Northern Trust’s FlexShares Exchange Traded Funds debuted its Quality Low Volatility suite of three funds on the New York Stock Exchange today.
The funds are the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV); FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD); and FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSE: QLVE).
The three ETFs utilize 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 regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
Christopher Huemmer, Senior Investment Strategist at FlexShares, told ETF Database that questions surrounding economic growth, monetary policy and the political landscape have made it important for advisors to be mindful of volatility, but not to fear it.
“As recently as a year and a half ago investors were lulled by calm markets and it is becoming clear that volatility is returning to normal levels,” Huemmer told ETF Database. “Consider that in 2017 the S&P 500 only experiences three trading days where the index was up or down greater than one percent; last year there were 48 days of moves greater than one percent. That is closer to the pre-crisis norms than what we saw in 2017, and presents an excellent opportunity for advisors to take advantage of low volatility strategies.”
Asked what challenges are advisors facing when looking for low volatility approach investments, Huemmer said there are three main pitfalls.
He said these were limited upside potential in periods of strong equity market growth, sector and country concentrations and higher turnover.
“We attempt to address each of these issues through our product design,” he said. “Our focus on companies with strong financial health through our quality factor has the potential to realize greater upside than an approach focused solely on low volatility, and the implementation of our strategy to minimize volatility at the portfolio level explicitly looks to limit turnover, sector and country concentrations.”
The three new products – QLV, QLVD and QLVE – are the only ETFs that are currently utilizing a quality factor in addition to seeking to minimize overall portfolio volatility, Huemmer said.
“That is a key distinguishing point,” he said. “Other multifactor strategies may include a low volatility factor in their approach, but that is not the same as limiting overall portfolio volatility like our products seek to do. One other difference that investors need to be mindful of when comparing low volatility strategies is looking at how they target low volatility. One approach is to simply target those companies with the lowest volatility and select those stocks. We prefer to focus on overall portfolio volatility so that we can take advantage of the diversification between stocks that has the potential to deliver a more efficient exposure to low volatility with lower unintended bets than focusing on price volatility alone.”
Low volatility strategies have come to the forefront of investor interest amid increased volatility stemming from market swings. According to Morningstar, in the first four months of the year, funds trying to mitigate risk raised nearly $10 billion. While this is the first quality low volatility fund for FlexShares, Northern Trust Asset Management introduced its first high quality, low volatility separate account strategy in 2014 and now has three, all of which have sizably outperformed their respective benchmarks.
Darek Wojnar, Head of Funds and Managed Accounts at Northern Trust Asset Management, said recent market swings have put a spotlight on the need for strategies that offer downside protection in an era of investor uncertainty.
“We have leveraged years of experience in equities research and our proven track record in quality low volatility strategies to construct the Quality Low Volatility ETF suite, which we are confident will reduce portfolio risk and provide strong performance for our clients,” Wojnar said.
For more information on the new ETFs, visit www.flexshares.com.