Turbulent markets are putting the spotlight back on the low volatility factor and that could be a benefit to the Nationwide Risk-Based U.S. Equity ETF (NYSEArca: RBUS), which offers a different point of view on the beloved factor.
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.
RBUS sets itself apart from traditional low volatility ETFs because it employs “a risk-based strategy that seeks to provide upside potential while protecting against losses stemming from volatility,” according to Nationwide.
Standard low vol funds 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 Stands Out
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.
With RBUS, 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.
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.
Among smart beta ETFs dedicated to individual investment factors, low volatility products have been popular with conservative investors based on the premise that emphasizing a low volatility strategy can help reduce a portfolio’s downside potential.
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.
