On the latest episode of ETF 360, VettaFi head of research Todd Rosenbluth was joined by Director of Asset Allocation Strategy for North Trust Asset Management Dan Philips. The two discussed a quality low volatility approach suited to a slow or no growth environment.
“Its nice to the Fed finally, and hopefully, get to the top of their rate hikes, but we don’t think they are going to be on a descending course anytime soon,” Philips said. He noted that the markets have several rate cuts priced in, but Northern Trust thinks the inflation numbers might still be too high for the Fed. “The economy is still doing okay, especially if you look at labor market.”
Though the inverted yield curve suggests that a recession is coming, Philips believes that there is a lot of momentum in the economy. “The makes us less embracing of risk right now,” he said.
The Slow Growth Environment
Philips thinks that in the near horizon, a slow growth environment is likely. He sees the Fed as likely keeping rates elevated for some time, which will lead to slower growth. “We don’t expect a lot of growth in the equity market,” he observed.
According to Philips, risk opportunities are available in high yield. Still, within equities, there is some potential upside in quality stocks that are low volatility. “We like this as a strategy all of the time – it’s a nice core solution for a portfolio,” he said, noting that it outperforms in times of high volatility.
Volatility spikes have more frequent in the new economic regime, making this strategy more appealing. Philips pointed to geopolitical tensions as another reason to consider a lower volatility strategy.
Quality Low Volatility Approach
“You don’t want quality or low volatility, you want quality and low volatility together,” Philips said. He shared that though there are plenty of stocks that offer low volatility, investors want the upside. Upside comes with quality. Meanwhile, quality stocks alone could end up bringing in both high and low volatility. Philips sees the intersection as a sweet spot. “Let’s stick to the stuff that works best in the portfolio.”
The FlexShares US Quality Low Volatility Index Fund (QLV) is built to capture this combination. An international spin on this idea can be found in the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD).
To watch past episodes of ETF 360, visit VettaFi’s ETF 360 Channel.