Franklin Templeton is a known and established investment firm, having 75+ years of investment experience and approximately CAN $2.2 trillion (US$1.6 trillion) in assets under management as of February 29, 2024. In Canada, the firm is deftly building an ETF product shelf and recently expanded its offerings with the launch of three low volatility-focused mandates. In this article, we will look at these new ETF solutions, highlighting their value proposition and how they can be of benefit to investors.

Franklin Templeton’s low volatility strategies

Franklin Templeton Canada has launched three low volatility strategies, Franklin Canadian Low Volatility High Dividend Index ETF (Ticker: FLVC), Franklin U.S. Low Volatility High Dividend Index ETF (Ticker: FLVU), and Franklin International Low Volatility High Dividend Index ETF (Ticker: FLVI), providing investors with equity market exposure to companies with relatively high dividend yields and lower price and earnings volatility in Canada, U.S., and international regions, respectively. 

The anomaly of low volatility investing

Low Volatility investing is a proven factor-based investing style that investors can utilize during periods of market uncertainty and for achieving their long-term investment objectives. The low volatility anomaly refers to the phenomenon where stocks with lower volatility tend to outperform stocks with higher volatility over the long term. This anomalous behavior is mystifying, as it goes against the central premise of financial markets – taking higher risk, must be compensated with a higher return.

Understanding the basis for performance

Low volatility portfolios are comprised of stocks that are less volatile than their peers, which means that on a risk-adjusted basis, they should exhibit superior performance and provide exceptional returns relative to other portfolios. Low volatility can be measured in two ways. The first is the standard deviation, which measures the volatility of each stock on a standalone basis, and the second is beta, which measures a stock's volatility and correlation relative to the overall market. The market has a beta of 1.0, so a stock with a beta below one is considered less volatile than the market and vice versa for a stock with a beta above 1.0. 

Low volatility portfolios are not impervious to market drawdowns, as over the last two decades, equity markets have faced numerous shocks to the system. When those situations have occurred, low volatility portfolios have generally managed to outperform (i.e. lose less) the broader market.

Given the high dividend focus of the Franklin Templeton ETFs, the methodology for the underlying indices of these mandates will give preference to stocks whose yields are supported by earnings, with relatively low price and earnings volatility and from countries with relatively low interest rates.

Conclusion

Franklin Templeton’s low volatility ETFs allow investors to benefit from a proven investment strategy that provides them with innate risk mitigation and a selection of equities best suited to thrive during the ups and downs of an economic cycle.  Furthermore, the dividend focus of these solutions adds an additional layer of investment surety, as the fund will prioritize companies capable of sustainably paying dividends over time.

For Canadian investors that have a low volatility and dividend focus, Franklin Templeton Canada’s newly launched ETFs provide exposure to companies that meet these criteria.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.