FlexShares US Quality Low Volatility Index Fund
Designed to Provide Strong Potential Exposure to Market Upside While Reducing Downside Risk
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 as 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. The Northern Trust Quality Low Volatility Index historically has offered an up market capture ratio of 84% on average, while providing a down market capture ratio of 71% on average in comparison to the broad market index.
We recommend that clients consider adding a quality low volatility strategy to their core equity allocation.
Historical evidence, based on Northern Trust’s research conducted on stocks in the Russell 1000 index from 1998 – 2016, shows that lower quality stocks have tended to experience higher levels of volatility. The Northern Trust Quality Low Volatility Index methodology assigns a proprietary Quality score to each stock (based on Cash Flow, Profitability and Management Efficiency metrics) and excludes the bottom quintile of stocks as ranked by Quality. This research suggests that applying the Quality factor further helps to diversify the portfolio and reduce volatility without sacrificing returns.
* The core components of the Northern Trust quality scoring model are based on quantitative ranking of various metrics obtained from company filings. These scores have three components: Management Efficiency (e.g. corporate finance activities). Profitability (e.g. assess the reliability and the sustainability of financial performance) and Cash Flow (e.g. cash flow generation).
Our research suggests that low volatility strategies have historically often resulted in portfolios with significant sector biases (e.g. utilities, consumer staples, etc.) that may result in unintended sector risks and potential interest rate sensitivity that investors may not have been expecting. The Northern Trust Quality Low Volatility Index employs constraints on portfolio construction in an effort to produce a portfolio with potentially less sector bias which can also mitigate interest rate sensitivity compared to other low volatility strategies.
The MSCI USA Minimum Volatility Index aims to reflect the performance characteristics of a minimum variance strategy applied to the US large- and mid-cap equity universe.
The S&P 500 Low Volatility Index measures performance of the 100 stocks with the lowest realized volatility over the past 12 months from within the broader S&P 500 Index.
The FlexShares approach to investing is, first and foremost, investor-centric and goal oriented. We pride ourselves on our commitment to developing products that are designed to meet real-world objectives for both institutional and individual investors. If you would like to discuss the attributes of any of the ETFs discussed in this report in greater depth or find out more about the index methodology behind them please don’t hesitate to call us at 1-855-FlexETF (1-855-353-9383).