Investors frequently hear about the benefits of portfolio diversification, but there are right and wrong ways to achieve that objective. The Nationwide Maximum Diversification U.S. Core Equity ETF (MXDU) is one of the better ideas.
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.
In fact, MXDU can be a better alternative to traditional diversification tools.
“Diversification is the key to any successful portfolio, and for good reason—a well-diversified portfolio can help an investor weather through the most turbulent markets,” writes Morningstar analyst Samantha Lamas. “However, there are times when the general principle of diversification can work against investors. For example, the prevalence of mixed target-fund investors is a continuing concern for financial professionals.”
Don't Diversify for Diversification's Sake
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 maintaining upside potential resulting. The result is better risk-adjusted performance.
MXDU also helps investors avoid diversification for the sake of diversification.
“Due to naïve diversification, our minds might automatically tell us to invest some assets into all the options, even those with similar holdings, but very different fees. Unfortunately, quite a few retirement plans offer two or more indistinguishable S&P 500 index funds with disparate costs—a choice environment that is identical to our experiment,” according to Lamas.
MXDU offers investors a quality approach with positive social and governance leanings that can generate better long-term returns.
“Before looking into your retirement options, there are a few things you can do to prepare for the tough decisions ahead. Define your desired asset allocation: Do some research so you can have a general idea of what allocation best fits your personal needs,” says Lamas.
For more on income strategies, visit our Retirement Income Channel.