Low volatility and quality are two distinct investment factors and while they may intersect in some ETFs, it’s often not by design.
On the other hand, the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV) makes a point to combine reduced volatility and quality stocks, making it a potentially compelling alternative to standard “low vol” funds. After all, it’s possible to have low volatility stocks that don’t qualify as quality fare. Likewise, not all quality stocks are docile names.
“Low volatility investing is an attempt to minimize the fluctuation of the value of an investment over a period of time and is often considered as a defensive strategy,” according to FlexShares research. “Applying the quality factor to a low volatility strategy may allow an investor to capture more of the market upside potential while protecting against downside risks.”
The $148.4 million QLV turns two years old in July and tracks the Northern Trust Quality Low Volatility Index.
A New Take on Low Volatility
Over the past year, the FlexShares ETF has closely followed the S&P 500 Low Volatility Index. However, investors can expect those performances to diverge over longer holding periods given the fund’s quality overlay.
Additionally, just 33.6% of QLV’s holdings overlap with those in the S&P 500 Low Volatility Index, and the overlap by weight between the ETF and that index is just 27.6%, according to ETF Research Center data.
Those data points shouldn’t imply that QLV doesn’t accomplish its low volatility objectives.
“The Northern Trust Quality Low Volatility Index historically has offered an up market capture ratio of 84% on average, while providing a down market capture ratio of 71% on average in comparison to the broad market index,” notes FlexShares.
QLV also has sector-level benefits. For example, it’s significantly overweight the technology sector relative to the S&P 500 Low Volatility Index, while being underweight to defensive consumer staples and utilities stocks.
Put another way, it’s rare to find a low volatility ETF with nearly a third of its roster allocated to growth stocks, but that’s the case with QLV. As just three examples, Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ:AMZN) combine for almost 12% of QLV’s weight.
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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.