Insurance and financial services firm Nationwide has launched three new smart beta ETFs that give exposure to US and international equities while aiming to lower risk compared to market cap-weighted indices. The ETFs, listed on the NYSE Arca, are the first issued by the firm and form part of a wider trend of ETF launches from non-specialist providers.
The smart beta ETFs already have plenty of competition in the risk-reduction alternative-weighted category.
The Nationwide Risk-Based International Equity ETF (RBIN) tracks the R Risk-Based International Index. The Index is a rules-based, equally risk-weighted index that is designed to provide exposure to large capitalization companies in developed markets outside the United States and Canada with lower volatility, reduced maximum drawdown, and an improved Sharpe ratio compared to traditional, market capitalization weighted approaches.
Securities in the eligible universe are subjected to a marginal risk contribution calculation based on each security’s volatility and correlation to each other for the most recent one-year calculation period. Securities are then ranked based on their marginal risk contribution, and the 50% of securities with the lowest marginal risk contribution are selected to be included in the index.
Index constituents are then weighted by a systematic equally weighted risk contribution model. This process produces a portfolio where weights are set so that each security contributes the same level of risk, subject to the constraint that no individual index constituent will have a weight that exceeds 5% of the index.
RBIN has a total expense ratio (TER) of 0.42%.
The Nationwide Risk-Based US Equity ETF (RBUS) tracks the R Risk-Based US Index. The index methodology is the same as the above index, except the starting universe comprises the largest 500 stocks domiciled in the USA. The ETF’s TER is 0.30%.
The Nationwide Maximum Diversification US Core Equity ETF (MXDU) tracks the Tobam Maximum Diversification USA Index. The index includes all stocks listed in the US that have a market capitalisation of over $5 billion. Securities are then passed through an environmental, social and governance (ESG) screen to filter out companies that do not meet the criteria for socially responsible investing. Remaining securities are then weighted using a quantitative model to maximize the portfolio’s diversification ratio, a proprietary metric based on the volatility of each index constituent and its correlation to the other index constituents. MXDU has a TER of 0.34%