Franklin LibertyQ U.S. Small Cap Equity ETF (FLQS) tracks an index of small cap U.S. stocks based on quality, value, momentum, and low volatility. The index tilts more heavily toward quality and value, with a lesser emphasis on momentum and low-vol.
The investment thesis behind a small cap investment is the growth factor that comes along with these securities. While mega cap firms have already hit their peak, smaller companies may become the next juggernaut. The downside to small cap investing is additional risk. Changes in regulation, credit availability, or product viability could send share prices plummeting. While some exposure to these small companies is healthy for a portfolio, the allocation should be kept relatively low since this market segment experiences extreme volatility. Investors in total-market ETFs already have some allocation to small caps and should make sure that they’re not unintentionally overweighting a risky space. Conversely, investors with strong convictions about small caps might want to augment a total market fund with SPSM to boost their exposure.
FLQS is reasonably priced for a smart-beta approach, but it trails rivals in size and liquidity. Investors can compare it to rival factor fund iShares Edge MSCI Multifactor U.S.A. Small-Cap ETF (SMLF), or to the low-cost and highly liquid iShares Core S&P Small Cap ETF (IJR), a plain vanilla index fund.