROOQ: We’re seeing advisors say, ‘Hey, at the end of the day, I need my fixed income to work for me—to provide me with the income I’m looking for, or the stability I need in a portfolio.’ We believe this outcome can be achieved through active management. Franklin Templeton takes that one step further by pricing our active fixed income solutions quite aggressively. Some of our fixed-income ETFs are priced at the same cost as passive, while others are even priced below passive ETFs.

Are you planning to launch any new ETFs?

PATRICK O’CONNOR: We strategically entered the market by introducing suites of global products that capitalize on Franklin Templeton’s investment prowess. I believe that any new products we introduce have to address our clients’ needs. We are coming out with a suite of active thematic investment solutions in the U.S., which we believe are consistent with the active portfolio manager and how he or she thinks through these themes.
In Canada, we will continue to launch new solutions as we identify gaps in the marketplace where investors’ needs aren’t being met. Recently, we’ve launched two ETFs that invest in existing mutual funds: FLCP (Franklin Liberty Core Plus Bond ETF, which invests in Franklin Bissett Core Plus Bond Fund) and FLSD (Franklin Liberty Short Duration Bond ETF which invests in Franklin Bissett Short Duration Bond Fund). This situation was primarily motivated by the fact that the back offices at many advisory firms don’t bulk trade mutual funds, making ETFs the preferred vehicles.

AHMED FAROOQ: From an industry standpoint, fixed income ETFs outsold equity ETFs in 2019. Actively managed fixed income ETFs grew their AUM 56% compared to their passive counterparts that showed only 20% growth over the same period.

Where do you see yourselves in the next three to five years?

PATRICK O’CONNOR: It’s hard to predict where the markets will be and which investment objectives or trends clients will be focused on. However, the way our fixed-income ETFs are resonating with the market, I’m confident we will continue to grow our position as one of the key providers in Canada and globally. We will continue to evolve our capabilities and offering, all with the end goal of helping to deliver better client outcomes.

O'Connor,Patrick H.E

In Canada, we started from zero assets to hitting a $1.9 billion milestone. It’s been an amazing journey.


PATRICK O’CONNOR,
Head of Global ETFs at
Franklin Templeton

Farooq, Ahmed

Actively managed fixed income ETFs grew their AUM 56% compared to their passive counterparts that showed only 20% growth over the same period.


AHMED FAROOQ,
VP of ETF Business Development at
Franklin Templeton Canada

Franklin Templeton

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