Latest Sell-Off Emphasizes the Need for Low Volatility Exposure

Just when it seems like a stock rally could be brewing, more inflation fears drag the major indexes back down to reality. Needless to say, 2022 has been a volatile year, supporting the case for volatility protection even further.

The inflation narrative is now evolving into recessionary fears. Inverting yield curves and slowing corporate earnings are adding to the wall of worry for investors.

“Usually when the economy’s slowing down, or there is a perception it’ll slow down, there are obvious sectors to hide in. Those traditional sectors aren’t as safe from an earnings basis as they are historically because they still are going to have negative impacts from inflation,” said Tavis McCourt, institutional equity strategist at Raymond James, in a Wall Street Journal article.

Volatility Protection and Market Upside

Investors who are looking to get protection from fluxing markets but don’t want to sacrifice performance when an uptrend occurs can opt for exchange traded funds (ETFs) like the FlexShares US Quality Low Volatility Index Fund (QLV). With a 0.22% net expense ratio, the added low-volatility feature doesn’t come at a high cost.

QLV tracks a proprietary index of U.S. companies that aims for a portfolio bias toward quality and reduced volatility. The index methodology first assesses financial strength and stability based on quality metrics like profitability, management efficiency, and cash flow. The lowest-scoring companies are excluded.

QLV seeks investment results that correspond generally to the price and yield performance, before fees and expenses, 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.

“The FlexShares US Quality Low Volatility Index Fund (QLV) is designed to provide exposure to US-based companies that possess lower overall absolute volatility and that also exhibit financial strength and stability, which we believe are quality characteristics,” a FlexShares Fund Focus says.

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