Three Reasons for QLV


Three reasons to consider a strategic allocation to quality low volatility in an effort to minimize volatility

p1_QLV_three points.jpg


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 87% on average, while providing a down market capture ratio of 74% 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.

p1_QLV_upside capture chart.jpg


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 Quality1 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.


p2_QLV_index return chart.jpg

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.

p2_QLV_historic performance chart.jpg


Cash flow is the amount of cash that comes in and goes out of a company. Businesses take in money from sales as revenues and spend money on expenses.

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.

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.

Standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation.

Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate, in this instance utilizing the US Generic Government 3-month Yield index, per unit of volatility or total risk.

Downside capture measures how much performance loss a fund captures relative to a benchmark index in down markets.

Upside capture measures how much performance gain a fund captures relative to a benchmark index in up markets.

Northern Trust Quality Low Volatility Index methodology is designed to reflect the performance of a selection of companies that, in aggregate, possess lower overall absolute volatility risk characteristics relative to the Northern Trust 1250 Index, a float-adjusted market capitalization weighted index of U.S. domiciled large- and mid-capitalization companies. In addition, the Index looks to select companies from the Parent Index that exhibit financial strength and stability (i.e., quality) characteristics.


1 Quality within the Northern Trust quality scoring model is 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).