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CONTRIBUTORS

David Mann

Head of Global Exchange-Traded Funds (ETFs) Capital Markets, Franklin Templeton

I won’t even attempt to wish everyone a happy new year since I’m trying to avoid the wrath of colleagues (and comedian Larry David) who declare January 8 to be the deadline for any such greetings. Also, given the focus on bringing spot bitcoin exchange-traded products (ETPs) to market over the last few months of 2023, I’ve decided to align my predictions column this year with Chinese New Year instead. Kung Hei Fat Choy!   

This is my eighth year of offering ETF-related predictions. As usual, last year had some that were spot-on, but also others that were off the mark. In the Chinese zodiac, 2024 is the year of the “Wood Dragon,” which is said to foster growth, progress and abundance. Thus, in lieu of re-reading my old predictions to find the errors of my ways, this year I’m going to let the Wood Dragon philosophy guide me.

And given the enthusiastic feedback I received last year on non-ETF topics, such as Taylor Swift and Colorado football, I’m also adding in some sports and culture predictions. Sadly, one of those predictions (which I am keeping in this article) was for the Detroit Lions to win the Super Bowl, but that dream crashed and burned in gut-wrenching style.

  1. The launch of spot bitcoin ETPs will spur an investment boom into alternative products

As I hinted above, we’ve spent a ton of time in recent months building out our infrastructure to ensure that spot bitcoin ETPs would work as designed. Early trading would indicate so far, so good! Volumes have been strong, creates/redeems have been generally seamless, and spreads have been tight. From a capital markets perspective, the plumbing is working properly.

More recently, the conversation has thus shifted from “will they work?” to “how do they fit in a portfolio?” Investors who are fans of the traditional 60% equity/40% fixed income portfolio are now contemplating how adding a small percentage to alternatives, including bitcoin, could impact risk-adjusted returns.  

Last year, there were approximately US$2.3 billion of ETF inflows into alternatives, with around one-third of those assets going into cryptocurrency strategies.1 I think that the spot bitcoin wave coupled with investor appreciation for the portfolio construction benefits of adding alternatives should cause inflows to increase substantially. The total market cap of the bitcoin market at the end of 2023 was approximately $828 billion.2 The combined net inflows into spot ETFs in the month of January was approximately $2.2 billion.3 Based on the size of the bitcoin market and that initial demand, we expected that pace of inflows to continue for three additional months before slowing down over the rest of the year, leading to our estimate of more than $10 billion in ETF inflows in 2024.

  1. The launch of spot bitcoin ETPs will also spur investments into thematics

In for a penny, in for a pound. From a classification perspective for portfolio construction, bitcoin ETPs seem to be lumped in as an alternative investment. However, given the technological advances that led to Bitcoin specifically and crypto/digital assets more broadly, I would not be surprised if Bitcoin causes a jolt to thematics like artificial intelligence, metaverse, cloud computing and genomic advancements.

Despite 2023’s strong tech market, these thematic ETFs lost almost US$5 billion in assets.4 Thematic ETFs saw net outflows of $5 billion in 2023 but saw inflows of $2.4 billion in 2022 and inflows of $51 billion in 2021.5 Given the previous strong interest in thematic ETFs and the introduction of bitcoin ETPs to the market, our expectation is that 2024 would see a return to inflows at double the inflows seen in 2022. As such, I see a combined US$5 billion of inflows into thematic ETFs.

  1. Established Active managers will continue to dip their toes into the ETF waters

Last year was a banner year for active ETF inflows, which represented almost 25% of the ~US$600 billion of net new money that went into US-listed ETFs.6 Investors who love the ETF wrapper for tax efficiency, liquidity, or transparency now appreciate that such features apply to both index and active strategies.

In 2022, the main story of active managers entering the ETF arena was the conversion of an existing mutual fund into an ETF (disclosure: this is something Franklin Templeton has done). In 2023, I think the main story was one of active managers contemplating creating an ETF share class from an existing mutual fund.

Lost in the share class discussion last year, a third option began—established managers launching unique and differentiated strategies in the ETF format. One Franklin Templeton example involves our Income Focus ETF (INCM), which launched last summer. Other large asset managers did the same with their more popular active managers. These ETFs saw strong inflows over the latter part of 2023.

Given the various challenges of conversions and share classes, I think this third option will continue to gain popularity in 2024.

  1. Non-ETF predictions

As promised, here are my sports and culture predictions.

2024 Super Bowl Winner – Detroit Lions Taylor Swift

2024 NBA Champion – LA Clippers

2024 MLB Champion – Atlanta Braves

2024 NHL Champion – Edmonton Oilers

2024 Best Picture – Oppenheimer

2024 Highest Grossing Movie – Deadpool 3

2024 Record of the Year – Midnights

 

Have a great 2024!

Endnotes

  1. Source: Bloomberg. As of December 31, 2023.
  2. Ibid.
  3. Source: Bloomberg. As of January 31, 2024.
  4. Source: Bloomberg. As of December 31, 2023.
  5. Source: Ibid.
  6. Ibid.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.  Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. 

Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in equity-linked notes often have risks similar to their underlying securities, which could include management risk, market risk and, as applicable, foreign securities and currency risks.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. 

Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.

Active management does not ensure gains or protect against market declines.

Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner.

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.

WHAT ARE THE RISKS OF BITCOIN ETPs DISCUSSED?

All investments involve risks, including possible loss of principal. Before you invest, for more complete information about the Fund and this offering, you should carefully read the Fund's prospectus.

The Bitcoin ETPs (“Bitcoin ETPs” hereafter) registered under the Securities Act of 1933, which have been discussed, are not an investment company registered under the Investment Company Act of 1940 (1940 Act), and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the 1940 Act. The Bitcoin ETPs are not a commodity pool for purposes of the Commodity Exchange Act (CEA) and accordingly are not subject to the regulatory protections afforded by the CEA.

Bitcoin ETPs hold only bitcoin and cash and are not suitable for all investors. Bitcoin ETPs are not a diversified investment and, therefore, are expected to be more volatile than other investments, such as an investment in a more broadly diversified portfolio. An investment in Bitcoin ETPs is not intended as a complete investment plan.

An investment in Bitcoin ETPs is subject to market risk with respect to the digital asset markets. The trading price of the bitcoin held by the Fund may go up and down, sometimes rapidly or unpredictably. The value of the Bitcoin ETP's Shares relates directly to the value of bitcoins, which has been in the past, and may continue to be, highly volatile and subject to fluctuations due to a number of factors. Extreme volatility in the future, including substantial, sustained, or rapid declines in the trading prices of bitcoin, could have a material adverse effect on the value of the Shares and the Shares could lose all or substantially all of their value.

Competitive pressures may negatively affect the ability of Bitcoin ETPs to garner substantial assets and achieve commercial success.

Digital assets represent a new and rapidly evolving industry, and the value of shares of Bitcoin ETPs depends on the acceptance of bitcoin. Due to the unregulated nature and lack of transparency surrounding the operations of digital asset exchanges, which may experience fraud, manipulation, security failures or operational problems, as well as the wider bitcoin market, the value of bitcoin and, consequently, the value of the Shares may be adversely affected, causing losses to Shareholders.

Digital asset markets in the US exist in a state of regulatory uncertainty, and adverse legislative or regulatory developments could significantly harm the value of bitcoin or the Shares of Bitcoin ETPs, such as by banning, restricting, or imposing onerous conditions or prohibitions on the use of bitcoins, mining activity, digital wallets, the provision of services related to trading and custodying bitcoin, the operation of the Bitcoin network, or the digital asset markets generally.

The Index price used to calculate the value of the bitcoin held by Bitcoin ETPs has a limited performance history and may be volatile, adversely affecting the value of the Shares. Moreover, the Index Administrator could experience system failures or errors. Errors in the Index data, computations and/or construction may occur from time to time and may not be identified and/or corrected for a period of time or at all, which may have an adverse impact on the Bitcoin ETPs and the Shareholders. A temporary or permanent “fork” could adversely affect the value of the Shares. Shareholders should not expect to receive the benefits of any forks or “airdrops.”

Bitcoin ETFs are a passive investment vehicle and are not actively managed, meaning they does not manage the portfolio to sell bitcoin at times when its price is high, or acquire bitcoin at low prices in the expectation of future price increases. Also, Bitcoin ETPs do not use any hedging techniques to attempt to reduce the risks of losses resulting from bitcoin price decreases. Bitcoin ETPs are not leveraged products and do not utilize leverage, derivatives or similar instruments or transactions. Bitcoin ETP Shares are not interests or obligations of the Fund's Sponsor or its affiliates and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

The amount of bitcoin represented by each Share will decrease over the life of the Bitcoin ETPs due to the sales of bitcoin necessary to pay the Sponsor's Fee and other Fund expenses. Without increases in the price of bitcoin sufficient to compensate for that decrease, the price of the Shares will also decline, and you will lose money on your investment in Shares.

Security threats to the Bitcoin ETP's account at the Bitcoin Custodian or Prime Broker could result in the halting of Fund operations and a loss of Fund assets or damage to the reputation of the Fund, each of which could result in a reduction in the value of the Shares.

If the process of creation and redemption of Creation Units encounters any unanticipated difficulties, the possibility for arbitrage transactions by Authorized Participants intended to keep the price of the Shares closely linked to the price of bitcoin may not exist and, as a result, the price of the Shares may fall or otherwise diverge from NAV.

Franklin Income Focus ETF (INCM)

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The fund is newly organized, with a limited history of operations. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund's share price may decline. Changes in the financial strength of a bond issuer or in a bond's credit rating may affect its value.  Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in equity index-linked notes often have risks similar to their underlying securities, which could include management risk, market risk and, as applicable, foreign securities and currency risks. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated. These and other risk considerations are discussed in the fund's prospectus.

Carefully consider a fund’s investment objectives, risks, charges and expenses before investing. Please view the prospectus or summary prospectus for this and other information. Read it carefully.

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 at 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 use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

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Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.

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