Nationwide Smart Beta ETFs Incorporate Traditional Active Methodologies

MarketsETF Trends

Nationwide Mutual Insurance Company has brought its years of money and risk management expertise into the ETF arena by adopting its traditional strategies into rules-based or smart beta index exchange traded funds.

The insurance giant has rolled out the Nationwide Risk-Based U.S. Equity ETF (NYSEArca: RBUS), Nationwide Risk-Based International Equity ETF (NYSEArca: RBIN) and Nationwide Maximum Diversification U.S. Core Equity ETF (NYSEArca: MXDU).

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“We’re used to looking at the raw data, the composites, and looking at those institutional managers and saying, ‘does this make sense in a retail product?'” Shana Martin, ETF Product Manager at Nationwide Fund Advisors, said at the Inside ETFs 2018 conference. “That’s the same process you have to go through when looking at an index. You have to be very critical of that index. You have to make sure that the index performs as it should in all market cycles.”

The Risk-Based Equity ETFs tries to reflect the performance of a rules-based, equal risk-weighted index designed to provide exposure to companies with lower volatility, reduced maximum drawdown and improved Sharpe ratio, compared to a traditional market cap-weighted index.

The Maximum Diversification U.S. Core Equity ETF includes a diversified rules-based index of large- and mid-sized U.S. companies that uses a quantitative model to weight companies to maximize the so-called Diversification Ratio of the index. The Diversification Ratio is a proprietary metric based on the volatility of each index constituent and its correlation to other constituents.

These alternative index-based ETFs help investors steer away from overvalued stocks that many would be exposed to through traditional market-cap weighted funds. Market capitalization weighted indexing methodologies would hold large tilts towards the biggest or best performing companies, which may expose investors to greater downside risk in case of a sudden correction.

The two smart beta ETFs follow an “advanced index design” or track “the performance of indexes created by institutional asset managers recognized for delivering value in a dynamic investment environment,” according to Nationwide.

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