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Franklin Templeton comments on emerging markets index updates


Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton, has commented on the effect that recent updates in the emerging markets classifications have had on their range of ETFs.

Ting joined Franklin Templeton four years ago, charged with building the firm’s ETF business. This has now grown to 68 global ETFs listed in the US, Canada and Europe.

“We are looking at different ways for investors to generate returns,” Ting says. “We offer three strategies: smart beta, which is designed to provide higher risk-adjusted returns for investors; passive, designed to mirror the market capitalisation and active strategies across equity and fixed income, which try to outperform the benchmarks.”
Since launching ETFs in 2016, Franklin Templeton has broken through the top 10 in certain markets and has seen its US large cap smart beta ETF break through USD1 billion in assets.
2019 saw two big changes in the emerging market indices, with domestic Chinese equities having a greater presence in both the MSCI and FTSE Emerging Markets Indexes—with more shares still to be added, and Saudi Arabia seeing a status upgrade.
Franklin Templeton uses both MSCI and FTSE indices for their ETFs, and for the smart beta ETF range, the firm customises the index methodology to select the top 25 per cent names based on aggregate factor score in an index.

Ting comments that although China has made significant improvements in opening its markets to foreign investors, there remain some challenges against becoming a fully free and open market, and reaching a 100 per cent inclusion factor.
Turning to Saudi Arabia, Saudi Arabia’s inclusion into emerging market indexes from stand-alone status has come to fruition after its markets were opened to foreign investors just four years ago, Ting says.

Various barriers have been removed since then, and during that time Saudi Arabia has had one of the most liquid emerging markets, allowing the country to bypass the normal route of starting with frontier market status.
MSCI began to add Saudi Arabian stocks to the MSCI EM Index in May 2019, with a second phase completed in August 2019. At completion, the 69 Saudi Arabian stocks added comprised approximately 2.8 per cent of the index.
FTSE has taken a more long-term approach, adding 44 Saudi Arabian stocks to its Emerging Index in March 2019. Although all 44 stocks were added in one go, their weightings will be included in phased timeline, bringing Saudi Arabia’s ultimate weighting in the index to 2.7 per cent.
 Ting writes: “We observed that the Saudi market traded USD7.7 billion on the first day of inclusion (May 28, 2019). This was nine times higher than the historical average daily volume, highlighting the importance and impact this inclusion had on the Saudi market. Additionally, we have seen some large intraday moves in the market, with prices fluctuating from -3.5 per cent to +9.5 per cent as of May 28, 2019, demonstrating the impact of these stocks being added into the emerging market index had on the domestic market.”
Ting comments that these changes will enable global investors to access more diverse opportunities across different equity markets.
“In terms of target investors, our smart beta ETFs are targeted at investors looking for better risk adjusted returns and who will buy and hold over a long period of time. Our passive ETFs are tools to target specific countries and our active strategies spread across fixed income as well as equity markets and are designed to outperform the benchmark.”

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