U.S. equities continued to suffer in May, as inflation concerns along with Fed rate hikes weighed on markets. Driven by a comeback in the final week of the month, the S&P 500® posted a slight gain of 0.2%, while the S&P MidCap 400® and S&P SmallCap 600® performed relatively better, according to S&P Dow Jones Indices.
Dividend and value strategies outperformed, signaling the market’s return to defense. Investing in low-volatility stocks is often used as a defensive strategy by investors who want to participate in some of the market’s growth while potentially reducing their downside risk.
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 FlexShares US Quality Low Volatility Index Fund (QLV) 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.
QLV, which is part of the firm’s stable of factor ETFs, seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Low Volatility Index.
The index methodology first assesses financial strength and stability based on quality metrics like profitability, management efficiency, and cash flow. The lowest-scoring companies are excluded.
The fund holds 118 securities. Top holdings in QLV currently include Microsoft Corporation, Apple Inc., Johnson & Johnson, Eli Lilly and Company, and Home Depot, according to ETF Database.
QLV charges a 22 basis point expense ratio, just half of what its factor strategy segment peers charge; the average for the category is 44 basis points.
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