Low volatility and quality are two of the more prominent investment factors and while this pair often meet by an incident in many ETFd funds, they come together by intent in the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV).
QLV follows the Northern Trust US Quality Low Volatility Index. The ETF’s benchmark employs a 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 the regional, sector, and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the March market swoon, indicating that the quality factor can provide some protection during times of elevated market stress. QLV’s ability to blend both factors is a potential advantage for investors. The current climate and post-coronavirus environment could be optimal times to embrace QLV.
Looking ahead, FlexShares believed that this time could be different or worse as it relates to the economic and financial markets. Specifically, the analysts pointed out that this virus is less deadly but will spread more easily and have a longer incubation period. The use of social media has increased news circulation but impaired short-term economic activity as people focus on fear. China, the epicenter of the outbreak, is also the second largest global economy and a big part of the world economic engine.
Time for QLV
QLV integrates rigorous fundamental analysis through a quality screen of US-based companies which can be viewed as a potential means to mitigate future volatility. FlexShares believes this is different than other low volatility funds that may utilize only historical return and/or correlation data in hopes the lower volatility will carry forward.
The core components of the quality scoring model are based on the quantitative ranking of various metrics obtained from company filings. These scores consist of three core components: management expertise, profitability, and cash flow.
Additionally, QLV incorporates strict sector controls to help prevent the index from deviating too significantly from the broader US-equity market. Constructs the final constituents list with consideration to the exposure of the low volatility factor, we believe giving investors a more efficient means of accessing this factor.
QLV is up 6.69% over the past month, slightly outpacing the S&P 500 over that span.
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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.