Three years and counting higher returns and lower risks

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By Jeremy Schwartz, CFA & Bradley Krom, WisdomTree.

What started as a thought experiment proposed by Cliff Asness in the late 90s has grown into one of the most successful crowdsourcing ideas in the history of ETF product development.

Take advantage of the historical inverse relationship between US stocks and US bond yields and provide a capital efficient mix of 90% stocks and 60% ‘stacked on top’ bond futures,1 WisdomTree has created a strategy — the WisdomTree US Efficient Core Fund (NTSX)– which generated cumulative returns higher than the S&P 500 Index with lower volatility and smaller withdrawals since its creation in August 2018.

Although there is no guarantee of investment, we are confident that this approach can continue to add diversification value at the heart of portfolios.

Cumulative returns

For standardized performance of NTSX, please click here.

Figure 2_Key measures

For definitions of terms in the tables, please visit our glossary.

Another way to quickly summarize past performance, with three years of data now available, NTSX received 5 stars from Morningstar, placing it near the top of the large-cap blends category. Based on risk-adjusted returns as of 08/31/21 on 1,254 funds for the large cap blended category for the 3 year period.

Morningstar’s Risk Dashboard presents key metrics from the past three years of live data:

  • NTSX ranked in the lowest risk fund category in the mixed fund category.
  • NTSX ranked in the top decile of funds based on risk-adjusted returns for performance in the large funds category.
  • NTSX had a beta of 0.84, illustrating the lower risk dynamics (and less than the 90% allocation to equities, showing the diversification value of bonds).
    • With 90% capture and 74% catch down, while the Morningstar category average for large mixes was 96% up but 102% down.

Figure 3_Mstar risk and return

For definitions of terms in the image, please visit our glossary.

What Could Go Wrong: Rising Yields and Falling Inventories

While it is clear that a rising environment bond yields and falling stocks would be the worst outcome for absolute returns of NTSX, we’ve had a mini episode of it over the past three years, and NTSX has always tended to outperform long-only exposure to equities.

This is mainly because losses on fixed income securities have historically tended to be smaller than losses on stocks. The bottom line may continue to be less bumpy when stocks drop.

Return over 2 years

Figure 4_ 2-year return

Current market challenges

Many investors are grappling with lower expected returns from stocks and bonds, with bond yields near historic lows and equities evaluations near the peaks.

Fears of inflation have risen and investors are looking for strategies that could diversify market volatility at the end of this Taurus the cycle or inflation risk of any money printing that has occurred in the world.

The challenge of adding assets like gold or commodities to portfolios: where do you fund allocations from? Commodities can provide a hedge against inflation to preserve purchasing power, but they do not offer the “risk-reducing characteristic” that bonds offer in the traditional sense of the market.

Using capital efficient strategies like NTSX at the heart of equity allocations creates room to “stack” all diversification strategies, be it gold, commodities, managed futures, or whatever else. alpha-strategy oriented seeking to increase returns or reduce the overall risk of the portfolio.

To illustrate this idea of ​​back stacking with an example:

  • Exchange the efficient core NTSX for 10% of traditional stocks in a portfolio, this frees up space to reduce traditional bond fund allocations by 6%, and then you can use that 6% to allocate to any return stream you want. would like to stack on top of their original allowances.
    • Specifically, in our 90/60 mix of stocks and bonds, the 10% swap results in an allocation of 9% to stocks and 6% to bond futures. Without cutting down on bond allocations, a 10% equity position swap with NTSX would result in a 1% decrease in the allocation to equities and an additional 6% exposure to bond futures.
  • Managed futures strategies could be an ideal portfolio complement to a capital efficient core fund like NTSX due to the historical ability of managed futures contracts to provide tactical hedges and short exposure to markets.
  • Other Efficient Core supplements could be:
    • Other income-oriented allocations to potentially increase portfolio income
    • Other high-growth themes if they are focused on capital appreciation mandates

Conclusion

We believe that our Efficient basic suite delivers significant innovation to the market and helps investors be creative in designing and optimizing their portfolios.

Now, with over $ 600 million in assets and a three-year track record, we see the time to reconsider how NTSX could improve your wallet.

Watch our latest video on Efficient Core Suite below.

1. Corey Hoffstein, one of the advocates of a capital efficient portfolio approach and who was quoted in Barron’s about the need for such strategies before our launch, recently wrote an article outlining the concept of stacking returns. in “Return Stacking: Strategies for Overcoming a Low Return Environment” with two colleagues from ReSolve Asset Management.

Initially published by WisdomTree, September 16, 2021.


Significant risks associated with this article

This information must be preceded or accompanied by a prospectus; Click on here to view or download the prospectus. We recommend that you carefully consider the objectives, risks, costs and expenses of the Fund before investing. The prospectus contains this information as well as other important information about the Fund. Please read the prospectus carefully before investing.

There are risks associated with investing, including possible loss of capital. Although the Fund is actively managed, the Fund’s investment process is expected to depend heavily on quantitative models, and the models may not work as intended. Equity securities, such as common stocks, are subject to market, economic and business risks which may cause their prices to fluctuate. The Fund invests in derivatives to gain exposure to US Treasuries. The performance of a derivative instrument may not match the performance of its underlying benchmark asset. The Fund’s use of derivatives will give rise to leverage, and derivatives may be volatile and may be less liquid than other securities. Therefore, the value of an investment in the Fund can change quickly and without warning, and you can lose money. Interest rate risk is the risk that fixed income securities and financial instruments linked to fixed income securities will lose value due to an increase in interest rates and changes in other factors, such as as the perception of the creditworthiness of an issuer. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

For each fund with a history of at least three years, Morningstar calculates a Morningstar RatingMT each month by subtracting the return on a 90-day US Treasury bill from the load-adjusted return for the fund for the same period, and then adjusting that excess return for risk. The richest 10% of funds in each broad asset class receive five stars, the next 22.5% four stars, the next 35% three stars, the next 22.5% two stars, and the poorest 10% a star. Morningstar Overall RatingMT for a fund is derived from a weighted average of the performance numbers associated with its Morningstar rating over three, five and ten years (if applicable)MT metric. The WisdomTree US Efficient Core Fund (NTSX) has been measured against the following number of US domiciled large cap blended funds over the following periods: 1,254. With respect to these large cap blended funds, the WisdomTree US Efficient Core Fund (NTSX) received a Morningstar ratingMT of five stars for the period of three years. Past performance is no guarantee of future results.

Morningstar Quartile Rankings are based on the Morningstar Percentile Rank in the Morningstar category, where 1% – 25% = first quartile (1); 26% – 50% = second quartile (2); 51% – 75% = third quartile (3); and 76% – 100% = fourth quartile (4). The Morningstar Percentile Rank compares a fund’s Morningstar risk and return scores against all funds in the same category, where 1% = best and 100% = worst.

Morningstar Risk is an assessment of changes in the monthly returns of a fund compared to similar funds. The greater the variation, the higher the risk score.

Morningstar Return is an assessment of the fund’s excess return over a risk-free rate (the return on 90-day T-bills) against similar funds.

© [2021] The morning star. All rights reserved. The information contained in this document: (1) is the property of Morningstar and / or its content providers; (2) may not be copied or distributed; and (3) is not guaranteed to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses resulting from the use of this information.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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