With a laser-focused fundamentals strategy, investors can combine quality holdings and low volatility with assets like the FlexShares US Quality Low Volatility Index Fund (QLV).
Low-volatility strategies often mean investors don’t need to hold separate hedging assets like gold or bonds. Furthermore, with an eye on quality, investors can not only capture upside in a hot market, but limit the downside in rougher times.
As mentioned, the heart of QLV’s strategy is a focus on quality holdings. While factors like growth can provide strong performance potential, quality can also help smooth out volatility.
“We believe that a company’s financial health is important when constructing low volatility strategies,” a FlexShares blog noted. “Metrics such as profitability and cash flow are key to assessing the quality of a company, and our research shows that the poorest quality companies also tended to be the most volatile. As such, incorporating the quality factor into volatility strategies to eliminate low quality companies can result in a more targeted low volatility experience.”
“The FlexShares Quality Low Volatility ETFs are designed to provide exposure to companies that possess lower overall absolute volatility characteristics, while also exhibiting financial strength and stability, or what we believe are quality characteristics,” the blog added further. “They’re also constructed with sector constraints to avoid the sector biases that can be inherent in low volatility strategies.”
A Value Lean for Larger Companies
To help minimize volatility, QLV’s holdings skew toward large cap equities that exhibit value traits. The value over growth narrative has been well-documented this year, with the S&P 500 Value index up over the S&P 500 Growth index by about 7%.
“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 explained.
The fund sifts through a vast pool of 1,250 stocks consisting of large- and mid-cap companies. Potential holdings are filtered out based on management efficiency, profitability, and cash flow with a score assigned to each company—only the highest-quality stocks are considered.
“Finally, NTI optimizes the index by applying a quality tilt to the overall portfolio,” FlexShares said further. “This step helps confirm that there is a good representation of low-volatility stocks that also are from the higher quintiles in their respective sectors.”
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