With low volatility strategies receiving renewed attention thanks to the novel coronavirus outbreak, some overlooked ETFs in this category merit examination, including the Nationwide Risk-Based U.S. Equity ETF (NYSEArca: RBUS).
Nationwide’s suite of risk-based equity ETFs tries to reflect the performance of a rules-based, an 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.
Home to nearly $119 million in assets under management, RBUS follows the Rothschild & Co Risk-Based US Index. The equally-weighted risk contribution methodology incorporates each constituent’s volatility and correlation to the other constituents for the past year to create a portfolio where each holding contributes the same level of risk, which should produce lower overall volatility of the index, a higher risk-adjusted return and diminish maximum drawdowns.
Right Now For RBUS
The low-volatility ETFs are factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. Historical data confirm that over long holding periods, the low volatility factor is rewarding for investors.
RBUS “eliminates the 50% of the stocks in the universe that represent the riskiest positions in the portfolio” and the “weights the remaining stocks by their volatility and correlation such that each security contributes the same amount of risk to the portfolio,” according to Nationwide.
RBUS features some departures relative to rival low volatility ETFs. For example, the fund’s 16.86% weight to utilities is underweight that of the S&P 500 Low Volatility Index and the Nationwide ETF has no real estate exposure, but it does devote 29% of its combined weight to financial services and healthcare stocks.
“You’d have to go back to mid-2013 to find the healthcare sector trading at a significantly cheaper price-to-earnings (P/E) multiple than it does today at 14.6x forward earnings estimates,” according to the ETF Research Center. “This is quite a discount for a sector that, at the margin, may benefit from increased demand stemming from the Coronavirus epidemic, suggesting that the recent sell-off may have been overdone.”
Low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.