What might the sensational superstar Taylor Swift have in common with exchange-traded funds? David Mann, our Head of ETF Products and Capital Markets, lightheartedly examines the different eras of the ETF industry—drawing parallels to Swift’s memorable eras as a musician.
Thanks to my daughter’s impeccable planning plus a little bit of luck, we were fortunate enough to see Taylor Swift’s incredible concert at Levi’s Stadium in Santa Clara, California. Exuding non-stop energy, Swift performed 45 songs over 3.5 hours to an ecstatic crowd that belted out every word right along with her. There is a reason they renamed the city “Swiftie Clara!” I am a little worried about recency bias but feel comfortable declaring this is the best concert I have ever attended. My daughter is still buzzing.
I was listening (and singing!) song after familiar song across all the “eras” of Swift’s long and successful musical career. And since my time in the ETF industry aligns nearly identically with Swift’s time as a performing artist, I wondered how else the products of our careers may be aligned. As a fan of both ETFs and Taylor Swift, I thought it’d be fun to reimagine her lyrics as reflections on the ever-expanding ETF industry. Here’s how I’d imagine she could have drawn inspiration from our industry based on some of my favorite songs from the concert:
Love Story (2008) – “It’s a love story. Baby, just say ‘Yes’.”
In the early 2000s, ETFs were still a bit of a novelty. Between 2000-2006, ETFs in the United States averaged around $40 billion in inflows each year.1 That changed in 2007 and 2008 when investor interest exploded, and the average inflows jumped to more than $150 billion.2 The ETF “Love Story” had officially begun!
I Knew You Were Trouble (2012) – “ ’Cause I knew you were trouble when you walked in/So shame on me now…”
ETF assets and inflows continued to grow as more and more investors began to appreciate the ETF vehicle. However, there was potential early “trouble” in the US market structure, causing irregular trading during times of heightened market volatility. These worries were sadly justified during the original Flash Crash of 2010, which negatively impacted ETFs along with single stocks.
Shake It Off (2014) – “ ’Cause the players gonna play, play, play, play, play/And the haters gonna hate, hate, hate, hate, hate/Baby, I’m just gonna shake, shake, shake, shake, shake/I shake it off, I shake it off…”
After the Flash Crash, the ETF wrapper was under attack. Detractors were screaming that the ETF arbitrage concept was not bulletproof and trading efficiency was more inconsistent than expected. There may always be both lovers and haters of the ETF wrapper. From an ETF capital markets perspective, much of the context in my early writings attempted to convince those haters that their concerns were unjustified.
…Ready For It? (2017) – “I know I’m gonna be with you, so I take my time/Are you ready for it?”
Perhaps this title anticipated that others would share my excitement for active ETFs! Active funds have gained in popularity and ETF issuers would have been wise to be “ready for it,” even before the passage of the “ETF Rule” that codified no operational differences between active and index funds. It’s fun to think these lyrics also presciently call for patience—ETF issuers needed to take their time as track records were built and investors became more comfortable getting active exposure within the ETF vehicle. Thus far in 2023, 23% of the almost $300 billion of ETF inflows in the United States have come from active ETFs.3
Cruel Summer (2019) – “It’s cool, that’s what I tell ‘em/No rules in breakable heaven/But ooh, whoa oh/It’s a cruel summer/With you.”
The ETF industry tends to slow down in the summertime. Last year, US ETFs averaged around $50 billion a month of inflows but only $40 billion in June, July, and August.4 Thus far in 2023, the industry has averaged $37 billion in inflows a month, but paralleling the success of Swift’s “Eras” tour, June saw $65 billion in inflows while July saw $53 billion. Maybe her tour has made summer a little less cruel for ETFs.
Karma (2022) – “Karma is a god (Ah)/Uh-huh, mm/Karma’s a relaxing thought…”
Are we in charge of our own destinies? Our Franklin Templeton ETF business has been making strides for seven years. Maybe there is a little bit of karma involved with the recent success of the Franklin ETF business; in the United States, we have now seen over $2.5 billion of net inflows in 2023 and our assets are closing in on $13.5 billion.5 While one might think we can relax now, I will continue to champion the merits of ETFs—and Taylor Swift’s music!
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Generally, those offering the potential for higher returns are accompanied by a higher degree of risk.
For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed, or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of the publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. There is no assurance that any prediction, projection, or forecast on the economy, stock market, bond market, or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated, or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from the use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on the availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
1. Source: Morningstar.
2. Ibid.
3. Source: Bloomberg as of July 31, 2023.
4. Ibid.
5. Ibid.
A message from Advisor Perspectives and VettaFi: Just as artificial intelligence (AI) is helping advisors create videos, write blogs, construct portfolios and coach clients, companies throughout the world are using it to deliver more value to their clients. Learn about the future of AI and the investment opportunities it is creating at our next symposium, on August 30 at 11 am ET. Click here to register.
© Franklin Templeton Investments
Read more commentaries by Franklin Templeton Investments
