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Strategic Beta ETFs

Our LibertyQT ETFs utilize a rules-based investing methodology, track an underlying index, and seek to achieve better risk-adjusted returns compared to traditional market cap weighted indices.

 

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Introducing Franklin LibertyQT: Strategic beta ETFs designed to improve upon the benefits of traditional market-cap weighted ETFs by offering the potential for better investment outcomes.

Designed for Investment Outcomes

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Index Methodology Based on Research Driven Insights

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Core Portfolios

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Franklin LibertyQT ETFs track indices constructed from a deliberate combination of well-established performance attributes – often called factors - that together seek to deliver attractive risk-adjusted returns.

Traditional market cap weighted index strategies are popular for their ability to provide broad market exposure. However, they may also expose investors to unintended risks. Some of these risks include over-concentration in:

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Large and
mega-cap stocks

The largest two percent of the companies in the MSCI All Country World Index account for twenty-five percent of the index.

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Over-valued
stocks

Seven of the ten largest companies in the MSCI All Country World Index have high P/E ratios relative to their averages.

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Sector
weights

High sector concentrations, have at times, created additional risks.

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Geographic
Weights

The top three countries in the MSCI EM Index account for 50% of the index.

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For illustrative purposes only. Source: © 2016 Morningstar, as of December 31, 2015. All rights reserved. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.

Franklin LibertyQT ETFs seek to improve upon traditional market cap-weighted strategies through our unique methodology, drawing on insights from decades of investment research expertise by our specialized quantitative team. The result is a proprietary, custom-weighted multi-factor methodology which is calculated independently by an index provider as a custom index, and tracked by our LibertyQT ETFs.

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    Market Cap-Weighted Index ETFs and funds

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    Single Factor ETFs

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    Multi-Factor Equal-Weighted ETFs

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    Franklin LibertyQT ETFs
    Multi-Factor Custom-Weighted ETFs

    Franklin LibertyQT ETFs pursue investment outcomes by applying research driven insights to traditional index investing.

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Learn More About How the Factors Work

Our initial offering of Franklin LibertyQT ETFs are designed to be core equity holdings.

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Franklin Liberty QT International Equity ETF FLDM Franklin Liberty QT U.S. Equity ETF FLUS
Fund Description1 Seeks to deliver investment results that closely correspond, before fees and expenses, to the performance of the LibertyQ International Equity Underlying Index. The underlying index seeks to achieve a lower level of risk and higher risk-adjusted performance than the MSCI EAFE Index over the long term. Seeks to deliver investment results that closely correspond, before fees and expenses, to the performance of the LibertyQ U.S. Large Cap Equity Underlying Index. The underlying index seeks to achieve a lower level of risk and higher risk-adjusted performance than the Russell 1000® Index over the long term.
Universe MSCI EAFE represents returns in developed markets in Europe, Australia and the Far East. The Russell 1000® Index is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.
Factors Utilized Quality: 50%
Value: 30%
Momentum: 10%
Low Volatility: 10%
Quality: 50%
Value: 30%
Momentum: 10%
Low Volatility: 10%

1. All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent the funds focus on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Performance of the funds may vary significantly from the performance of an index, as a result of transactions costs, expenses and other factors. These and other risks are discussed in the fund’s prospectus.

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While there are numerous strategic beta products in the industry, we believe our approach is unique and is grounded in the following:

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Equity Performance Is Driven by Many Risk Factors

Factors represent important underlying drivers of equity returns. Some factors dominate others depending on the market environment.

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Not All Factors Are Created Equal

Quality and value are the most important contributors to stock performance, while momentum and low volatility offer technical signals that contribute to diversification.

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Our Multi-Factor Approach Has the Potential to Increase Returns and Reduce Risk

Different factors outperform at different stages of the market cycle, so diversifying across factors, with an emphasis on quality and value, can lead to stronger, more consistent risk-adjusted returns over the long-term.

Strategic beta refers to a methodology of index construction that seeks to achieve better risk-adjusted returns compared to traditional market capitalization weighted benchmark indices. There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus.

Decades of academic and Franklin Templeton research have helped our expert quantitative team identify four well-established factors that have demonstrated long-term outperformance. Our analysts have created a proprietary definition for each of these factors, and applied a custom weighting. Franklin LibertyQT U.S. Equity Index ETF and Franklin LibertyQT International Equity Index ETF apply our custom mix, emphasizing quality and value which, we believe has the potential to help drive attractive returns, while seeking a degree of reduced downside protection.

Factor Mix

Quality

  • May be an important driver of stock performance
  • Helps reduce overall portfolio volatility
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Value

  • Helps capture opportunities in undervalued companies
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Momentum

  • Helps avoid value traps*
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Low Volatility

  • May help reduce overall portfolio risk during market downturns
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There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus.
* Stocks that appear undervalued and continue to trade at low valuations for extended periods of time.

Rationale1

  • High-quality companies tend to be less volatile over the long term

Factor Defintion

  • Companies with stable earnings growth, strength of balance sheet, and efficient use of assets

Factor Descriptors

  • Return on Equity (ROE)
  • Earnings Variability
  • Cash Return on Assets
  • Leverage

The information provided is for educational purposes only and should not be construed as investment advice. There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus. 1. The stated definition is based on Franklin Templeton’s internal research that was used to develop the Franklin LibertyQT methodology. The stated descriptors are examples of how the quality factor is measured.

Rationale

  • Helps avoid penalizing non-financial companies with temporarily depressed earnings but whose earnings are expected to bounce back
  • Blending trailing and forward Price to Earnings (P/E) may provide a more comprehensive view of firm's outlook
  • Comparing Price/Book ratios of financial firms may help evaluate different types of firms within the sector

Factor Defintion

  • Companies that appear to have low prices relative to their fundamental value

Factor Descriptors

  • ex Financials
    • Blended P/E (average of Trailing and Forward)
    • Dividend Yield
  • Financials
    • Price to Book (P/B)
    • Dividend Yield

The information provided is for educational purposes only and should not be construed as investment advice. There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus. 1.The stated definition is based on Franklin Templeton’s internal research that was used to develop the Franklin LibertyQ methodology. The stated descriptors are examples of how the value factor is measured.

Rationale

  • Stocks with strong recent past performance tended to have excess price returns for short periods of time
  • Ranking stocks based on momentum may identify investment needs
  • Adjusting momentum by risk may help dampen the high volatility associated with momentum investing and may reduce the risk of large drawdowns
  • May help avoid value traps

Factor Defintion

  • Companies that exhibit shorter-term relative risk-adjusted price strength

Factor Descriptors

  • 6-Month Risk-Adjusted Price Momentum
  • 12-Month Risk-Adjusted Price Momentum

The information provided is for educational purposes only and should not be construed as investment advice. There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus. 1. The stated definition is based on Franklin Templeton’s internal research that was used to develop the Franklin LibertyQ methodology. The stated descriptors are examples of how the momentum factor is measured.

Rationale

  • Historically, low volatility stocks have tended to decline less than the market during times of crises and market downturns
  • This defensive strategy has historically produced a premium to the market that has persisted over time

Factor Defintion

  • Companies that demonstrate lower than average volatility

Factor Descriptors

  • Historical beta based on 2-year weekly returns
  • 12-Month Risk-Adjusted Price Momentum

The information provided is for educational purposes only and should not be construed as investment advice. There is no guarantee that any strategy will achieve its objective. Franklin LibertyQT ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus. 1. The stated definition is based on Franklin Templeton’s internal research that was used to develop the Franklin LibertyQ methodology. The stated descriptors are examples of how the low volatility factor is measured.

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The Investment Process - Three Core Portfolios

  • 1. Start with an Investment Universe
  • 2. Apply Factor Methodology
  • 3. Create Custom Index
  • 4. Franklin LibertyQT ETFs

Indices Rebalanced
Semi-Annually

Click on an investment
universe to continue

  • Investment Universe
  • MSCI Emerging Markets Index
  • MSCI EAFE Index
  • MSCI ACWI ex REITs Index
Composite Score
Select Top 25%
CustomLibertyQ
Index
LibertyQT
ETF
CustomLibertyQ Emerging
Markets Index
Emerging
Market
ETF
CustomLibertyQ International
Equity Hedged Index
EAFE
Hedged
ETF
CustomLibertyQ Example
example
EXA
Example
SAMPLE

Portfolio Manager seeks to track the custom index, considering risk, return, and cost/tax implications of each trade.

Step 1: We begin with a broad based MSCI or Russell index which represents the desired investment universe

Step 2: A score is applied to each of the stocks based on factor weightings of 50% quality, 30% value, 10% momentum and 10% volatility

Step 3: Based on each stock’s composite score, the top 25% of stocks in the broad MSCI or Russell index are selected for the custom LibertyQ index

Step 4: The ETF manager builds an ETF designed to track the custom index, taking into consideration risk, return and cost/tax implications of each trade

The Investment Process - Three Core Portfolios

  • 1. Start with an
    Investment Universe
  • 2. Filter to
    Identify Attributes
  • 3. Apply Factor
    Methodology
  • 4. Create
    Custom Index
  • 5. Franklin
    LibertyQ ETF

Indices Rebalanced
Semi-Annually

Click on an investment
universe to continue

  • MSCI All Country World Index
  • MSCI Emerging Markets Index
  • MSCI EAFE Index
  • MSCI ACWI ex REITs Index
...
...

...

...

...

Custom ...
...

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Step 1: Start with a broad-based index such as the MSCI All Country World Index ex REITs

Step 2: Filter for companies with dividend sustainability and another for companies that demonstrate dividend growth

Step 3: After the filters are applied, a score is applied to the stocks, based on quality

Step 4: Based on each stock’s composite score, approximately 100 stocks are selected for the custom LibertyQ Global Dividend Index

Step 5: The ETF manager builds an ETF designed to track the custom index, taking into consideration risk, return and cost/tax implications of each trade, while limiting each stock to no more than 2% of the entire portfolio

Franklin LibertyQT ETFs

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