Swap to Franklin Funds Saved Clients Over $100,000

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Back in 1996, iShares was one of the first companies to create country-specific exchange-traded funds (ETFs). Their country-specific ETFs have an expense ratio of about 0.50%. While we prefer not to invest in anything with an expense ratio greater than 0.50%, iShares country-specific ETFs are our one exception. Even now, iShares is the only reasonable way to invest in several countries.

In June 2019, we wrote about new funds for Australia and Switzerland, and in March 2021 we wrote about new funds for United Kingdom, Hong Kong, and Canada. These Franklin Templeton funds, with an expense ratio of 0.09%, were expected to save our clients approximately 0.41% each year.

Expense ratios are not itemized on account statements. Neither can they be determined from returns since investment returns are usually much larger. But expense ratios are extremely important. They directly lower your investment returns. Morningstar did a study and found that low expense ratios was the best predictor of future returns, better even than Morningstar stars.

We work hard to lower the expense ratio of funds we invest in.

This past year, we were able to move approximately 87% of client assets that were previously invested in an iShares fund to a Franklin Templeton fund that is now available.

The remaining 13% typically has one of two reasons why we have not yet made the switch. First, Charles Schwab has not yet added many of the Franklin Templeton funds to their Institutional Intelligent Program (IIP) platform, which means we have not been able to switch those assets. Second, some of our clients have holdings of iShares funds in a taxable account which are highly appreciated, have an unfavorable hurdle rate, and thus smart capital gains management suggests keeping the fund rather than switching.

On paper, we would have expected that the advantage of Franklin Templeton over iShares would be 0.41%, which is 0.50% expense ratio minus 0.09% expense ratio. However, because the expense ratio is included in the fund’s return, we can look back over this past year to see a closer estimate of what actual savings may have been.

For the 87% that we were able to switch, here is a retrospective estimate of the savings our clients may have experienced using returns from January 1, 2021 through December 31, 2021 from this swap.

Country (Ticker Symbols) iShares 2021 Return Franklin 2021 Return 2021 Difference Marotta Amount Invested Savings
Australia (EWA to FLAU) 8.95% 9.91% 0.96% $7,216,138 $69,275
Canada (EWC to FLCA) 27.00% 28.69% 1.69% $4,388,821 $74,171
Hong Kong (EWH to FLHK) -3.48% -3.31% 0.17% $1,239,545 $2,107
Great Britain (EWU to FLGB) 18.22% 17.15% -1.07% $7,883,375 -$84,352
Switzerland (EWL to FLSW) 20.19% 20.82% 0.63% $9,167,320 $57,754
TOTAL 0.40% $29,895,200 $118,955

 

The estimated advantage of Franklin funds during 2021 was 0.40% or $118,955.

A fund’s return is influenced by many different factors. The iShares funds are based on the MSCI index while the Franklin funds are based on the FTSE index. These funds have slightly different holdings, which can influence returns. And a fund doesn’t always follow its index exactly. These issues are not a concern when we are choosing a country specific investment. The lower expense ratio performed very near to the superior expected return.

Reducing expense ratios by 0.41% is a significant result and has further lowered our average portfolio expense ratio for hand-traded accounts if you came to us all in cash to approximately 0.15%.

Photo of Australia by Josh Withers on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

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