With domestic stocks struggling, investors are likely apprehensive about considering ex-US developed markets, but opportunities remain in that asset class and when those markets rebound, the Nationwide Risk-Based International Equity ETF (NYSEArca: RBIN) could be a winning idea.
Nationwide’s Risk-Based International Equity ETF tries to reflect the performance of the R Risk-Based International Index, a rules-based, equal risk-weighted index of large-cap companies in developed markets outside the U.S. and Canada with lower volatility, reduced maximum drawdowns and improved Sharpe ratio.
The top 500 equity securities by market-cap are taken and are then subjected to a marginal risk contribution calculation based on the security’s volatility and correlation to other securities for the past year. Securities are then ranked by marginal risk contribution, and 50% of those with the lowest marginal risk contribution are selected.
RBIN, which turns three years old later this year, allocates over 93% of its weight to Europe and developed Asia.
RBIN helps 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.
Home to 232 stocks, RBIN offers a volatility-muting approach not found in traditional cap-weighted international ETFs. Low volatility offerings are designed to perform less poorly when markets swoon, not capture all of a bull market’s upside. However, there are times when these funds can outperform their traditional rivals.
Historical data indicate that the minimum volatility factor is persistent in markets outside the U.S., too, providing investors with a potentially attractive avenue for increasing international allocations.
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility or systematic risk of security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.
RBIN holdings are equally-weight, a methodology that can also reduce risk and volatility.
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.
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.