Franklin Templeton debuts LibertyShares smart beta ETF range

Jun 9th, 2016 | By | Category: ETF and Index News

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Californian asset manager Franklin Templeton Investments has launched LibertyShares, its new exchange-traded fund arm. The provider has officially begun operations with the launch of four new smart beta funds known as LibertyQ ETFs, offering exposure to global, emerging market and international stocks.

Franklin Templeton debuts LibertyShares smart beta ETF range

To celebrate the launch of LibertyShares, members of Franklin Templeton rang the opening bell of the NYSE on Monday 6 June 2016.

Each fund tracks a proprietary, research-driven index, targeting exposure across four factors which have historically provided superior returns to market cap-weighted benchmarks over the long-term. Franklin Templeton believes certain factors play a more significant role over others in driving long-term out-performance and has thus assigned a varied weighting across the factors of quality (50%), value (30%), momentum (10%) and low volatility (10%).

The LibertyQ index methodology assigns each security within the parent index four z-scores, each representing that firm’s relative position in one of the above factors. Z-scores are capped at maximum and minimum values of +3 and -3 respectively. The quality z-score is determined through an analysis of return on equity, earnings variability, and cash return on assets; the value z-score is determined through an analysis of price-to-book ratios and dividend yields, the momentum z-score is determined through an analysis of 6-month risk-adjusted price momentum and 12-month risk-adjusted price momentum, and the volatility z-score is determined through analysis of the variability of return over the previous 104 weeks.  

The four z-scores are thereby combined according to the above weightings to arrive at a composite z-score for each firm. All constituents are ranked in descending order according to their composite scores. The top 600 stocks are selected for inclusion into the global index, the top 250 for the international index, the top 200 for the emerging markets index and the top 100 for the dividend index. Constituents are weighted according to a function of their market capitalization and their final composite scores. The indices are managed by MSCI and re-balanced on a semi-annual basis.

“Many of our clients have embraced the ETF wrapper for its benefits, including liquidity, tax efficiency and transparency, and now they are looking for more than what a traditional market cap-weighted index can offer,” said Patrick O’Connor, head of Global ETFs for Franklin Templeton Investments. “LibertyQ offers investors our fundamental and quantitative expertise that drives our ability to seek specific outcomes with reduced risk, packaged within the ETF wrapper.

“Franklin Templeton strategic beta funds track the LibertyQ indices developed with Franklin Templeton’s team of quantitative experts who have spent decades developing quantitative active equity strategies, coupled with academic research. We approached the creation of the LibertyQ indices in the same way we have approached quantitative stock selection, and we believe that, just as with discretionary stock picking, all factors are not created equal — some are more correlated to certain outcomes.”

The Franklin LibertyQ Global Equity ETF (NYSE: FLQG) tracks the LibertyQ Global Equity Index, which offers global equity exposure and seeks to achieve higher risk-adjusted returns than the MSCI All Country World Index. As of 7 June 2016 the major country exposures within the fund are to the US (54.4%), the UK (9.2%), and Japan (4.8%). The largest sector exposures are in consumer staples (17.0%), information technology (16.8%), consumer discretionary (15.3%), health care (12.9%) and industrials (9.6%). The fund’s total expense ratio (TER) is 0.35% due to a contractual fee waiver in place until April 2017. The fund’s expense ratio without the fee waiver is 0.66%.

The Franklin LibertyQ Emerging Markets ETF (NYSE: FLQE) tracks the LibertyQ Emerging Markets Index, which offers broad emerging markets exposure and seeks to achieve higher risk-adjusted returns than the MSCI Emerging Markets Index. As of 7 June 2016 the major country exposures within the fund are to South Korea (15.2%), Taiwan (14.2%), the US (10.2%), Russia (9.2%) and South Africa (6.8%). The largest sector exposures are in telecommunications (15.1%), information technology (14.6%), consumer discretionary (13.3%), financials (12.5%) and consumer staples (10.6%). The fund’s TER is 0.55% due to a contractual fee waiver in place until April 2017. The fund’s expense ratio without the fee waiver is 0.89%.

The Franklin LibertyQ International Equity Hedged ETF (NYSE: FLQH) tracks the LibertyQ International Equity Hedged Index, which offers international developed markets exposure and seeks to achieve higher risk-adjusted returns than the MSCI EAFE Index. As of 7 June 2016 the major country exposures within the fund are to the UK (26.6%), Japan (18.2%), Australia (13.8%), Switzerland (9.0%) and Spain (4.6%). The largest sector exposures are in financials (19.0%), consumer staples (18.6%), health care (16.6%), consumer discretionary (15.6%) and telecommunications (10.8%). The fund’s TER is 0.40% due to a contractual fee waiver in place until April 2017. The fund’s expense ratio without the fee waiver is 0.71%.

The Franklin LibertyQ Global Dividend ETF (NYSE: FLQD) tracks the LibertyQ Global Dividend Index, which offers global exposure to high-quality, dividend-oriented stocks to help meet investors’ needs for income and total return. The index was constructed using proprietary dividend and quality screens, which account for not only long-term dividend sustainability and growth, but also for underlying balance sheet strength. Momentum, value and low volatility are not directly considered when constructing this index. As of 7 June 2016 the major country exposures within the fund are to the US (32.6%), the UK (16.9%), Australia (12.1%), Canada (10.6%) and Switzerland (4.2%). The largest sector exposures are in consumer staples (23.6%), financials (22.2%), health care (14.2%), consumer discretionary (12.3%) and telecommunications (9.2%). The fund’s total expense ratio (TER) is 0.45% due to a contractual fee waiver in place until April 2017. The fund’s expense ratio without the fee waiver is 0.76%.

“For nearly 70 years, Franklin Templeton has been committed to providing best-in-class investment solutions to meet the evolving needs of our clients. The launch of LibertyShares, taking an active approach to ETFs, is a strong complement to our commitment to active management,” added Greg Johnson, chairman and CEO of Franklin Resources. “Our dedicated team of seasoned ETF specialists, in collaboration with our quantitative research experts and experienced active managers, positions us at the forefront of the advancement of ETF investing.”

The funds will compete with several US-listed multi-factor ETFs which include:

iShares Edge MSCI Multifactor Global ETF (ACWF). TER – 0.50%
SPDR MSCI World Quality Mix ETF (QWLD).
TER – 0.30%

iShares Edge MSCI Multifactor International ETF (INTF). TER – 0.45%
iShares Enhanced International Large-Cap ETF (IEIL).
TER – 0.35%
SPDR MSCI EAFE Quality Mix ETF (QEFA).
TER – 0.30%
PowerShares S&P International Developed Quality Portfolio (IDHQ).
TER – 0.49%
PowerShares FTSE RAFI Developed Markets ex-US Portfolio (PXF).
TER – 0.46%
First Trust Developed Markets Ex-US AlphaDEX Fund (FDT).
TER – 0.80%

iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF). TER – 0.65%
SPDR MSCI Emerging Markets Quality Mix ETF (QEMM). TER – 0.30%
PowerShares FTSE RAFI Emerging Markets Portfolio ETF (PXH). TER – 0.49%
First Trust Emerging Markets AlphaDEX Fund (FEM). TER – 0.80%

iShares International Select Dividend ETF (IDV). TER – 0.50%
WisdomTree Global ex-US Quality Dividend Growth Fund (DNL).
TER – 0.58%
ProShares MSCI EAFE Dividend Growers ETF (EFAD).
TER – 0.50%

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