Smart beta exchange traded funds help investors diversify away from drawbacks of traditional market cap-weighted investments and potentially enhance risk-adjusted returns over the long haul.
ETF Trends publisher Tom Lydon spoke with Pierre Caramazza, Head of ETF Distribution for Franklin Templeton, at the 2017 Morningstar Investment Conference in Chicago April 26-28 to talk the widespread use of cap-weighted strategies and ways Franklin Templeton has broken from the traditional mentality.
“They really are the dominant player in the ETF space, but we think there’s an opportunity for us as well, mainly because cap weighted doesn’t work for everybody, and there’s people that look at the index and say, ‘I want something different,” Caramazza said.
As investors come to realize the potential short-comings of traditional market cap-weighted index strategies, such as heavy tilts toward some of the more overbought companies, many have turned to alternative ways to gain market exposure, such as through smart beta ETFs.
“We launched a bunch of smart beta offerings – our LibertyQs,” Caramazza said. “We’ve built them off of a lot of the same stock picking tenets that we’ve sued across the firm, right – quality, value, low volatility, momentum – and looking at those for the entire index, building them together, gives us what we think is a very compelling opportunity that’s built on the tenets of long-term Franklin views.”
Specifically, Franklin Templeton has launched a suite of LibertyQ smart beta ETFs, including the Franklin LibertyQ U.S. Equity ETF (BATS: FLQL), Franklin LibertyQ U.S. Mid Cap Equity ETF (BATS: FLQM), Franklin LibertyQ U.S. Small Cap Equity ETF (BATS: FLQS),Franklin LibertyQ International Equity Hedged ETF (NYSEArca: FLQH), Franklin LibertyQ Emerging Markets ETF (NYSEArca: FLQE), Franklin LibertyQ Global Dividend ETF (NYSEArca: FLQG) and Franklin LibertyQ Global Equity ETF (NYSEArca: FLQD), among others. Each of the smart beta ETFs screen for companies in their respective market capitalization and segments based on four factors, including quality, value, momentum and low volatility.
“The way we’ve built our smart betas is as we’ve looked at at them for a risk-adjusted perspective,” Caramazza said. “We really tried to do them, not to beat the marketplace in any sort of give year, but really to do a long-term view and to have a risk-adjusted number where we protect on the downside, get some of the upside. And over the long-term, we think we do well.”
For more on smart beta ETFs, visit our Smart Beta Channel.