Today Nationwide is rolling out three of the five ETFs it currently has in registration. The mix includes two risk-based funds and a diversification-focused fund.
The funds, which list on the NYSE Arca, and their expense ratios, are as follows:
- Nationwide Risk-Based U.S. Equity ETF (RBUS), 0.30%
- Nationwide Risk-Based International Equity ETF (RBIN), 0.42%
- Nationwide Maximum Diversification U.S. Core Equity ETF (MXDU), 0.34%
The two risk-based ETFs 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%, the prospectus said.
MXDU tracks the TOBAM Maximum Diversification USA Index, which covers large- and midcap common and preferred stocks. The benchmark considers volatility and correlation, but also takes into account socially responsible investment (SRI) criteria.
Companies in the selection universe that meet liquidity and size requirements are screened according to common SRI standards. 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.
Once the components are established, the underlying index methodology 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.
Another insurance provider recently launched risk-focused ETFs. In early August, Transamerica rolled out four multiasset “Managed Risk” ETFs that allocate between equities and fixed income based on the moving averages of the funds’ underlying indexes.
Strategy Shares Plans ETF Of ETFs
Strategy Shares has filed for an ETF that will invest in other ETFs. The 7 HANDL Index ETF (HNDL) is slated to come with an expense ratio of 0.96% and will list on the Nasdaq exchange.
The fund will track an index of the same name that splits its portfolio 50/50 between two buckets. The index will also incorporate a level of leverage that equates to 23% of the fund’s total portfolio.
In one bucket is an assortment of domestically focused equity and fixed-income ETFs that allocates 30% of its weight to equity funds and 70% to fixed-income funds.
The fixed-income sleeve is equally weighted among the three largest U.S. aggregate bond ETFs, while the core equity sleeve allocates 50% of its weight to an equal-weighted subportfolio of the three largest large-cap U.S. ETFs and the other 50% to the largest ETF tracking the Nasdaq-100 Index.
The filing does not mention whether the Nasdaq-100 ETF can be leveraged or inverse. If not, the only ETF to track that index is the $53 billion PowerShares QQQ Trust (QQQ)
The other bucket represents alternative assets and is referred to in the prospectus as the “Explore Portfolio.” It contains 12 asset categories that are each represented by a single ETF that is usually the largest in that particular space. Those ETFs are weighted in their portion of HNDL’s portfolio using a proprietary methodology that is subject to certain weighting constraints.
The prospectus describes the fund’s underlying index as “broadly diversified” and says it is designed to provide high levels of monthly distributions to the tune of a 7% annual distribution rate while also offering a stable net asset value over time. The document also notes that the 7% distribution rate is not guaranteed. The fund will target risk levels that coincide roughly with the U.S. capital markets.
Rational Advisors serves as the fund’s advisor.
Contact Heather Bell at [email protected]