Franklin revamps multifactor ETFs to focus on dividends

Franklin Templeton is overhauling four of its oldest equity ETFs, ditching multifactor smart beta strategies and opting for a focus on dividend-paying stocks or, in one case, cheap vanilla equity exposure.

The firm will change the investment strategies, indices and names of three ETFs: the $20mn LibertyQ International Hedged Equity ETF, $16mn LibertyQ Emerging Markets ETF and $15mn LibertyQ Global Equity ETFs, effective August 1.

The funds currently track a FTSE index that weights constituents based on four factors: quality, value, momentum and volatility, their prospectuses show.

But starting in August, the international and emerging markets ETFs will follow Morningstar benchmarks that tilt towards higher dividend-paying stocks in their respective geographies. The global equity ETF, meanwhile, will be relaunched as the Franklin US Equity Index ETF and provide cap-weighted exposure to large- and mid-cap companies.

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A fourth ETF that already focuses on dividends will also swap indices and take a different slant on the strategy, disclosures show. The $30mn LibertyQ Global Dividend ETF will become the Franklin US Core Dividend Tilt Index ETF, also in August.

Franklin will also slash the fees on all four funds, last week’s filings show. Global Dividend’s 45 basis-point fee will plummet to 6 bps when it becomes the US Core Dividend Tilt. The 45-bp fee on the LibertyQ Emerging Markets ETF, meanwhile, will shrink to 19 bps, and the International Equity Hedged ETF’s fee will fall from 40 bps to 9 bps. And the fee on the LibertyQ Global Equity ETF will drop from 35 bps to 3 bps.

The LibertyQ funds were launched in 2016 and were Franklin’s initial push into the equity ETF space having rolled out a short-term government bond ETF in 2013. But over the last six to 12 months, the firm has been evaluating its line-up, which grew significantly through its acquisition of Legg Mason, said Pierre Caramazza, the firm’s head of US product and specialty sales.

“[Some of] the products we had weren’t working as well for what we are trying to do here,” Caramazza said.

Only one of the four affected ETFs ever crossed the $100mn-asset mark, Morningstar Direct data show. The emerging markets strategy hit a high of $415mn in assets in October 2017 but dropped to $21mn by October 2020.

Franklin still believes in smart beta and multifactor investing, Caramazza said. Its fifth-biggest ETF is the $616mn Legg Mason Low Volatility High Dividend ETF, Morningstar data show. However, clients told Franklin that the strategy used in the LibertyQ funds did not stand out, Caramazza said. Dividends, however, “is something we heard a lot, a lot about”, he said.

Investors have poured money into dividend-focused strategic beta ETFs this year: $35.9bn during the first five months of 2022, according to Morningstar Direct data. The next-best-selling strategic beta category, value, amassed just $13.4bn in the same timeframe. Multifactor strategies collected just $1.6bn in new sales in the period.

Dividends are popular because of their income and because they have a bias towards value and quality factors that are in favour during periods of declining earnings sentiment and growth potential, said Matthew Bartolini, State Street Global Advisors head of SPDR Americas research, in a research note.

Yet the $341bn dividend ETF market is dominated by a handful of large providers, Morningstar’s database shows. Vanguard’s dividend ETFs accounted for more than $114bn at the end of May, iShares’ dividend products represented $66bn, and Charles Schwab’s held $37bn.

Franklin priced all of its refashioned ETFs aggressively based on market dynamics, Caramazza said. The 3-bp fee on the US equity ETF is in line with large-cap offerings from Vanguard, Charles Schwab, iShares and the low-cost portfolio series from State Street. The new US Dividend Tilt ETF’s 6-bp fee, meanwhile, is close to the cost for the $64bn Vanguard Dividend Appreciation, $46.7bn Vanguard High Dividend and $37bn Schwab US Dividend Equity ETFs.

Franklin’s $9bn US ETF business netted $48mn in sales during the first five months of the year but saw outflows of $103mn in May, according to Morningstar Direct. The firm’s long-term open-end mutual funds, meanwhile, experienced net outflows of $15bn in the four months to the end of April, according to data from Morningstar.

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