Ex-US developed market equities are again lagging their American counterparts. One way for investors to revisit the asset class is by emphasizing quality with the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD).
As its name implies, QLVD’s index methodology emphasizes both low volatility and quality traits, two styles that often intersect in ETFs by incident, not intent.
QLVD’s quality screen analyzes a broad universe of equities based on key indicators such as profitability, management efficiency, and cash flow, and then excludes the bottom 20% of stocks with the lowest quality score. The index is then subject to the regional, sector, and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
QLVD Cushion
Low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
For a fund with low volatility traits, QLVD does an admirable job of mixing value and growth stocks, the latter of which are often scant parts of traditional minimum volatility strategies.
Data suggest the COVID-19 pandemic could be presenting investors with an ideal opportunity with which to embrace QLVD.
QLVD’s quality screen analyzes a broad universe of equities based on key indicators such as profitability, management efficiency, and cash flow, and then excludes the bottom 20% of stocks with the lowest quality score. That makes for one of the more robust quality screens among ETFs focusing on that particular investment factor.
According to FlexShares research, in the majority of cases, a global health crisis has been a non-event for the global equity markets, with markets showing a positive return throughout the full 9 month period in 6 of the 8 instances. Furthermore, over half of the instances, markets were positive in both the 3 months leading up to and the 6 months after the crisis.
Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the March market swoon, indicating that the quality factor can provide some protection during times of elevated market stress. QLV’s ability to blend both factors is a potential advantage for investors.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.