With the U.S. equity market charging toward the tenth year of its bullish run, some investors may consider alternative index or smart beta ETFs to hedge against potential pullbacks in an extended rally.
Smart beta ETFs “offers more deliberate allocations to potential sources of risk, avoiding the excessive exposures to unrewarded risks implicit in market cap-weighted indexing,” according to Nationwide.
In an extended bull run, market capitalization-weighted indexing methodologies may be more at risk since the largest components are often those that have increased the most during a bullish uptrend. Consequently, market-cap index fund investors may be exposed to the most pricey or overvalued segment of the market.
On the other hand, the Risk-Based U.S. Equity ETF will try to reflect the performance of the R Risk-Based US Index, a rules-based, equal risk-weighted index designed to provide exposure to U.S. large-cap companies with lower volatility, reduced maximum drawdown and improved Sharpe ratio, compared to a traditional market cap-weighted index.