Product Panel: Franklin FTSE India UCITS ETF

The Franklin FTSE India UCITS ETF (FRIN) was launched in late June, first on the Deutsche Boerse and then on the London Stock Exchange, Borsa Italiana and the Swiss Stock Exchange.

It adds to the firm’s single-country emerging market range including funds focused on Brazil, China and Korea that were launched earlier in the month, The company was keen to stress that the new fund, like the other EM single country funds, will feature physical replication of the index in question

What they say:

Caroline Baron, head of ETF sales EMEA at Franklin Templeton: “Building on Franklin Templeton’s strong and extensive emerging markets investment heritage, we are delighted to introduce these four new emerging markets country passive ETFs at the lowest fees, to European investors. It is important to note that our new passive ETFs will be physically replicated which is rare in the emerging markets country ETF category.  This is due to strong client feedback noting their preference over synthetically replicated ETFs.”

What the panel says:

Kenneth Lamont, Morningstar

Franklin Templeton have made a statement with the launch of the India UCITS ETF. The new fund offers the most comprehensive beta exposure to the Indian equity market (tracking a broader index than the popular MSCI India index). Sporting a fee of just 0.19%, the fund aggressively undercuts its cheapest rival (the iShares MSCI India ETF) on price.

While the low fee will rightly grab headlines, when evaluating performance in emerging markets, they only tell half the story. The challenges and additional costs associated with physically accessing the Indian equity market mean that tracking difference (fund return less index return) can far exceed the management fee. Should Franklin Templeton manage to keep tracking difference low, then this fund could easily become a go-to option for fund selectors seeking passive country specific EM exposure.

Timo Pfeiffer, Solactive

It is crucial for investors to build the desired portfolio structure or asset allocation as precise and detailed as possible. There is no such thing as the common emerging markets since every country and economy are quite different in many respects, e.g., stage of development, political background, demographic structure, etc. Furthermore, the sector weights can differ substantially. If an investor merely wants a broad EM investment, there is no need for single-country EM funds.

On the other hand, if an investor prefers a more sophisticated investment strategy, single-country EM funds are essential. The setup of an index requires the pricing of all its constituents on a regular basis. Ideally, this process happens daily. To create a fund or ETF with real money flows, liquidity can become an issue, i.e., the bigger the fund grows. Especially in emerging markets, the access and limitations of tradability are important. Physical replication of an index, which is often preferred by investors, can become a challenge if liquidity and tradability is an issue.

Mark Northway, Sparrows Capital

Single-country ETFs are a useful mechanism for rapidly adjusting exposure to a country in the short term. But the advisability of using ETFs to express a strategic allocation in EM can vary substantially by geography. Country-specific considerations include rule of law, governance standards, the existence of a fair and liquid local market. As market inefficiencies increase, so the rationale of accessing that market via an ETF decreases.

ETFs are excellent instruments for accessing major, efficient markets where the information flow has been democratised and new data is instantaneously reflected in two-way trading prices. In such circumstances there is little opportunity for arbitrageurs and liquidity providers to benefit from the rule-based activity of ETFs and index funds. At the fringes of global markets this balance is more easily disturbed and indexers are more exposed to large bid-offer spreads, event risk, imperfect information flows and even market abuse.

The Indian market is complex, concentrated, and has suffered a series of scams over the years. The situation has improved recently under the supervision of the Securities and Exchange Board of India, but the country remains at the crossover point between ETF domain and the territory of local experts.

The Franklin Templeton India ETF has chosen to play to investor demand by using physical replication. The prospectus states that this will be achieved though equities, depositary receipts and participatory notes. The latter are notes issued by registered intermediaries providing foreign investors will access to the domestic market without the need to register with the SEBI. Replication will be partial (optimised) only, due to the idiosyncrasies of the market. Investment in India by funds and by ETFs is often achieved synthetically in order to minimise tracking error and reduce fiscal drag (India imposes a 10% tax on long-term capital gains), so the question is whether Franklin Templeton’s desire to play to the crowd with physical replication is entirely prudent.

The ETF prospectus supplement is very light on expected levels of taxation in the portfolio, implicit and explicit trading costs and local custody arrangements. Up to 25% of the portfolio may be lent out, but here again details are sparse. This is disappointing, and investors should require more upfront transparency in these areas. In summary, the Franklin Templeton India ETF is a useful tool for managing tactical exposure to India over the short term, but perhaps not ideal as a strategic portfolio holding.

Nicolas Rabener, FactorResearch

Franklin Templeton’s India UCITS ETF (FRIN) is a welcome addition for investors seeking exposure to specific emerging markets versus buying a basket of countries. There are a few competing ETFs on the market and most track the MSCI India, in contrast to FRIN, which replicates the FTSE 30/18 Capped India index. Franklin Templeton notes the unique feature of physical replication, but iShares’ India UCITS ETF also offers that. The key differentiator is likely the TER of 0.19% which ranks favourably against the peer group’s average of 0.75%.

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