European equities have long lagged their U.S. counterparts, but there are signs of an awakening across the pond and investors can participate in some of that potential upside with the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD).
QLVD’s 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.
As its name implies, QLVD is a broad developed markets ETF, not a dedicated Europe fund, but it’s exposure to European equities is more than adequate for investors looking for that trait without the full commitment of a Europe-specific ETF.
“While the state of the Covid-19 pandemic in the U.S. and China has gotten much of the focus, Europe has quietly been making progress. Policymakers have been united and have worked swiftly to cushion the fallout—and that means European stocks could be ready for a comeback,” reports Reshma Kapadia for Barron’s.
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.
Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the March market swoon, indicating that the quality factor can provide some protection during times of elevated market stress. QLV’s ability to blend both factors is a potential advantage for investors.
“Coronavirus may have changed the equation. In its midyear briefing, the BlackRock Investment Institute said the restart from Covid-19 will look different across the globe because public policy and public health measures have varied. And while the U.S. appears to be struggling to keep the virus contained, Europe stands out for the progress it’s made,” according to Barron’s.
QLVD’s 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. That makes for one of the more robust quality screens among ETFs focusing on that particular investment factor.
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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.