ETF of the week: FlexShares US Quality Low Volatility Index Fund (QLV)
VettaFi VP Tom Lydon discussed the FlexShares US Quality Low Volatility Index Fund (QLV) on this week’s “ETF of the Week” podcast with “Money Life’s” Chuck Jaffe.
Quality and low volatility are two popular strategies in the current market environment, and while advisors and investors would typically need to allocate to one strategy or the other, QLV combines the two quite successfully, explained Lydon.
“Without a doubt, as we’ve seen interest rates rise, as we’ve seen inflation kick in, as we’ve seen not only volatility on the fixed income side, but also volatility on the equity side , then the threats of recession, investors in America and around the world are a bit worried,” Lydon said.
The majority of the equity portion of portfolios is generally highly correlated to the S&P 500, a strategy that has worked quite well over the past decade. In a high inflation environment that has tested growth stocks such as FAANGs and companies like Microsoft and Tesla, these allocations have become increasingly volatile as companies underperform.
“If you’re an investor and you’re a bit concerned about stock markets, you’re concerned about volatility – however, you want to stay invested, here’s an opportunity to stay in higher quality, less volatile stocks,” Lydon explained. . .
Quality in the case of QLV means price-to-earnings ratios, available cash and earnings generally superior to those of mega growth stocks which have been hit hard over the past six months. Due to the underperformance of many of these large companies, this offers advisors and investors the opportunity to potentially reap tax losses on exposures that have lost money and redeploy them to a fund like QLV.
Reduce volatility in times of uncertainty
As the Federal Reserve continues to raise interest rates, this creates a level of uncertainty for investors that is reflected in market volatility over the past few months, and is expected to continue through the end of the year. ‘year.
“It’s going to be really interesting when we see what the Fed does (in September), and many are currently expecting a 75 basis point hike,” Lydon explained. “We also expect another hike in November, and then the question will be ‘Is inflation under control? Are we going to witness a recession? »
Investing in QLV is not a trend-following game (the fund is currently below its 200-day moving average) but rather an opportunity to introduce less volatility into a portfolio and the diversification it can provide as well than catching an uptrend when you start instead of trying to time it, which many investors don’t know how to do.
“A little shift towards this type of strategy will create less volatility, more quality in the portfolio and might help you sleep a little better at night,” Lydon said.
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