With investors placing added emphasis on companies with strong balance sheets and other indicators of sound financial well-being, the quality factor is again in the spotlight, meaning the time is right to consider the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV).
QLV follows the Northern Trust US Quality Low Volatility Index. The ETF’s benchmark employs 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 the regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
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.
“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,” said FlexShares in a recent note. “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.”
Count on QLV
QLV, which debuted last July, features 137 holdings with a weighted average market value of $200.67 billion. The fund allocates about 49% of its combined weight to the technology, healthcare, and financial services sectors.
Data suggest the COVID-19 pandemic could be presenting investors with an ideal opportunity with which to embrace QLV.
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.
“Since 12/31/2013 through 3/31/2020, the Northern Trust Quality Low Volatility Index historically has offered an upmarket capture ratio of 88% on average, while providing a down market capture ratio of 64% on average in comparison to the broad market index,” according to the issuer.
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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.