Keep Post-Election Volatility in Check with ETFs | ETF Trends

It doesn’t matter who wins the presidential election come November, investors could be in for a wild ride of volatility. If September’s market swings were akin to an aftershock, then November could bring the big one, according to Wells Fargo Securities’ head of macro strategy Michael Schumacher.

“Normally, you might think that it’s Election Day or Election Day plus one that is super volatile,” Schumacher told CNBC’s “Trading Nation” on Tuesday. “But this year, markets are saying ’Hey, wait a minute. We see a lot of vol after the election.”

Schumacher is also taking note of the activity in options, which could portend to how volatile the markets could be.

“The big takeaway is three-month options vol is still quite high, and it has not really come down versus the two,” he said. “Why is that? Maybe it’s a messy result. Maybe the results aren’t even clear for a few weeks. Maybe Brexit gets onto the scene, as well.”

For those who can’t stomach the volatility, it’s important for investors to smoothen the ride with ETFs like the FlexShares US Quality Low Volatility Index Fund (NYSEArca: QLV). Rather than assume additional hedging positions to mute volatility, QLV has a low volatility component built into the fund.

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.

QLV Chart

QLV data by YCharts

Quality Scoring Model

The core components of the quality scoring model are based on the 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.

Fund facts:

  • 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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