Remaining diversified is often dispensed advice, but some large-cap broad market funds don’t accomplish that objective. Investors think an alternative to consider is the Nationwide Maximum Diversification U.S. Core Equity ETF (NYSEArca: MXDU).
The Maximum Diversification U.S. Core Equity ETF tries to reflect the TOBAM Maximum Diversification USA Index’s performance, a diversified rules-based index of large- and mid-sized U.S. companies that uses a quantitative model to weight companies to maximize the so-called Diversification Ratio of the index. The Diversification Ratio is a proprietary metric based on each index constituent’s volatility and its correlation to other constituents.
“Most investors agree that diversification plays an important role in an equity portfolio. However, the extent of that role can cause disagreement. Some investors believe that there is little downside to diversification—negligible cost for adding even more stocks to a portfolio—because they believe that the primary benefit of diversification is the reduction of overall portfolio risk,” according to research by J.V. Bruni and Company.
Withing MXDU, 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.
Diversification with Potential Benefits
A diversified equity portfolio contains various stocks that react differently to external market forces such as interest rate changes, regulatory and technology shifts, and the emotional behavior of investors, among other factors. Simply put, the goal of diversification is to reduce the portfolio volatility that results from those forces,” according to J.V. Bruni.
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 has the potential to produce lower overall volatility of the index, a higher risk-adjusted return, and diminish maximum drawdowns.
Additionally, MXDU features socially responsible benefits for virtuous investors.
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 violations of ethical norms. The index then analyzes each component’s volatility and correlation and weights them to maximize the Diversification Ratio.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
NUSI Prospectus (https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html )
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying index.
KEY RISKS: The Fund is subject to the risks of investing in equity securities. Please refer to the summary prospectus for a more detailed explanation of the Fund’s principal risks. There is no assurance that the investment objective of any fund will be achieved. Diversification does not assure a profit or protect against a loss in a declining market.
TOBAM Diversification Ratio® (DR(w)) is calculated by using the weighted average volatility and volatility as follows: DR(w)=(w|σ)/σ(w) where (w|σ) = Σ wiσi.
Call 800-617-0004 to request a summary prospectus and/or a prospectus. You may also download the prospectus at the link above or by visiting etf.nationwide.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
KEY RISKS: The Fund is subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Fund is subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets). The Fund may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Fund employs a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Fund’s investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
Nasdaq-100 Index: An unmanaged, market capitalization-weighted index of equity securities issued by 100 of the largest non-financial companies, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliate with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2021 Nationwide
MFM-4057AO (03/21) Q-20210310-0044
For more on income strategies, visit our Retirement Income Channel.
newETFs.io respects the hard work of others and gives all credit to the remarkable folks at ETFTrends.com. This excerpt/article was pulled from their RSS feed; click here to view the original. Please note that on occasion, the RSS feed will not have the author. When this happens this site defaults the author to "News". Make no mistake, this excerpt/article was not created by newETFs.io, it was simply shared with you.