Exchange traded funds (ETFs) like the FlexShares US Quality Low Volatility Index Fund (QLV) can not only shield investors against future volatility, but can also capture upside in market that’s trending higher.
“Investing in low volatility 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 said.
QLV isn’t a one-trick pony. The fund’s strategy can still climb in an uptrend, which is evidenced by its 13% year-to-date gain.
“Low-volatility strategies can be a helpful defensive strategy for investors who want to reduce potential portfolio declines during market downturns, while still capturing some of the gains that come during positive markets,” the Fund Focus added.
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.
Capturing Upside During Periods of Low Volatility
The current market environment is exhibiting signs of low volatility. It could be the calm before the storm, or an opportunity to capture more upside. QLV is set to shine in either case.
“The VIX index, the so-called market fear gauge, has recently fallen to a reading of around 16 points,” a Market Research Telecast article said. “This figure is lower than the 19-point average since 1991. The VIX reflects the amount of volatility that traders expect to see. the US S&P 500 stock index for the next 30 days.”
“The recent calm in the markets has set off alarms among some investors for fear of complacency,” the article said further. “However, if we look back, investors would not have been wise to sell stocks based solely on a low VIX reading.”
While investors might be tempted to sell equities that aren’t moving, sometimes the best strategy is to stand pat.
“On average, the S&P 500 has delivered a return of about 15% in the 12 months following a VIX reading of 16,” the article added. “Rather than being an opportune time to sell, it has historically been when it has performed better.”
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