Historically, December has been a good time for U.S. equities, but if 2019 mimics anything like last year when stocks hit a low on Christmas Eve, then it’s important for investors to smoothen the ride of volatility with ETFs like the FlexShares US Quality Low Volatility Index Fund (NYSEArca: QLV).
Per the site’s fund description, QLV integrates rigorous fundamental analysis through a quality screen of US-based companies which can be viewed as a potential means to mitigate future volatility. FlexShares believes this is different than other low volatility funds that may utilize only historical return and/or correlation data in hopes the lower volatility will carry forward.
The core components of the quality scoring model are based on quantitative ranking of various metrics obtained from company filings. These scores consist of three core components: management expertise, profitability and cash flow.
Additionally, QLV incorporates strict sector controls to help prevent the index from deviating too significantly from the broader US-equity market. Constructs the final constituents list with consideration to the exposure of the low volatility factor, we believe giving investors a more efficient means of accessing this factor.
QLV seeks investment results that correspond generally to the price and yield performance of the Northern Trust 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 the Northern Trust 1250 Index, a float-adjusted market capitalization weighted index of U.S. domiciled large- and mid-capitalization companies.
“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,” noted FlexShares. “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. The Northern Trust Quality Low Volatility Index historically has offered an up market capture ratio of 89% on average, while providing a down market capture ratio of 62% on average in comparison to the broad market index.”
“Our research suggests that low volatility strategies have historically often resulted in portfolios with significant sector biases (e.g. utilities, consumer staples, etc.) that may result in unintended sector risks and potential interest rate sensitivity that investors may not have been expecting,” FlexShares added. “The Northern Trust Quality Low Volatility Index employs constraints on portfolio construction in an effort to produce a portfolio with potentially less sector bias which could mitigate interest rate sensitivity compared to other low volatility strategies.”
- Invests in US-based companies and employs quality factor as a tool to potentially mitigate future volatility
- Utilize constraints to help optimize and remove biases
- Maximize exposure to low volatility factor
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