Franklin Templeton

Franklin LibertyShares ETFs

Client Education is the Key to Increasing Portfolio DiversificationClient Education is Key to Increasing Portfolio Diversification

As advisors guide their clients heading into the uncertainty of 2017, one of the most valuable things they can offer is a clear, concise path for managing potential volatility.

“The market is always going to fluctuate,” says David Mann, head of global capital markets in ETFs for Franklin Templeton, “which is why it’s so important to educate your clients on the need for diversity within a portfolio. Pursuing a strategy that maximizes the upside and minimizes the downside—no matter what the analysts and pundits are predicting for the next 12 months—is vital.”

That need to help advisors and their clients achieve greater diversification among asset classes is one reason Franklin Templeton recently expanded its ETF offerings to include a growing library of active and strategic beta ETFs.

With investing expertise that dates back to the firm’s founding in 1947, the team at Franklin Templeton has truly seen it all. Recessions and inflation. Skyrocketing interest rates, and the longest low-interest rate environment in history. They’ve watched markets crash and markets recover. That longevity gives them a perspective that many investors lack.

“For many investors, the last decade may feel unprecedented, but history tells us a different story,” says Mann.

That’s one reason he recommends providing clients with a market history lesson as they head into the new year. By putting current events into perspective, advisors can help even the most risk-averse investors understand the value of a strategy that focuses on exposures such as emerging markets, global equities, and fixed income.

“Start the conversation with clients and advisors by preparing them for volatility,” he says, “and then talk to them about how a strategy that reaches beyond US equities can help reduce risk.”

Despite the prevalence of media attention on investing, US equities are often the only asset class that gets the spotlight, even though many of the most undervalued, high-quality opportunities are found in other asset classes.

“Advisors understand the need to include more asset classes in the core portfolio, but it can be a difficult conversation to have with clients because they are not as frequently exposed to the discussion of different asset classes, much less the concept of diversification,” says Mann. That can be a challenge and an opportunity. “The Dow finally hit the 20,000 mark in January, so US equities seem to be all clients want to think about, but that’s very short sighted.”

To steer the conversation, he advises talking about the risk of volatility and the need to support a longer-term dynamic by adding more exposure to other asset classes within the core portfolio.

Once your client is on board with the concept, the next step is to identify an ETF that addresses this need. Doing that (and doing it well) means looking beyond brand names, product assets under management, and high trade volumes to really focus on each fund’s exposure methodology.

Examine how each option supports three key goals: reducing volatility1, increasing diversification, and seeking long-term growth. Why is the actual exposure methodology so critical? According to Mann, even many of the highest-volume ETFs track the major market indices rather than seek exposure in areas that matter most from a risk and diversification perspective.

As a result, they can introduce unintended risks by overweighting the US large cap stocks that happen to be performing well at the moment. So while the S&P 500 was the star performer in Q4’16, that doesn’t mean it will continue to shine over the next decade. In fact, Franklin Templeton’s decades-long research shows that quality and value stocks have demonstrated a higher level of sustainable growth over the past 10 to 15 years.

The good news is that a variety of options are available to address any number of strategies. ETFs are now available as active and strategic beta tools, providing exposure to a wide variety of asset classes.

For investors seeking international equity exposure, it may be wise to utilize an active ETF such as the Franklin Liberty International Opportunities ETF (FLIO) that offers broad, diversified access to international equity markets outside the US. When the focus is on honing fixed income exposure in investment grade corporates, the Franklin Liberty Investment Grade Corporate ETF (FLCO) is an option. Those seeking exposure to emerging markets equities might consider a strategic beta ETF, with alternative rules within an index, such as the Franklin LibertyQ Emerging Markets ETF (FLQE).

Though some pundits may try, no one can predict the future—which means the future of the US equities market is as unpredictable as the world that surrounds it. “Few saw Brexit coming, and perhaps even fewer saw a Trump presidency as a real possibility,” says Mann. “With that as a backdrop, portfolio diversification is more important than ever, and ETFs designed to deliver thoughtful outcomes may very well be the best tools available to make it happen.”

The Franklin LibertyShares platform of LibertyQ strategic beta and Liberty actively managed ETFs leverages the investment expertise, active management insights and deep resources of Franklin Templeton Investments, a recognized global leader in asset management with 70 years of experience. Franklin LibertyShares has more than $556 million in assets under management as of February 8, 2017.

1Source: Factset, MSCI Inc.

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