Investors looking for core equity strategies that go beyond traditional market capitalization weighting have some interesting options available. One strong choice is the Nationwide Maximum Diversification U.S. Core Equity ETF (MXDU).
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 so-called Diversification Ratio of the index. The Diversification Ratio is a proprietary metric based on the volatility of each index constituent and its correlation to other constituents.
A key selling point of broad market index funds and exchange traded funds is diversity. Yet upon closer examination, many funds lack the diversity investors come to expect. MXDU uses a unique methodology to help investors enhance equity market diversification.
How Does MXDU Better-Diversify Your Funds?
MXDU, which debuted in September 2017, holds nearly 500 stocks and has a defensive tilt.
TOBAM, the index creator for MXDU, “uses the ratio of the weighted average volatility of a portfolio’s holdings to the portfolio’s volatility, which it calls the Diversification Ratio,” said Morningstar in a recent note. “This is based on the idea that diversification should reduce the portfolio’s risk relative to the risk of its holdings. The diversification ratio is larger for portfolios that hold assets with lower correlations to each other because uncorrelated risk largely offsets at the portfolio level.”
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 he lowest marginal risk contribution are selected.
MXDU also offers investors a fresh approach to socially responsible investing.
The TOBAM Diversification Ratio used by MXDU 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.
MXDU is up 4.30% to start 2021.
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