Investors frequently hear about the virtues of remaining diversified and that’s something ETFs – the right ones that are – can accomplish. Put the Nationwide Maximum Diversification U.S. Core Equity ETF (NYSEArca: MXDU) in the “right ones” category.
The Maximum Diversification U.S. Core Equity ETF tries to reflect the performance of the TOBAM Maximum Diversification USA Index, 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.
MXDU offers investors a quality approach with positive social and governance leanings that can generate better long-term returns.
The TOBAM Diversification Ratio used by MXDU screens against a socially responsible investment exclusion blacklist to exclude those involved with the production or sale of unconventional weapons, production of tobacco, production of coal or coal-based energy, serious or systematic human rights violations, severe environmental damage, gross corruption, or other particularly serious violation of ethical norms. The index then analyzes the volatility and correlation of each component and weights them to maximize the Diversification Ratio.
MXDU Under The Microscope
Home to 467 stocks, MXDU isn’t likely to move in lockstep with traditional benchmarks such as the S&P 500 and Russel 100 because the Nationwide ETF is significantly underweight the technology and financial services sectors relative to those benchmarks. Those groups combine for 16.56% of MXDU’s roster.
MXDU allocates nearly half its weight to the two consumer sectors and healthcare stocks. The Nationwide Maximum Diversification U.S. Core Equity ETF provides a balance core holding that seeks to curtail idiosyncratic risks, resulting in better long-term performance compared to that of market cap-weighted strategies.
A rough market can be an ideal proving ground for some ETFs and March’s brutal declines are putting the spotlight on environmental, social and governance (ESG) funds, giving advisors and investors a real-time look on how ESG holds up when times get tough.
The coronavirus pandemic is obviously putting the hurt on many sectors, but the outbreak could actually be beneficial to the environmental, social and governance (ESG) space. With its social and governance leanings, MXDU could be a credible choice for today’s volatile market environment that’s exposing companies that score poorly on those metrics.
For more on income strategies, visit our Retirement Income Channel.
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.