Higher-than-average market volatility may be inducing sea sickness among investors in 2022. That said, they can opt for low volatility options to help ease the effects of market fluctuations.
One option is low volatility exchange traded funds (ETFs). For example, there’s the FlexShares US Quality Low Volatility Index Fund (QLV), and with a 0.22% net expense ratio, the added low volatility feature doesn’t come at a high cost.
QLV seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Low Volatility Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to the Northern Trust 1250 Index, a float-adjusted market capitalization-weighted index of U.S.-domiciled large- and mid-capitalization companies.
“The FlexShares US Quality Low Volatility Index Fund (QLV) is designed to provide exposure to US-based companies that possess lower overall absolute volatility and that also exhibit financial strength and stability, which we believe are quality characteristics,” a FlexShares Fund Focus says.
Low Volatility Diversification
For a diversified approach into developed markets outside the U.S., there’s the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD). The fund seeks investment results that correspond generally to the Northern Trust Developed Markets ex-US Quality Low Volatility Index, which is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in developed market countries, excluding the United States.
“Investing in low volatility international stocks is often used as a defensive strategy by investors who want to participate in some of the market’s growth while potentially reducing their downside risk,” a FlexShares Fund Focus article notes. “Our research has found, however, that traditional low volatility strategies may introduce unintended sector concentration and interest rate risk, among other challenges.”
FlexShares takes a different approach to addressing the challenges with traditional low volatility strategies. QLVD employs a multi-faceted methodology that focuses on quality holdings to reduce further volatility.
“NTI starts with the Northern Trust Global Index, which represents approximately 97.5% of world’s float adjusted market capitalization,” FlexShares notes. “Then, they exclude all U.S.-based companies and apply a multi-faceted Quality Score (QS) to measure a company’s core financial health and evaluate whether it may increase (or decrease) its future dividends.”
Furthermore, the scoring method utilizes three filters: management efficiency, profitability, and cash flow. Based on these characteristics, companies are further segmented into five quintiles.
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