Data suggest investors have not been fond of international equity ETFs this year. On aggregate, those funds, whether it’s developed or emerging markets, have not attracted any new inflows this year.
That doesn’t mean the case for ex-US developed markets funds is dead. Not when valuations are low and performance gaps relative to the U.S. are well beyond historical norms (in favor of the U.S.). One approach to consider is the newly minted FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD), which debuted in July.
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. Although QLVD is new on the scene, it’s already proving the quality/low volatility marriage works as the fund has gained nearly 3% since inception.
The low-volatility ETFs are factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. Historical data confirm that over long holding periods, the low volatility factor is rewarding for investors.
Limiting Drawdowns
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. The fund allocates 37% of its weight to value stocks and 26.5% to growth names.
At the geographic level, QLVD allocates over 36% of its weight to Japan and the U.K. while featuring a 10.45% weight to Canada. Canadian stocks are not found in the MSCI EAFE Index.
Related: U.S. Stock ETFs Find Support from Earnings, Trade Progress
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.
QLVD holds 184 stocks with a weighted average market value of $55.72 billion.
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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.