Looking Under the Hood of a Quality Low Vol Strategy

Low volatility investing is an attempt to minimize the fluctuation of the value of an investment over a period of time and is often considered a defensive strategy. Applying the quality factor to a low volatility strategy may allow an investor to capture more of the market upside potential while protecting against downside risks, according to FlexShares.

The Northern Trust Quality Low Volatility Index has historically offered an upmarket capture ratio of 84% on average while providing a down market capture ratio of 71% on average compared to the broad market index, according to FlexShares.

Traditional low-volatility strategies may introduce unintended sector concentration and interest rate risk, among other challenges, but this may be mitigated by applying the quality factor to a low-volatility strategy.

According to FlexShares, research conducted on stocks in the Russell 1000 Index between 1998 and 2016 shows that the lowest quality stocks tended to experience higher levels of volatility, suggesting that incorporating a quality screen in a low-volatility strategy further helps diversify the portfolio and reduce volatility without sacrificing returns.

QLV offers exposure to U.S.-based companies that possess lower overall absolute volatility, and that also exhibit financial strength, stability, and quality characteristics.

The underlying index of QLV employs constraints on portfolio construction to produce a portfolio with potentially less sector bias which can also mitigate interest rate sensitivity compared to other low-volatility strategies.

Top holdings in QLV currently include Microsoft Corporation, Apple Inc., Johnson & Johnson, Eli Lilly and Company, and Home Depot, according to VettaFi. 

With a 22 basis point expense ratio, QLV charges just half of what its factor strategy segment peers charge — 44 basis points, on average. 

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