The quality factor incorporates measures like return on equity, earnings, variability, cash return on assets and leverage. The value factor incorporates measures such as price-to-earnings, price-to-forward earnings, price-to-book value and dividend yield. The momentum factor covers measures such as 6-month risk adjusted price momentum and 12-month risk-adjusted price momentum. Lastly, the low volatility factors include measures like historical beta, a measure of the volatility of a security relative to the total market.

Franklin research notes that when value is in style, ex-US stocks tend to outpace their U.S. counterparts.

“There are several possible explanations for this relationship. These include a typically higher representation of cyclical sectors in markets outside the United States and ta generally higher level of operating leverage in these markets attributable to higher fixed costs and less flexible labor. Additionally, we believe the recent valuation discount applied to “riskier” non-US equities creates greater scope for re-rating,” according to Franklin Templeton.

FLQH features ample cyclical exposure with almost 35% of its combined weight allocated to financials and consumer discretionary names and another 9.2% devoted to industrials.

For more on smart beta ETFs, visit our Smart Beta Channel.

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