With the MSCI Emerging Markets Index down 20.30% year-to-date, its understandable that investors have reservations about revisiting developing economies. Should they choose to do so, focusing on quality and reduced volatility with the FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE) could be the way to go.
QLVE 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.
In addition to its quality leaning, QLVE also avoids some of the trouble spots that often plague emerging markets, including heavy commodities exposure. For example, the FlexShares fund allocates just 9.20% of its weight to the energy and materials sectors. Likewise, its exposure to commodities exporting countries is low as China, Taiwan, and South Korea combine for nearly 59% of the fund’s weight.
Today, emerging markets equities trade at jaw-dropping discounts relative to U.S. benchmarks, but that doesn’t mean the entire universe is a good value. QLVE can take some of the edge off value traps with its low volatility bias,
The 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.
Some of the emerging markets value proposition is intensified by China’s weakening economy, but some market observers believe that conditions will be fleeting as Beijing takes steps to shore up output.
Looking ahead, FlexShares believed that this time could be different or worse as it relates to the economic and financial markets. Specifically, the analysts pointed out that this virus is less deadly but will spread more easily and have a longer incubation period. The use of social media has increased news circulation but impaired short-term economic activity as people focus on fear. China, the epicenter of the coronavirus outbreak, is also the second-largest global economy and a big part of the world economic engine.
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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.