Investors who are building a diversified investment have long looked to quality investments and exchange traded funds that can enhance their portfolios.
“We have a very strong emphasis on quality as a strategy embedded in all our investment thinking, right? So, whether you’re thinking about income generation or managing volatility at the core of your portfolio, how do we incorporate the fact that what you really want at the end of what you’re holding is to know what you own – so, make sure you’re all owning quality stocks,” Paula Kar, SVP, Head of Product Strategy, Northern Trust Asset Management, said at the Inside ETFs conference.
As a way to help investors access quality and low-volatility strategies to hedge risks and still maintain upside potential, Northern Trust’s FlexShares offers a suite of quality strategies, such as the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV). The ETF utilizes 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 critical 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, to manage unintended style factor exposures, significant sector concentration, and high turnover.
Additionally, something like the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) focuses on quality dividend-paying stocks by measuring a company’s financial health. Furthermore, it provides a defensive tilt, targeting a beta that is lower than the market universe’s beta. The smart beta indexing methodology targets management efficiency or quantitative evaluation of a firm’s deployment of capital and its financing decisions, along with a company’s profitability and cash flow, as a way to provide a better sense of a dividend-paying company’s outlook in quickly changing conditions.
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