High Quality, Low Vol ETFs Debut

Newest smart beta ETFs mix two big factors in search of a smoother ride.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Northern Trust’s FlexShares launched a lineup this week of ETFs on the NYSE that combine low volatility investing with the quality factor.

The funds, the FlexShares US Quality Low Volatility Index Fund (QLV); the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (QLVD); and the FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE), are designed to offer investors access to top quality companies that have lower risk, delivering a lower volatility ride in an equity portfolio.

According to FlexShares, quality is measured by various metrics including profitability, management efficiency and cash flow. Only the top 80% of companies with highest quality scores are considered for the portfolios, and allocation to these companies takes into account sector, regional and other risk factors in an effort to manage concentration and other unintended factor risks in the portfolios.

Forward-Thinking Low Vol

Calling this lineup “the next evolution of low volatility-based strategies,” Christopher Huemmer, senior investment strategist at FlexShares, said that by adding quality to the mix, these low vol ETFs don’t rely solely on historical (backward-looking) data to pick the lowest vol names, but instead consider the future price outlook of companies. It’s a low vol approach that’s more forward-looking.

The launch—FlexShares’ first in a year—comes at a time when low vol investing has resonated with investors.

Lingering concerns about global economic growth, geopolitical risk and a watchful eye on the Federal Reserve’s next move have all fueled massive asset inflows into low vol funds such as the iShares Edge MSCI Min Vol U.S.A. ETF (USMV) and the Invesco S&P 500 Low Volatility ETF (SPLV).

Year to date, investors have poured more than $6.6 billion into USMV and $2 billion into SPLV, the market’s biggest low vol ETFs.

FlexShares is the 12th-largest ETF issuer in the U.S. market, with $15.8 billion in total ETF assets under management.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.