Positioning for volatility with Quality


Over the past ten years markets have experienced historically high and low levels of volatility with 2017 the lowest this century.  We expect volatility to return in 2018. 

Volatility expected to return in 2018

2017 saw investors enjoy a slow grind higher in almost all asset classes. Despite threats of nuclear war between the US and North Korea, erratic tweets from US president Donald Trump, rocky Brexit negotiations, political turmoil in Brazil, South Africa and Zimbabwe and dysfunction in the Saudi Royal family, markets remained eerily quiet. The S&P 500 Index, as an example, did not have a single down month for the entire year and volatility was well below its recent historic averages. 2017 saw the lowest volatility this century.

Historical Vix and Volitility

The CBOE Volatility Index (VIX) is a real time volatility index, it is also known as the ‘fear index’. It is calculated so that investors, financial media, researchers and economists can assess investor sentiment and expected levels of market volatility and it began 2018 at historical lows.

VIX Index

Quality withstands volatility and provides better downside protection

In markets, change is the only constant and astute investors stick to long standing investment principles that have withstood the tests of time.  Fads come and go. However in swinging up and down markets, the go-to strategy is investing in profitable companies with strong balance sheets and stable earnings.

History has persistently shown that in times of volatility quality companies have outperformed and when markets fall they lose less and recover faster.  In the chart below, when the orange line is rising, quality is outperforming.  In the three most recent periods of increased volatility, quality has outperformed the market benchmark.   

Big Vix

VanEck Vectors MSCI World ex Australia Quality ETF (QUAL)

QUAL tracks the MSCI World ex Australia Quality Index (QUAL Index).  QUAL is a portfolio of 300 international stocks and includes only the highest scoring stocks based on three easily identifiable financial characteristics:

  • High return on equity (ROE);
  • Low earnings variability; and
  • Low debt-to-equity ratio.

The chart below shows the drawdown of QUAL Index versus the broader benchmark MSCI World ex Australia Index for the past 15 years capturing the GFC.  In summary:

  • The maximum drawdown of the QUAL Index was -24.28% versus the benchmark -38.41%
  • The pace of recovery of the QUAL Index was eight months faster.

Big Vix 2

QUAL offers exposure to ~300 quality companies across geographies and sectors and has delivered outperformance in volatile markets and better downside protection when markets have fallen. Volatility is expected to return in 2018. 

Speak to your adviser or broker about positioning you portfolio for volatility with quality.


IMPORTANT NOTICE: This email is not to be circulated or distributed and is solely for the information of financial services professionals, such as a financial adviser. This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of the VanEck Vectors MSCI World ex Australia Quality ETF (‘Fund’). This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund.

QUAL invests in international markets. An investment in QUAL has specific and heightened risks that are in addition to the typical risks associated with investing in the Australian market. These include currency risks from foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and regulations including taxation.

QUAL is indexed to a MSCI index. QUAL is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to QUAL or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and QUAL.

Published: 09 August 2018