A unit of insurance giant Nationwide has filed for a family of ETFs that target risk and diversification. Nationwide Fund Advisors will be advisor to five ETFs, while Vident Investment Advisory will subadvise the products. The funds are as follows:
- Nationwide Risk‐Based U.S. Equity ETF
- Nationwide Risk‐Based International Equity ETF
- Nationwide Maximum Diversification U.S. Core Equity ETF
- Nationwide Maximum Diversification Emerging Markets Core Equity ETF
- Nationwide Maximum Diversification International Core Equity ETF
The two risk-based ETFs will track indexes from Rothschild Risk Based Investments that are designed to minimize volatility and maximum drawdown while improving the Sharpe ratio. The international ETF selects its components from 19 developed countries, excluding the U.S. and Canada.
The two indexes screen out stocks in their respective universes that have been trading less than a year and that do not meet liquidity or size requirements, with both targeting the large-cap space. The methodology uses a “marginal risk contribution calculation” on the remaining pool of securities that relies on an individual security’s 12-month volatility and correlation to the other securities in the pool, according to the prospectus.
Companies are ranked based on their risk contribution, with those falling within the 50% contributing the least risk selected for inclusion in the index. The methodology relies on a risk-weighting model to assign weights to components; it also takes into account volatility and correlation. Components are equally weighted based on risk contribution, with a maximum possible weighting of 5%.
A Focus On Diversification
The three diversification-focused ETFs similarly consider volatility and correlation, but also take into account socially responsible investment (SRI) criteria. Each tracks an index provided by Tobam, a Paris-based asset management firm known for its diversification-based approach to investing.
While the U.S. fund covers large- and midcap common and preferred stocks, the emerging market fund targets small- and midcap common and preferred stocks. The international fund covers developed-market common and preferred large-cap stocks from countries other than the U.S. and Canada.
Companies in the indexes are also screened according to common SRI standards, with those in violation excluded from the index. Those involved in serious human rights violations, severe environmental damage, corruption or other deviations from ethical norms are excluded, as are those involved in the production of tobacco products, unconventional weapons or coal and coal energy, the prospectus said.
Each fund’s index relies on a quantitative model, known as the MaxDiv Model, designed to maximize its diversification ratio, a Tobam metric that is based on a component stock’s volatility and correlation to other index components. The MaxDiv Model is used to weight the components in such a way that minimizes volatility and maximizes diversification, with each stock’s maximum weighting set at either 1.5% or 20 times the security’s weight in a cap-weighted version of the eligible universe, whichever is the lower weighting. Further, the index’s “active share” relative to the cap-weighted index is capped at 50%, the prospectus noted.
The filing indicates that all the funds will list on the NYSE Arca, but it does not include tickers or expense ratios.
Contact Heather Bell at [email protected].