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Smart Beta ETFs

Our LibertyQ 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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Franklin LibertyQ is a series of smart 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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Franklin LibertyQ ETFs track proprietary 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 LibertyQ 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 MSCI as a custom index, and tracked by our LibertyQ 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 LibertyQ ETFs
    Multi-Factor Custom-Weighted ETFs

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

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Learn More About How the Factors Work

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While there are numerous smart 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.

Smart 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 LibertyQ ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus.

The LibertyQ methodology is based upon four custom weighted factors, which is designed to help drive attractive returns while seeking a degree of reduced downside protection over the long-term.

Factors and Weights LibertyQ Quality Factor LibertyQ Value Factor LibertyQ Momentum Factor LibertyQ Volatility Factor
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Why it Matters
  • May be an important driver of stock performance
  • Helps reduce overall portfolio volatility
  • Helps capture opportunities in undervalued companies
  • Helps avoid value traps
  • May help reduce overall portfolio risk during market downturns
Factor Definition1 Companies with stable earnings growth, strength of balance sheet and efficient use of assets Companies that appear to have low prices relative to their fundamental value Companies that exhibit shorter-term relative risk-adjusted price strength Companies that demonstrate lower than average volatility
How We Measure1
  • Return on Equity
  • Earnings Variability
  • Cash Return on Assets
  • Leverage
  • ex Financials: Blended Price/Earnings* Dividend Yield
  • Financials: Price/Book: Dividend Yield
  • 6-Month Risk-Adjusted Price Momentum
  • 12-Month Risk-Adjusted Price Momentum
  • Historical beta based on 2-year weekly returns

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 LibertyQ ETFs are not riskless investments, and investors can lose money. For additional risk considerations please see the prospectus. The Franklin LibertyQ Global Dividend ETF utilizes the quality factor with an emphasis on dividends.
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 four factors are 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 LibertyQ 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
LibertyQ
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
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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 LibertyQ ETFs

Insights

Index Investing and the Factor Evolution

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Smart Beta: Index Investing, Evolved

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Meet the Manager: Dina Ting

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The ABCs of Trading a New ETF

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