Advisors and investors are making risk reduction a priority in the current market climate and the Nationwide Risk-Based U.S. Equity ETF (NYSEArca: RBUS) is an example of an ETF that can help with that objective.
Volatile conditions are rocking the markets, but that doesn’t mean the best strategy is to sit on the sidelines forever.
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 Is Right for the Times
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.
Successfully navigating uncertain markets requires separating market psychology from business fundamentals, maintaining a long-term perspective, and keeping emotions in check.
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.
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 to the same level of risk.
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.