Position Your Portfolio to Absorb Volatility in 2022 | ETF Trends

If the first trading week of 2022 is a harbinger of things to come, then investors could be in for a volatile ride, which makes low-volatility options a must for the new year.

After the stock market pushed towards record highs early in the trading week, inflation fears once again forced sell-offs in Wednesday’s and Thursday’s trading sessions, shaving off the week’s earlier gains. The capital markets are fearing that the Federal Reserve may raise interest rates more aggressively than anticipated.

“Markets had largely continued 2021’s momentum into the new year,” the Wall Street Journal reports. “The prospect of higher interest rates and an accelerated shrinking of the Fed’s bond portfolio, however, has clouded investors’ outlooks.”

While the latest moves don’t necessarily mean doom and gloom in 2022, market experts are already anticipating more volatility. That said, investors should do their due diligence and cushion their portfolios.

“We expect 2022 to be another positive year for risk assets, but investors should be prepared for lower returns than the past few years and more volatility than the past 20 months,” head of Asset Allocation Americas at UBS Global Wealth Management Jason Draho said.

Getting Quality While Also Limiting Volatility

The quality factor can help tamp down volatility, and it can be had in an ETF wrapper with funds 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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