As is being widely documented, emerging markets equities are again lagging their U.S. rivals, but there are signs of recovery in China, meaning investors may want to revisit the right ETFs addressing this asset class. That includes the FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE).
QLVE 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 key 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, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
“In an environment where regional recovery is uneven, we see the country as a unit of analysis becoming more relevant for investment decision-making,” said BlackRock in a recent note. “In particular, our data covering the universe of emerging countries finds dispersion has tripled since January, reaching its highest level since the global financial crisis.”
Why QLVE Matters
In addition to its quality leaning, QLVE also avoids some of the trouble spots that often plague emerging markets, including heavy commodities exposure. For example, the FlexShares fund allocates just 9.20% of its weight to the energy and materials sectors. Likewise, its exposure to commodities exporting countries is low as China, Taiwan, and South Korea combine for nearly 59% of the fund’s weight.
“We find the differing experience across emerging economies has hinged on the individual response throughout the various stages of the coronavirus crisis,” according to BlackRock. “For example, countries like Brazil, Russia, and Mexico were slower to contain the spread of the virus with policy actions like social distancing and reduction in non-essential business activities. COVID-19 cases and deaths consequently continued to accelerate faster than elsewhere in EM, and recovery appears farther away.”
The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
“Meanwhile, Asian countries such as South Korea, Taiwan, and China have been faring better than other EMs given the relative strength of their health care systems,” notes BlackRock. “Greater fortitude on the health front has facilitated re-openings, helping to stem some of the economic damage and supporting stock prices of companies that have a higher relative exposure to those countries.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.