3 Challenges with Low Volatility Approach Investments | ETF Trends

In uncertain times, investors could be looking to alternative strategies to help diminish risks while still maintaining exposure to markets for potential further gains.

On the upcoming webcast, 3 Challenges with Low Volatility Approach Investments, Christopher Huemmer, Senior Investment Strategist, Northern Trust Asset Management, will consider the next evolution of low-volatility based strategies to help investors provide a quality tilt to a low-volatility strategy within a diversified portfolio.

For example, investors who are faced with an increasingly volatile market environment may turn to quality and low-volatility ETF strategies, such as the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV), FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD) and FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE).

“Low volatility investing is an attempt to minimize the fluctuation of the value of an investment over a period of time and is often considered as a defensive strategy. Applying the quality factor to a low volatility strategy may allow an investor to capture more of the market upside potential while protecting against downside risks,” according to FlexShares.

The three ETFs utilize a quality screen to provide exposure to high-quality companies with lower absolute risk, thereby limiting potential future volatility. The 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 regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.

“Our research suggests that low volatility strategies have historically often resulted in portfolios with significant sector biases (e.g. utilities, consumer staples, etc.) that may result in unintended sector risks and potential interest rate sensitivity that investors may not have been expecting,” according to FlexShares.

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 fourth quarter of last year market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.

Financial advisors who are interested in learning more about low-volatility investment strategies can register for the Tuesday, October 8 webcast here.