Three years and counting higher returns and lower risks

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 has generated higher cumulative returns than the S&P 500 Index with lower volatility and lower drawdowns since its inception in August 2018.

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

Cumulative returns

Figure 1_NTSX cumulative yield

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 sum up 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 last three years of live data:

  • NTSX ranked in the lowest risk fund category in the large mixed fund category.
  • NTSX ranked in the top decile of funds based on risk-adjusted returns for return in the blended fund category.
  • NTSX had a beta of 0.84, illustrating weaker risk dynamics (and less than the 90% allocation to equities, showing the diversification value of bonds).
    • With 90% catch up and 74% 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’s clear that an environment of rising bond yields and falling stocks would be the worst outcome for NTSX absolute returns, we’ve had a mini episode of this over the past three years, and NTSX has always tended to outperform long equity exposures only.

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 the lower expected returns on stocks and bonds, with bond yields near historic lows and stock valuations near highs.

Inflation fears have increased and investors are looking for strategies that could diversify either the market volatility at the end of this bull cycle or the risk of inflation resulting from all the money printing that has occurred around 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 such as NTSX at the heart of equity allocations creates room to ‘stack’ all diversification strategies, be it gold, commodities, futures. managed or any creative alpha-driven strategy seeking to increase returns or reduce overall portfolio risk.

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

  • Swapping the NTSX Efficient Core for 10% traditional stocks in a portfolio frees up space to reduce traditional bond fund allocations by 6%, then one can use that 6% to allocate to any flow. yield that one wishes to stack in addition to their original allocations. .
    • 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 reducing bond allocations, a 10% equity position swap with NTSX would result in a 1% lower equity allocation and an additional 6% exposure to bond futures.
  • Managed futures strategies could be an ideal portfolio addition to a core capital efficient fund like NTSX due to the historical ability of managed futures 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


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

Now, with over $ 600 million in assets and a three-year track record, we think it’s time to reconsider how NTSX could improve your portfolio.

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.

Originally posted by WisdomTree on 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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