The case for revisiting ex-US developed markets is growing and investors looking to do that can take some of the volatility out of that equation 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.
QLVD is particularly relevant today because of the recent history of international stocks against their U.S. counterparts and the weakening U.S. dollar.
“Investors looking to improve their portfolios’ diversification by investing in stocks outside the United States haven’t had an easy time of it. Non-U.S. equity markets have lagged by a staggering margin over the past decade, with international market benchmarks falling behind their domestic counterparts by about 9 percentage points per year over the trailing 10 years through Aug. 31, 2020,” notes Morningstar analyst Amy Arnott.
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.
A primary advantage of QLVD is that it’s diversified at the country level, keep investors away from the risks associated with single-country or region-specific strategies.
“Investors in highly specialized categories–such as funds focusing on Japan, Latin America, Europe, or China–have suffered the biggest investor return gaps, but those investing in broadly diversified categories–such as foreign large blend and world large stock–have fared significantly better,” says Arnott.
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.
Those are relevant considerations when evaluating the recent performance of ex-US developed market equities. QLVD is beating the MSCI EAFE Index by 130 basis points this year.
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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.