Investors can prepare for domestic upside without taking on elevated risk via the FlexShares US Quality Low Volatility Index Fund (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.
Anchored by the sturdy quality factor, QLV has several tailwinds heading into the new year as some market observers are acknowledging more gains for stocks in the world’s largest economy.
“The pandemic has accelerated some key structural trends, such as increased flows into sustainable assets and the dominance of big tech companies,” according to BlackRock research. “The U.S. market has a favorable sector composition compared with other major equity markets. It boasts a higher share of quality companies – those with strong balance sheets and free cash flow generation – in sectors backed by long-term growth trends such as tech and healthcare.”
The QLV ETF: Strict Controls to Stay Stable
QLV incorporates strict sector controls to help prevent the index from deviating too significantly from the broader US-equity market. The fund constructs the final constituents list with consideration to the exposure of the low volatility factor, giving investors a more efficient means of accessing this factor.
Quality stocks often come with a higher cost of admission, or elevated valuations, relative to lower quality fare. That’s the price investors pay to put this factor on their sides. However, quality now looks attractively valued.
“Bottom line: We see the vaccine development providing a constructive backdrop for risk assets as we approach 2021, but advocate a balanced approach: quality companies that should outperform even if fiscal support disappoints; and selected cyclical exposures that are likely to thrive as the timeline for widespread vaccine deployment advances,” notes BlackRock.
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.
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