FlexShares US Quality Low Volatility Index Fund (QLV)

QLV is a passive index fund tracking the Northern Trust Quality Low Volatility Index, a subset of the broader US stock market. Unlike a fund that holds all or most of the market, QLV screens for two characteristics: quality (as measured by profitability and balance-sheet strength) and low volatility (historical price swings). The result is a portfolio of roughly 100–150 US stocks that embody both traits, offering exposure to the US market with less bouncing around than the full market exhibits.

The two-sided screen: quality and volatility

The index that QLV tracks applies two consecutive filters to the universe of US stocks. The first filter asks: is this company profitable and well-managed? It looks at return on capital, profitability margins, and balance-sheet quality — similar metrics to the quality screens other funds use. The second filter then asks: among those quality names, which ones have historically been less volatile? That is, which ones have had smaller price swings relative to the overall market?

The result is a portfolio tilted toward companies that have both durable business models and share prices that do not oscillate wildly. A pharmaceutical giant with consistent earnings and predictable cash flows might pass both screens. A speculative biotech company with breakthrough science but lumpy earnings might be profitable long-term but will fail the volatility test. A mature utility or bank might pass both screens because of steady earnings and lower beta — the tendency of the stock to swing more or less than the market.

Why combine quality and volatility?

The combination is philosophically appealing but empirically complex. Theoretically, you are buying the best of both worlds: stable, predictable businesses that also do not gyrate like a slot machine. In practice, the screens can work at cross-purposes. Some high-quality companies have recently experienced higher volatility because of sector rotation or idiosyncratic news. Some low-volatility stocks are low-volatility because they are boring and slow-growing, not because they are high-quality.

The fund manager’s thesis is that the intersection of the two — names that are both quality and stable — represent a kind of sweet spot. These are compounders that can be held without requiring a iron stomach. They are index-like in their passive nature and low-cost, but with a screen applied so you are not holding the spectrum of the market.

How it differs from a quality fund and a low-volatility fund

A pure quality fund like GMO’s would select high-quality names regardless of volatility — some might be quite swinging. A pure low-volatility fund would select the smoothest-trading names regardless of profitability — some might be undeniable dogs, or at least unprofitable. QLV’s dual screen is a middle path.

The consequence is that QLV likely lags a broad market index in strong, risk-on bull markets, because it is tilted away from the most volatile, most speculative names that tend to lead during such periods. But QLV should outperform in downturns and choppy periods, because its holdings are both more stable and fundamentally sounder than the market average. That is the bet — you trade away some upside in the best of times for less downside in the worst of times.

Composition and sector tilts

The Northern Trust Quality Low Volatility Index includes roughly 100 to 150 names, depending on the current market composition. The holdings are weighted by market cap within the index, so larger names carry larger weight, but the screening process means some of the very largest, most-volatile mega-cap tech stocks may be underrepresented or excluded. You are still getting US large-cap and mid-cap exposure, but with a tilt away from the most frothy segments.

Sector positioning reflects the screening naturally. Consumer staples, utilities, and industrials often pass both quality and volatility screens, so the fund tends to be heavier there. Technology, which can be high-quality but is often volatile, tends to be underweighted. Financials are mixed — some banks pass both screens, others are too volatile. This means QLV is structurally taking a stance: growth and stability are secondary to quality fundamentals and price stability.

Expense ratio and passive management

QLV’s expense ratio is in the 0.35% to 0.45% range — significantly cheaper than an actively managed quality fund but more than a plain vanilla S&P 500 index fund, which might cost 0.03%. That premium reflects the cost of screening and implementing the index methodology, but it is still reasonable for a passive fund with rules that add value.

Because it is passive — it simply holds the index rather than making stock-picking calls — QLV has no manager risk. You are not betting on active management skill. You are getting a transparent, rules-based screen applied to the US market, and paying a modest fee for that service.

Real risks

The primary risk is that the screening philosophy does not persist in adding value. If the market reprices and decides that volatility no longer matters, or that low-volatility stocks deserve lower returns, then QLV could underperform. Historical data suggests that low-volatility strategies do tend to outperform on a risk-adjusted basis over very long periods, but past returns do not guarantee future results.

A secondary risk is that by excluding the most volatile stocks, QLV misses concentrations of real growth. In a period where technology and high-growth names drive market returns by a wide margin, a fund underweight those names will lag. This is not a flaw in the fund; it is the intended consequence of its selection rules. But it is a reality the investor should understand.

How to use it

QLV fits well as a core holding in a diversified portfolio, particularly for investors who want US equity exposure but prefer not to swing with every market whim. It is not appropriate for a trader making short-term bets; the passive nature and lower volatility make it unsuitable for speculation. It is also not suitable for someone who specifically wants technology or high-growth exposure — those investors should use a different fund. QLV is for the investor who wants a stable US equity foundation, built on good businesses with clean balance sheets, and is willing to tolerate the fact that this means trading away some upside in euphoric bull markets.