Value remains in ex-US developed market equities, but some investors willing to take the bait want a better volatility profile. The Nationwide Risk-Based International Equity ETF (RBIN) can fulfill that objective.
RBIN seeks to track the total return performance of the Rothschild & Co Risk-Based International Index. The index is a rules-based, equal risk-weighted index that is designed to provide exposure to large capitalization companies in developed markets outside the U.S. and Canada with lower volatility, reduced maximum drawdown, and an improved Sharpe ratio as compared to traditional, market capitalization weighted approaches.
Investors looking for value in developed markets outside the U.S., and there is some to be had, may want to consider an active, multi-factor approach.
Why It's Important
Under RBIN’s methodology, 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.
RBIN’s quality factor often goes overlooked compared to growth and value, but with market volatility still, a primary consideration and many investors favoring defensive sectors, quality stocks, and the related ETFs are worth examining in 2020.
RBIN helps investors steer away from overvalued stocks that many would be exposed to through traditional market-cap weighted funds. Market capitalization weighted indexing methodologies would hold large tilts towards the biggest or best-performing companies, which may expose investors to greater downside risk in case of a sudden correction.
Historical data indicate that the minimum volatility factor is persistent in markets outside the U.S., too, providing investors with a potentially attractive avenue for increasing international allocations.
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility, or systematic risk of security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.
While investors are flocking to safe haven assets like bonds, there’s still a need for products that capture the upside potential should 2020 see a rebound for ex-U.S. equities. At the same time, however, there’s also a need for strategies that offer downside protection built into the product.
RBIN is an alternative to the cap-weighted MSCI EAFE Index. Indicating that it has stringent requirements for admission, the $100 million RBIN holds 232 stocks, significantly less than the MSCI EAFE Index.