5 Lessons I’ve Learned since launching LibertyShares ETF's

Ahmed Farooq reflects on some of the lessons he has learned since LibertyShares launched 3 years ago.

    I can’t believe it’s been just over three years since my colleagues and I left the largest ETF shop in the world to join Franklin Templeton to help launch their new ETF business “LibertyShares”. When I started this journey I knew it was an amazing opportunity to head up the Canadian ETF business and help a global asset manager known primarily for their suite of Mutual Funds, to evolve into a great ETF provider in Canada. One of the big allures of this opportunity was getting the chance to play a key role in starting a new business segment from scratch where I could leverage my decade of experience with an asset manager that was driven to make an impact in the market.

    Over the last three years I feel we’ve definitely made an impact and I want to reflect on a few lessons I’ve learned along the way.

    Lesson 1: There is lots of opportunity for education in the ETF space

    Coming into a new shop and being the ETF expert for the firm, it started with a lot of education both internally and externally. Up until a few years ago, ETFs had always been known to be passive, low cost indexed based strategies, but as the ETF industry evolved, so has the product set.

    Some of our first ETFs to hit the market were smart beta strategies that were a combination of rules and quantitatively driven methodologies. It took a fair amount of education to get advisors accustomed to the fact that ETFs were no longer just passive strategies. With many ETF players already offering passive strategies, we knew we could create value for investors who were looking for new differentiated strategies in an ETF form by bringing a suite of smart beta ETFs to the market. Smart beta strategies had exploded into the market place, and with that, education on what these products were actually trying to offer was very important for a successful launch.

    We wanted to convey to advisors that smart beta strategies in their simplest form are purely outcome-oriented investment strategies. At Franklin Templeton, we focused on investor outcomes – seeking a smoother performance ride with better downside protection. Further, having to worry about picking the right factor, we bundled 4 factors (Quality, Value, Momentum, and Low Vol) and weighted them based on conviction on how advisors build their stock models.

    Lesson 2: We needed to create ETFs that address the needs of advisors

    I’ve spent a fair number of years of my career selling, positioning, and helping investors with passive index-based ETFs, but I always encountered advisors that were not interested in passive management. Many advisors who were experienced using mutual funds were looking for active, higher conviction strategies or even outcome-oriented funds. At Franklin Templeton we felt that this void in the market was a tremendous opportunity that we could play in. We were quite excited and committed to bringing our investment management expertise to the ETF market in both smart beta and higher conviction active strategies. We wanted to ensure that we were developing products as core holdings and portfolio building blocks for the long term. It was not only a great way to differentiate ourselves from other ETF providers, but also a great way for an advisor to help their clients who were seeking strategies that complemented their stocks and other holdings.

    Fixed income was a particular area of focus and it only made sense to leverage Franklin Templeton’s decades of fixed income expertise. Over the last three years, interest rates and monetary policy were unpredictable, causing the fixed income side of investor portfolios to become a bigger headache for advisors. Our suite of low cost active fixed income strategies that helped outsource the management burden to us. Our global fixed income mandate FLGA (Franklin Liberty Global Aggregate Bond Fund CAD Hedged) became a success and grew to over half a billion in AUM in less than two years! Having a fund manager make calls with conviction and adjust to fiscal/monetary policy decisions was clearly an important need for many advisors.

    Lesson 3: Leveraging our existing successful strategies and products

    The great thing working for Franklin Templeton, we are first an investment manager at the core and vehicle agnostic – so we were very much focused on bringing the right strategies to ETF vehicle to meet the needs of our clients. One opportunity for us was to launch already successful mutual funds in the ETF vehicle. Leaning on the expertise of the Franklin Bissett Fixed Income team we were able to successfully launch ETF versions of their successful Core Plus Bond fund and the Short Duration fund into ETF versions of the funds FLCP and FLSD.

    Similarly, with the success of our FLGA ETF, we are now going in the other direction. We just launched the mutual fund version of this ETF to give MFDA advisors access to this popular strategy. At the end of the day, we want to make sure we are giving advisors access to our best investment strategies whether it’s in an ETF or Mutual Fund format. We are also closely monitoring other markets to see if products that worked in those regions can be replicated for Canadian investors i.e. Franklin Templeton’s new thematic ETFs in the US and Green Bond ETF in Europe.

    Lesson 4: The value of being selective and strategic

    As the Canadian ETF market continued to grow, we saw a fair number of new issuers jump into the ETF ring over the past couple of years. It was interesting to see everyone’s strategy, were they jumping all in or were they dipping their toes in the water? As a new provider we also had to think about our strategy and how we wanted to compete as a fair number of advisors were evolving their business practices to include ETFs.

    One thing I really enjoyed about our approach at Franklin Templeton, is that we had a global strategy in place to launch in 3 different regions - US, Europe and in Canada. We were going to be selective and only compete in areas where we saw opportunity to add value to our clients and the market. It was very exciting to get into an office, have a product that is backed by a star investment team, backed by the ETF analyst community and priced very close to passive or lower. This really helped get our business running.

    Lesson 5: Some challenges are unique to ETFs

    ETFs have always faced an uphill battle in terms of being accepted as a mainstream investment. Over the years there have been continual naysayers who predict that ETFs won’t hold during times of volatility. ETFs have endured through previous periods of volatility, but the recent bout of volatility due to the Covid-19 pandemic, there was a big discrepancy between market price and NAV at the height of the volatility. Some pointed this out as bug in ETFs, claiming that the ETF price was flawed. In actuality, it was a testament to ETFs as they turned out to be the correct actionable price in the open market. We saw similar results when there were large redemptions in mutual funds, where there NAV adjusted closer to where ETFs was trading the following business day.

    As we celebrate the 3rd anniversary of Franklin LibertyShares, we continue to be committed to ETFs from a global perspective. In Canada with assets of $1.81b we are now the 9th largest ETF provider amongst the 37 other providers. We have come a long way from being 24th of 24th when we launched in early spring 2017. We will continue to develop products that align with our clients’ needs to maintain competitiveness in this ever-growing ETF market and provide advisors they support they need throughout their ETF buying journey. The lesson I’ve learned have been valuable and I am excited to what see comes next.

    Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

    Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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