FlexShares blends quality with low volatility in new equity ETFs

Jul 17th, 2019 | By | Category: Equities

Northern Trust’s FlexShares has expanded its line-up of factor-based ETFs with the launch of three funds combining quality and low volatility.

Christopher Huemmer, Senior Investment Strategist at FlexShares.

Christopher Huemmer, Senior Investment Strategist at FlexShares.

The funds, which have been listed on NYSE Arca, are likely to appeal to investors seeking a lower volatility approach while also desiring the resilience of quality companies.

The ETFs track proprietary indices and provide exposure to US, international developed, and emerging market equities.

They are the FlexShares US Quality Low Volatility Index Fund (QLV US), which comes with an expense ratio of 0.22%, the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD US) priced at 0.32%, and the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE US) at 0.40%.

The funds’ underlying indices use a corresponding Northern Trust broad market equity index as their starting universe. Securities in the respective universe are then screened according to a quality screen that focuses on indicators such as profitability, management efficiency, and cash flow. Stocks ranking in the lowest quintile by their quality score are excluded.

The remaining constituents are then reweighted using an optimization process that seeks to enhance exposure to the quality and low volatility factors. To deliver a lower volatility outcome, each index targets a beta between 0.65 and 0.70 relative to its parent universe.

The optimization also accounts for several regional, sector, and risk-factor constraints in order to manage unintended style factor exposures, significant sector concentration, and high turnover. The indices are reconstituted and rebalanced quarterly.

“We are delighted to offer investors the next evolution of low volatility strategies,” said Christopher Huemmer, Senior Investment Strategist at FlexShares. “Existing low volatility strategies often rely exclusively on historical return data and fail to account for future price fluctuations and unintended risks. Our quality-focused approach addresses these flaws in an effort to provide a more efficient means of accessing the low volatility factor.”

“Recent market swings have put a spotlight on the need for strategies that can potentially help in an era of investor uncertainty,” added Darek Wojnar, Head of Funds and Managed Accounts at Northern Trust Asset Management. “We have leveraged years of experience in equities research and our track record in quality low volatility strategies to construct the Quality Low Volatility ETF suite which we believe can reduce portfolio risk and provide competitive performance for our clients.”

The new funds complement Northern Trust’s existing suite of factor ETFs that target returns from quality firms with high dividends. The suite, which houses over $3.1 billion in AUM, consists of three US and three international equity ETFs which can be further broken down into market-following (target beta of 1), defensive (target beta between 0.5 and 1), and dynamic (target beta between 1 and 1.5) funds.

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