While investing in international equities comes with inherent risks, exchange traded fund (ETF) investors can sleep easier with the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD).
“Investing in low volatility international 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 noted. “Our research has found, however, that traditional low volatility strategies may introduce unintended sector concentration and interest rate risk, among other challenges.”
FlexShares takes a different approach to addressing the challenges with traditional low volatility strategies. QLVD employs a multi-faceted methodology that focuses on quality holdings to reduce further volatility.
“NTI starts with the Northern Trust Global Index, which represents approximately 97.5% of world’s float adjusted market capitalization,” FlexShares noted. “Then, they exclude all U.S.-based companies and apply a multi-faceted Quality Score (QS) to measure a company’s core financial health and evaluate whether it may increase (or decrease) its future dividends.”
Furthermore, the scoring method utilizes three filters—management efficiency, profitability, and cash flow. Based on these characteristics, companies are further segmented into five quintiles with one being the highest and five the lowest.
In summation, the fund seeks investment results that correspond generally to the Northern Trust Developed Markets ex-US 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 a broad universe of securities domiciled in developed market countries, excluding the United States.
Playing Defense in the International Space
Investors saw firsthand in 2020 how a low volatility strategy can be beneficial. When markets went awry due to the pandemic scare, having a built-in components that minimized market fluctuations provided the convenience of hedging without taking on additional assets like gold or government bonds.
“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,” FlexShares said. “We believe that the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD), which incorporates our research-driven findings about the role of quality in a stock’s potential volatility, can help investors meet their risk management and capital appreciation goals.”
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