“If we can have a period of double digit earnings growth, then we can expect markets will go higher,” Hackett added. “It is incredibly hard to short that market, hard to bet against that market.”
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. For example, the Nationwide Risk-Based U.S. Equity ETF (NYSEArca: RBUS) and Nationwide Maximum Diversification U.S. Core Equity ETF (NYSEArca: MXDU) help provide “smart” diversification.
The Risk-Based U.S. Equity ETF tries 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.
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.
Additionally, 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 TOBAM Diversification Ratio® of the index. The TOBAM Diversification Ratio® is a patented, proprietary metric based on the volatility of each index constituent and its correlation to other constituents.
The underlying 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.
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.
Bringing risk-management to a volatile market, Nationwide ETFs seek to protect on the downside while still maintaining upside potential resulting in better risk adjusted performance.