With U.S. stocks looking expensive as the bull market ages, investors are looking for value opportunities and some developed international markets have plenty of value appeal. That theme has benefiting an array of exchange traded funds this year, including some smart beta plays.
For example, the Franklin LibertyQ International Equity Hedged ETF (NYSEArca: FLQH), which debuted just over a year ago, is an idea to consider. FLQH is the international developed markets ETF in Franklin Templeton’s smart beta ETF suite that also includes the Franklin LibertyQ Emerging Markets ETF (NYSEArca: FLQE), Franklin LibertyQ Global Dividend ETF (NYSEArca: FLQG) and Franklin LibertyQ Global Equity ETF (NYSEArca: FLQD).
“We believe equities outside the United States look exceedingly attractive in the current environment relative to US stocks. The argument for non-US stocks today in many ways resembles the case for value stocks that we’ve been making over the past 18 months. Non-US stocks appear undervalued, have underperformed US stocks and possess potential catalysts that could help spur a turnaround,” according to a recent note from Franklin Templeton.
FLQH, which holds almost 250 stocks, allocates nearly 49% of its combined weight to the U.K. and Japan. Australia is the next largest country weight at 17%.
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.
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