Emerging markets equities could be back in vogue if there’s regime change here in the U.S. come November and that could be a positive for exchange traded funds, including the FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE).
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.
A victory by former Vice President Joe Biden on Election Day could lift emerging markets assets because it’s expected his tone toward China – the largest developing economy – will be far less bellicose than President Trump’s has been.
“The election result will have implications for the key geopolitical risks we track. A Biden win – under either scenario – would likely signify a return to more predictable trade and foreign policy, supporting emerging market assets and broader risk sentiment in the short term,” according to BlackRock research.
QLVE Increasing In Relevance
Underscoring its quality tilt, QLVE is underweight China relative to the MSCI Emerging Markets Index and the fund allocates about a quarter of its weight to Taiwan and South Korea, which fit the bill as quality developing economies. Still, QLVE’s quality emphasis and geographic diversity will be relevant regardless of what happens on Election Day.
“Yet we see U.S.-China rivalry staying structurally elevated across dimensions such as technology, trade and investment under Biden, due to bipartisan support for a more competitive stance on China,” according to BlackRock.
QLVE tilts toward higher-quality fare from that country and others via a combined 41% weight to the technology, communication services, and consumer discretionary sectors.
Investors may also find that the quality low-volatility index strategies, including QLVE, also exhibit lower drawdowns and upside potential compared to indexing methodologies that only focus on low volatility or minimum volatility.
Another benefit of QLVE is that emerging markets central banks are aggressively easing and the fruits of the policy could be harvested next year.
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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.