The ongoing effects of the Omicron variant and inflation should continue to pose risks for investors in 2022, making a high-quality, low-volatility exchange traded fund (ETF) option almost imperative.
Market analysts are already predicting that 2022 will be another volatile year. While it may not be the roller coaster ride that 2020 brought with the first introduction of the COVID-19 pandemic, it could still be enough to make risk-averse investors’ stomachs churn.
“Volatility comes as a storm, and it usually takes years for it to exhaust itself,” said Nicholas Colas, co-founder of DataTrek Research, who noted that the CBOE Volatility Index, which measures expected S&P 500 volatility over a forthcoming 30-day period, has risen above its long-term average of 19.5 within the last two years.
“We expect 2022 to look a lot like 2021 in terms of market churn because, well, the investment issues are largely the same: Pandemic concerns, inflation, etc.,” Colas added. “U.S. equities can do well in that environment; 2021 shows that. We just need corporate earnings to come through, and we remain confident they will.”
Getting Quality While Also Limiting Volatility
The quality factor can help tamp down volatility, and it can be had in an ETF wrapper with funds like the FlexShares US Quality Low Volatility Index Fund (QLV). With a 0.22% net expense ratio, the added low volatility feature doesn’t come at a high cost.
QLV tracks a proprietary index of U.S. companies that aims for a portfolio bias toward quality and reduced volatility. The index methodology first assesses financial strength and stability based on quality metrics like profitability, management efficiency, and cash flow. The lowest-scoring companies are excluded.
QLV seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Low Volatility Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility characteristics relative to the Northern Trust 1250 Index, a float-adjusted market capitalization-weighted index of U.S.-domiciled large- and mid-capitalization companies.
“The FlexShares US Quality Low Volatility Index Fund (QLV) is designed to provide exposure to US-based companies that possess lower overall absolute volatility and that also exhibit financial strength and stability, which we believe are quality characteristics,” a FlexShares Fund Focus says.
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