As volatility in the market remains at elevated levels, investors may find solace in strategies designed to minimize volatility and help to mitigate losses when equities sell off, but that also offer investors a way of staying invested if the rally resumes.
Traditional low-volatility strategies may introduce unintended sector concentration and interest rate risk that may be mitigated by applying the quality factor to a low-volatility strategy, according to research by FlexShares, thereby allowing an investor to capture more of the market upside potential while protecting against downside risks.
Research conducted on stocks in the Russell 1000 Index between 1998 and 2016 found that the lowest-quality stocks tended to experience higher levels of volatility, suggesting that incorporating a quality screen in a low-volatility strategy may help further reduce volatility and add incremental returns, according to FlexShares.
The Northern Trust Quality Low Volatility Index historically has offered an upmarket capture ratio of 84% on average, while providing a downmarket capture ratio of 71% on average in comparison to the broad market index, according to FlexShares.
Investors can gain exposure to the index with the FlexShares US Quality Low Volatility Index Fund (QLV ), which is designed to provide exposure to U.S.-based companies that possess lower overall absolute volatility and that also exhibit financial strength, stability, and quality characteristics.
This strategy leans toward smaller, growthier companies than its average peer in the Large Blend Morningstar Category. QLV strategy also has displayed high-yield exposure, holding more companies returning cash to shareholders via dividends or buybacks, according to Morningstar. Such stocks can be more mature, stable businesses capable of generating long-term income streams with some growth.
QLV charges a 22 basis point expense ratio and has $166 million in assets under management.
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