Some sectors are known to be defensive, but not all low volatility exchange traded funds feature adequate exposure to those groups. That’s an important point, particularly when investors bring international stocks or global strategies into the equation. Fortunately, the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD) has credible defensive credentials.
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 built to withstand drawdowns because of it has the right sector mix.
“Meanwhile, some sectors within the index recorded significant outperformance compared with the broader market. The S&P Global BMI Health Care, S&P Global BMI Consumer Staples, and S&P Global BMI Utilities surpassed the benchmark by 9.9%, 8.9%, and 2.4%, respectively,” notes S&P Dow Jones Indices.
Those sectors combine for approximately 38% of QLVD’s weight, according to FlexShares data. Consumer staples and healthcare are through fund’s second- and third-largest sector allocations, respectively.
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.
Data confirm QLVD’s sector positioning is significant.
“Since Dec. 31, 1994, the global equity market has experienced four severe downturns when the S&P Global BMI TR declined 20% or more. However, three sectors—consumer staples, health care, and utilities—stayed in positive territory during all the drawdowns,” according to S&P Dow Jones.
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 other benefits to QLVD’s sector exposures.
“Over the long run, the consumer staples, health care, and utilities sectors generated the highest excess risk-adjusted returns. From the end of 1994 through May 29, 2020, the risk-adjusted returns from the consumer staples, health care, and utilities sectors were 0.68, 0.71, and 0.57, respectively, greatly exceeding the benchmark’s 0.53,” according to S&P Dow Jones.
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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.