Quality Can Make a Difference in Emerging Markets | ETF Trends

An important investing lesson from the coronavirus outbreak is that the quality factor can play an important role in emerging markets equities and ETFs. Investors looking to access a higher quality approach to developing economies can consider 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 regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.

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.

There are multiple ways of defining quality, making it somewhat misunderstood relative to rival factors, such as value and low volatility. However, there are some hallmarks of quality that usually easy to identify.

A Relative Underweight

Underscoring its quality tilt, QLVE is underweight China relative to the MSCI Emerging Markets Index and the fund allocates about a quarter of its weight to Taiwan and South Korea, which fit the bill as quality developing economies.

Even with large exposure to China (29.23%), QLVE tilts toward higher-quality fare from that country and others via a combined 41% weight to the technology, communication services, and consumer discretionary sectors.

Investors may also find that the quality low-volatility index strategies, including QLVE, also exhibit lower drawdowns and upside potential compared to indexing methodologies that only focus on low volatility or minimum volatility.

Another perk of QLVE is that it has a value tilt without sacrificing growth exposure. Value stocks represent just over 38% of the fund’s weight while growth names account for 25.69%, according to FlexShares data.

For more on ETF strategies, please visit our Multi-Asset Channel.

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.