Some international equity funds notched decent returns in the third quarter, potentially giving investors reasons to revisit exchange traded funds such as 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.
“International equities continued to post gains in 2020’s third quarter, though they were more muted than the previous quarter’s sharp market rebound,” writes Morningstar analyst Claire Butz. “Continued widespread uncertainty surrounding the global pandemic did not hold the markets back during the third quarter; as the global death toll from the coronavirus exceeded 1 million, the MSCI All Country World Index ex USA grew 6.3%.”
QLVD Quality in Uncertain Times
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.
Fortunately for QLVD, it’s not a dedicated value fund, a relevant point at a time when value is still trailing growth in ex-US developed markets.
“Many market trends persisted during the third quarter,” notes Butz. “The long-standing growth-value disparity pressed on, as the foreign large-growth and foreign small/mid-growth Morningstar Categories surpassed their value counterparts by 6.6 and 4.6 percentage points, respectively, in the quarter.”
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.
Additionally, QLVD is positioned for success after the coronavirus pandemic.
According to FlexShares research, in the majority of cases, a global health crisis has been a non-event for the global equity markets, with markets showing a positive return throughout the full 9 month period in 6 of the 8 instances. Furthermore, over half of the instances, markets were positive in both the 3 months leading up to and the 6 months after the crisis.
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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.