(NEW) WisdomTree 90/60 U.S. Balanced Fund

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columbia
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Wed Aug 08, 2018 9:21 pm

vineviz wrote:
Wed Aug 08, 2018 9:10 pm
columbia wrote:
Wed Aug 08, 2018 7:52 pm
Historically since 1930, a portfolio like this would have theoretically had returns about 24% higher than a 100/0 portfolio with 8% less annual volatility. So I think it is interesting in principle.
Out of curiosity: link?
Here's a link to a backtest in PortfolioVisualizer (with the caveat the quick 1.5x simulation I made may or may not match what this new ETF actually produces.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Portfolio 1 is 100% large cap stocks (the SBBI total return series).

Image

Interestingly, the drawdowns for the 90/60 portfolio were slightly smaller than those for the 100/0 portfolio but it remains to be seen how well the futures contracts perform for this fund is a truly stressful market.
Many thanks.

If I’m understanding some other posts: the leverage is on the treasuries only. If so, I guess I “get” the approach.

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vineviz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Wed Aug 08, 2018 9:25 pm

randomguy wrote:
Wed Aug 08, 2018 9:07 pm
vineviz wrote:
Wed Aug 08, 2018 7:54 pm
columbia wrote:
Wed Aug 08, 2018 7:52 pm
Historically since 1930, a portfolio like this would have theoretically had returns about 24% higher than a 100/0 portfolio with 8% less annual volatility. So I think it is interesting in principle.
Out of curiosity: link?
Aargh. I computed it in Excel but I’m not at my computer now.

I’ll try to add supporting details later tonight or tomorrow.
I don't suppose you can do rolling 10 or 20 year terms. I don't find it shocking that the fund does well over a 90 year period. That is sort of what you expect. The question to me is what the couple of poor performing segments look like. You would probably need some period where both stock and bonds dropped to have higher than 100% stock volatility.
You can play around with it in the PV link I posted, but it's really hard to find period longer than 3 or 4 years when the simulated 90/60 portfolio underperformed a 100/0 portfolio. 1947 to 1953 is the longest period I see.
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dumbmoney
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by dumbmoney » Wed Aug 08, 2018 9:36 pm

"100/100" funds have been around for a while. They work by investing in bonds and using S&P 500 futures to simulate a 100% stock position, with the goal of outperforming a vanilla S&P 500 fund.

Examples:
Pimco StocksPLUS (PSTKX)
DFA Enhanced US Large Co. Portfolio (DFELX)
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Wed Aug 08, 2018 9:38 pm

Theoretical wrote:
Wed Aug 08, 2018 9:14 pm
Rather than a 90/60, I'd say you're getting more like a 90/50/10 Stocks/Short-Intermediate Bonds/T-Bills portfolio, which is pretty respectable for a young accumulator.
the t bills can be used for collateral, most FCM's take it for 95% of the value.
Last edited by hdas on Sun Nov 18, 2018 10:21 am, edited 1 time in total.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by LadyGeek » Wed Aug 08, 2018 9:40 pm

triceratop wrote:
Wed Aug 08, 2018 8:33 pm
LadyGeek wrote:
Wed Aug 08, 2018 8:26 pm
Caution, Wikipedia is not an authoritative source.

Let's go directly to the authoritative source: S&P 500® - S&P Dow Jones Indices and download the factsheet. There are 505 companies in the S&P 500, and they are all based in the US.
Incorrect. You have to read the footnotes which refer to companies which are US domiciled, which ultimately becomes a question of index methodology. Just as an example, for Ireland, the Vanguard S&P500 Index Fund Annual Report lists holdings in Accenture plc Class A shares in the amount of 10.6 million shares. Accenture is based in Dublin, Ireland.

The answer lies in the Eligibility criteria for Domicile from the S&P U.S. Indices Methodology.
Domicile. Only common stocks of U.S. companies are eligible. For index purposes, a U.S. company has
the following characteristics:

1. Files 10-K annual reports.
2. The U.S. portion of fixed assets and revenues constitutes a plurality of the total, but need not
exceed 50%. When these factors are in conflict, assets determine plurality. Revenue determines
plurality when there is incomplete asset information.
3. The primary listing must be on an eligible U.S. exchange as described under Exchange Listing
below.

If criteria #2 is not met or is ambiguous, S&P Dow Jones Indices may still deem it a U.S. company for
index purposes if its primary listing, headquarters and incorporation are all in the U.S. and/or a “domicile
of convenience” (see Appendix A).

In situations where the only factor suggesting that a company is not a U.S. company is its tax registration
in a “domicile of convenience” or another location chosen for tax-related reasons, S&P Dow Jones
Indices normally determines that the company is still a U.S. company.

The final determination of domicile eligibility is made by the Index Committee which can consider other
factors including, but not limited to, operational headquarters location, ownership information, location of
officers, directors and employees, investor perception and other factors deemed to be relevant.
So, like ADRs are not eligible but plenty of other companies are. This is all just to answer columbia's question -- I don't actually think these companies are truly and properly not US companies. But, he asked why the country breakdown was why it was. The answer is because not every fund company recognizes the S&P's committee's somewhat arbitrary inclusion rules. Other index companies will have other rules, so what are you going to do when writing a website or assigning a stock to a particular country? Morningstar has a similar difficulty. :)

I also don't see a problem with my citing Wikipedia here.
I stand corrected, thanks.

The problem with citing Wikipedia is that it is not an authoritative source. If possible, try to verify the sources to ensure accuracy.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Wed Aug 08, 2018 10:10 pm

typical.investor wrote:
Wed Aug 08, 2018 8:40 pm
whodidntante wrote:
Wed Aug 08, 2018 7:59 pm
I don't see the mystery. Here's my hack explanation for what the fund is doing. It would be better if I were twelve.

It owns 90% large cap stocks.
It has 10% invested in cash.
It has 60% notional exposure in a mix of 2, 5, 10, and 30-year Treasury futures contracts. This is the source of the leverage, and I think this is the part that is confusing people. But notional exposure is just a fancy way to say the exposure you bought with the futures contracts.

The cash is acting as collateral for the futures.
Wow, nice explanation.

Some questions though:

1) do Treasury futures behave differently in a rising rate environment. Does the same basic rule of holding for the duration to recover from NAV loss hold true.

2) How much will this affect rebalancing? The fund is going to maintain 90-60 exposure (and rebalance when %5 off).

I'd guess that rising rates would lower bond NAV, and perhaps the fund would move some stocks to cash so it could gain more Treasury exposure. Conversely, if stocks crashed, the higher treasury exposure would allow one to rebalance more into equities.

I don't understand futures though, so this might just be silly conjecture.

I mean can we predict how this might behave over different environments?
If the value of the underlying asset falls, then so does the value of your exposure. You've lost money. Real money. If you sell, you'll realize the loss. And vice versa. If you don't roll they contract (the fund will) the contract holder gets and must pay for a basket of bonds. That's what "delivery" means on this page, under settlement method. https://www.cmegroup.com/trading/intere ... tions.html

Futures do not provide perfect exposure to the underlying asset. For one thing, you're paying something for the leverage, 3 month LIBOR as a rule of thumb. So the leverage is cheap, but is not free. I believe you need a Bloomberg terminal to know exactly what you are paying. Someone will be along shortly to correct me.

If asset prices move beyond the dead band, then the fund manager would have to trade to restore the desired asset allocation, though the redemption process will make this more tax efficient if the ETF trades actively. The fund can shed appreciated assets for tax purposes.
typical.investor wrote:
Wed Aug 08, 2018 8:40 pm

UPDATE:

The wisdom case for .pdf notes in a rising rate environment, this could be beneficial tax wise as capital gains on Treasury futures contracts are taxed at 60% long-term, 40% short-term capital gains rates instead of distributing interest that is taxed at marginal rates.
I commented on potential tax advantages upthread. That is a nice benefit of bond futures.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by FlyingMoose » Wed Aug 08, 2018 10:18 pm

Do you get the same amount of interest/dividends you’d get from owning 60% bonds? What are the leveraged bonds for? To amplify anti-correlation to the stock market? I don’t understand what they do...

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Wed Aug 08, 2018 11:18 pm

Theoretical wrote:
Wed Aug 08, 2018 9:14 pm

Rather than a 90/60, I'd say you're getting more like a 90/50/10 Stocks/Short-Intermediate Bonds/T-Bills portfolio, which is pretty respectable for a young accumulator.
Is it really that attractive though? After leverage costs, the bond portion doesn't seem to return that much.

Libor is 2.34% for a 3 month contract. Let's call it 2%. 2-30 year treasury yields are 2.67-3.13% . Let's call it 3% (which is where the 10 year is at). Which means the bonds are yielding maybe 1%.

So today's expected nominal returns from 90% stocks + 60% (leveraged bonds yields) isn't that much different than 100 stocks.

0.9 (stock allocation) * 0.05 (expected stock returns per Vanguard's 10 year forecast) = 4.5%
0.6 (bond futures) * 0.01 (yield after leverage costs )=.6%

So it looks like a 5.1% return on 90/60 vs a 5% return on 100% stocks. (at least at this point in time) . Or 4.8% from a 90% stock 10% 10-year treasury position.

And if equity returns were actually double Vanguard's estimate, you'd do 0.3% worse than only holding equities.

I just can't see using this fund and considering it 60-40 or 90-60 in my asset allocation. It's 90% stocks and 20% bonds (from a return perspective at today's rates with the understanding that the leverage has you really locked into holding for the duration).

Am I looking at this wrong?

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vineviz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Thu Aug 09, 2018 1:19 am

typical.investor wrote:
Wed Aug 08, 2018 11:18 pm
Theoretical wrote:
Wed Aug 08, 2018 9:14 pm

Rather than a 90/60, I'd say you're getting more like a 90/50/10 Stocks/Short-Intermediate Bonds/T-Bills portfolio, which is pretty respectable for a young accumulator.
Is it really that attractive though? After leverage costs, the bond portion doesn't seem to return that much.

Libor is 2.34% for a 3 month contract. Let's call it 2%. 2-30 year treasury yields are 2.67-3.13% . Let's call it 3% (which is where the 10 year is at). Which means the bonds are yielding maybe 1%.

So today's expected nominal returns from 90% stocks + 60% (leveraged bonds yields) isn't that much different than 100 stocks.

0.9 (stock allocation) * 0.05 (expected stock returns per Vanguard's 10 year forecast) = 4.5%
0.6 (bond futures) * 0.01 (yield after leverage costs )=.6%

So it looks like a 5.1% return on 90/60 vs a 5% return on 100% stocks. (at least at this point in time) . Or 4.8% from a 90% stock 10% 10-year treasury position.

And if equity returns were actually double Vanguard's estimate, you'd do 0.3% worse than only holding equities.

I just can't see using this fund and considering it 60-40 or 90-60 in my asset allocation. It's 90% stocks and 20% bonds (from a return perspective at today's rates with the understanding that the leverage has you really locked into holding for the duration).

Am I looking at this wrong?
Remember that you’re getting yield on the full notional value of the bonds but only paying LIBOR on the contract value. So the net bond returns in your example would be higher.

With normal equity risk premiums, total expected return on a 90/60 portfolio should be about 20-25% above the expected return on a 100/0 portfolio.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Aug 09, 2018 4:11 am

vineviz wrote:
Thu Aug 09, 2018 1:19 am
typical.investor wrote:
Wed Aug 08, 2018 11:18 pm

Am I looking at this wrong?
Remember that you’re getting yield on the full notional value of the bonds but only paying LIBOR on the contract value. So the net bond returns in your example would be higher.

With normal equity risk premiums, total expected return on a 90/60 portfolio should be about 20-25% above the expected return on a 100/0 portfolio.
Ok I see for example ...
to go long a Treasury futures contract representing $100,000 par amount of Treasuries, you merely have to deposit $2,025 in a margin account, and maintain at least $1,500 in the account, as changes in the value of the contract are either added to or subtracted from it.
Then what? On settlement, how is the value determined?

a) the interest the $100k generated
+/-
b) the change in value of those treasuries
-
c) the cost of the contract
--------------------------------
??? something like this ???

I'm sure there is a complicated formula to calculate these things, but generally is that right?

What is cost of the contract by the way, $2,025???

And so anyway the leverage cost for $100k exposure would only be $2,025 * Libor (now roughly 2%)?

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by nisiprius » Thu Aug 09, 2018 5:41 am

whodidntante wrote:
Wed Aug 08, 2018 7:59 pm
I don't see the mystery. Here's my hack explanation for what the fund is doing. It would be better if I were twelve.

It owns 90% large cap stocks.
It has 10% invested in cash.
It has 60% notional exposure in a mix of 2, 5, 10, and 30-year Treasury futures contracts. This is the source of the leverage, and I think this is the part that is confusing people. But notional exposure is just a fancy way to say the exposure you bought with the futures contracts.

The cash is acting as collateral for the futures.
So here's where I am, and I still see a mystery. My understanding is that:

a) It owns 90% large cap stocks, straight out, plain and simple, no derivatives, no leverage.
b) It owns 10% of something that behaves like a 6:1 leveraged investment in bonds.

Yes?

Question #1: If it owns 90% large-cap stock plain and simple, why is Morningstar showing 60%?
Image

Question #2: In The Case for 90/60 Balanced Fund (NTSX), WisdomTree keeps mentioning a portfolio of "50% Equity/30% Bond/20% (Long/Short Equity)." What is the connection 90% stocks, 6:1 leveraged bonds and between "50% Equity, 30% Bond, 20% Long-Short Equity? On careful reading, they certainly do not say that NTSX has this composition; they are quite clear:
[In NTSX], WisdomTree applies 1.5x accounting leverage to a traditional 60/40 portfolio to create exposure equal to 90% equities, 60% bonds. This exposure is created by investing 90% of Fund assets in equities and 10% in short-term fixed income. The 60% bond exposure is achieved by overlaying Treasury futures contracts to achieve the net 90/60 target.
So why, exactly, are they talking about "50% Equity, 30% Bond, 20% Long-Short Equity?"

Is that, in fact, the goal, which 90/60 is a tool for achieving? What's meant by this graphic? Are they saying NTSX is not supposed to be used by itself as an improved version of 60/40, but only in combination with "Alpha Strategy?"

Image

Question #3a: In terms of risk and effectiveness, explain the use of futures here. Since mutual funds are allowed to use a limited amount of leverage, why do they not actually use leverage (as QSPIX does, and as 130/30 funds used to?) What are the effective differences between 10% cash held as collateral for futures contracts representing 60% bonds, and an actual leveraged holding of actual bonds plus an actual loan?

Question #3b: What are the effective differences between:

--a 60/40 fund bought using actual 1.5X leverage, i.e. if it drops 67% you have lost all your money;

--90% plain unleveraged stocks and 60% bonds bought with 10% cash using 6:1 leverage;

--90% plain unleveraged stocks and 10% futures contracts?

Question #4: Is 90% unleveraged stocks + 10% holding of 6:1 leveraged bonds effectively the same thing as a 1.5X leveraged holding of a 60/40 portfolio? First I keep thinking it isn't, then I keep thinking that because money--even negative money, borrowed, is fungible, maybe it is.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Aug 09, 2018 6:23 am

nisiprius wrote:
Thu Aug 09, 2018 5:41 am

Question #2: In The Case for 90/60 Balanced Fund (NTSX), WisdomTree keeps mentioning a portfolio of "50% Equity/30% Bond/20% (Long/Short Equity)." What is the connection 90% stocks, 6:1 leveraged bonds and between "50% Equity, 30% Bond, 20% Long-Short Equity? On careful reading, they certainly do not say that NTSX has this composition; they are quite clear:
[In NTSX], WisdomTree applies 1.5x accounting leverage to a traditional 60/40 portfolio to create exposure equal to 90% equities, 60% bonds. This exposure is created by investing 90% of Fund assets in equities and 10% in short-term fixed income. The 60% bond exposure is achieved by overlaying Treasury futures contracts to achieve the net 90/60 target.
So why, exactly, are they talking about "50% Equity, 30% Bond, 20% Long-Short Equity?"

Is that, in fact, the goal, which 90/60 is a tool for achieving? What's meant by this graphic? Are they saying NTSX is not supposed to be used by itself as an improved version of 60/40, but only in combination with "Alpha Strategy?"

I think the point is that adding alternatives can smooth the ride and maybe boost returns.

HOWEVER, as the past has shown, adding alternatives can possibly detract from returns because you have to allocate some of your portfolio to it, and alternatives can underperform. Thus, you end up with tracking error and regret.

SO, using the 90/60 portfolio gives you similar returns to being fully invested in a 60/40, but leaves you with unallocated resources that you can put into alternatives for smoothing, inflation protection or additional returns.

I mean I don't want to allocate 5% of my portfolio to gold because it's most likely to just be a drag, but if I use this and get my full returns but can hold some gold and don't have to worry about it's returns. There might be upside in stagflation where both equities and bonds do poorly.

Just my guess anyway. There's gotta be a way it can all go wrong. There always is. Maybe that is just default risk on the leveraged bonds (or damage from market gyrations due to a temporary default after a debt ceiling raise isn't agreed upon in a timely fashion for instance).

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Thu Aug 09, 2018 7:39 am

nisiprius wrote:
Thu Aug 09, 2018 5:41 am
Question #1: If it owns 90% large-cap stock plain and simple, why is Morningstar showing 60%?
Answer: Fund is really new, and they are probably as confused as you are.
nisiprius wrote:
Thu Aug 09, 2018 5:41 am
Question #2: So why, exactly, are they talking about "50% Equity, 30% Bond, 20% Long-Short Equity?"
Because the original idea of this fund is all about efficient capital allocation. Using leverage to open space to uncorrelated strategy within the allocation, without giving up space for equities. As I mentioned, the idea of this fund came from a blog post, read this: http://econompicdata.blogspot.com/2016/ ... funds.html

For the rest of your questions I recommend you read this introduction to treasury futures https://www.cmegroup.com/education/file ... utures.pdf
Last edited by hdas on Thu Aug 09, 2018 8:01 am, edited 1 time in total.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by qwertyjazz » Thu Aug 09, 2018 7:53 am

In theory this fund is tailor made for me which paradoxically worries me. How could it blow up? What is its real risk of not minor under-performance but rather truly awful returns or even being wiped out? Too good to be true worries me. The comparison is 100% SP or it’s ilk in mind. So I am not talking about risk in that, but more LTC Fund type default risk. I really want to embrace sensible leverage though.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Thu Aug 09, 2018 8:24 am

Relevant to a lot of points in this thread, here's an article that compares index tracking between: ETF, Futures, Swaps. (It's a bit biased towards ETF bcs is a marketing pamphlet, but it's useful regardless)

Link: http://www.lyxor.com/uploads/tx_bilyxor ... net_02.pdf
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Aug 09, 2018 8:26 am

qwertyjazz wrote:
Thu Aug 09, 2018 7:53 am
In theory this fund is tailor made for me which paradoxically worries me. How could it blow up? What is its real risk of not minor under-performance but rather truly awful returns or even being wiped out? Too good to be true worries me. The comparison is 100% SP or it’s ilk in mind. So I am not talking about risk in that, but more LTC Fund type default risk. I really want to embrace sensible leverage though.
85% NTSX (returns of 60%/40% so you can retire if things go well)
5% gold (inflation protection and meltdown currency)
5% defensive (lead, gas masks, water purifiers etc.)
5% health (medicine, supplies etc.)

You could probably put the 3d printer in defensive and make parts for your SUV when it breaks down.

If treasuries go kaput NTSX will suffer but you will be well prepared!

I think the allocations are fine. You can always sell defensive and health at a premium in the chaos or keep them for your legacy!

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by qwertyjazz » Thu Aug 09, 2018 8:37 am

typical.investor wrote:
Thu Aug 09, 2018 8:26 am
qwertyjazz wrote:
Thu Aug 09, 2018 7:53 am
In theory this fund is tailor made for me which paradoxically worries me. How could it blow up? What is its real risk of not minor under-performance but rather truly awful returns or even being wiped out? Too good to be true worries me. The comparison is 100% SP or it’s ilk in mind. So I am not talking about risk in that, but more LTC Fund type default risk. I really want to embrace sensible leverage though.
85% NTSX (returns of 60%/40% so you can retire if things go well)
5% gold (inflation protection and meltdown currency)
5% defensive (lead, gas masks, water purifiers etc.)
5% health (medicine, supplies etc.)

You could probably put the 3d printer in defensive and make parts for your SUV when it breaks down.

If treasuries go kaput NTSX will suffer but you will be well prepared!

I think the allocations are fine. You can always sell defensive and health at a premium in the chaos or keep them for your legacy!
Minus the gold, defensive and health - add in some tax considerations (which is actually a bunch of stuff in my situation) is what I am thinking - NSTX is relatively cheap - I like the allocation - I like the little bit of leverage in theory especially on the bond part - the logic just sounds too good
So I am balancing overthinking it versus the history of the markets where most things that sound good prospectively are pretty stupid retrospectively. There are exceptions - stock company, bonds, mutual funds, index funds but those are far fewer ... now is it intelligent use of leverage for the average investor?

Thank you
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Thu Aug 09, 2018 8:48 am

How many funds/ETFs disappeared after the last crash? This is a fairly exotic idea and could certainly see it being abandoned in the afternath if some ugly market times.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by qwertyjazz » Thu Aug 09, 2018 9:02 am

columbia wrote:
Thu Aug 09, 2018 8:48 am
How many funds/ETFs disappeared after the last crash? This is a fairly exotic idea and could certainly see it being abandoned in the afternath if some ugly market times.
Excellent point - liquidation risk with time money tied up working through it and capital gains - as well as downmarket contraction especially if moving sensible leverage downmarket is such a good idea - then there will be multiple competitors - who knows which will still be standing in a decade or two
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by strafe » Thu Aug 09, 2018 9:22 am

nisiprius wrote:
Thu Aug 09, 2018 5:41 am
whodidntante wrote:
Wed Aug 08, 2018 7:59 pm
I don't see the mystery. Here's my hack explanation for what the fund is doing. It would be better if I were twelve.

It owns 90% large cap stocks.
It has 10% invested in cash.
It has 60% notional exposure in a mix of 2, 5, 10, and 30-year Treasury futures contracts. This is the source of the leverage, and I think this is the part that is confusing people. But notional exposure is just a fancy way to say the exposure you bought with the futures contracts.

The cash is acting as collateral for the futures.
So here's where I am, and I still see a mystery. My understanding is that:

a) It owns 90% large cap stocks, straight out, plain and simple, no derivatives, no leverage.
b) It owns 10% of something that behaves like a 6:1 leveraged investment in bonds.
It's throw-back Thursday. Time to dust off this old nugget on efficient frontiers:
NAME for the MPT or CAPM-based diagram with the hyperbola and tangent line?

This new fund is designed to follow the capital market line, presumed to be tangent to an "efficient" 60/40 portfolio.

Image

The devil of course is in the details.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by FireProof » Thu Aug 09, 2018 9:50 am

Is the real expense ratio (loss relative to index) 0.2%, including borrowing costs, or are there additional hidden costs?

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Thu Aug 09, 2018 2:47 pm

FireProof wrote:
Thu Aug 09, 2018 9:50 am
Is the real expense ratio (loss relative to index) 0.2%, including borrowing costs, or are there additional hidden costs?
Like all other funds the ER does not include trading or borrowing costs nor lending income.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by stemikger » Thu Aug 09, 2018 2:59 pm

This violates two of my investing rules. Don't invest in something you don't understand and choose simplicity over complexity.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by bgf » Thu Aug 09, 2018 3:06 pm

i read the prospectus on this a couple days ago and was interested in it. i also considered posting about it here but did not. discussion here by people who know a lot more than i do has been good. i am considering investing in this for my US allocation in my taxable account.

it really does not seem that complicated, and it is a strategy that I would not feel comfortable doing myself (that is, managing the futures).

its just 90% SP500 with some super liquid futures on the side. doesn't seem that crazy at all to me and has tax benefits.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by strafe » Thu Aug 09, 2018 4:09 pm

bgf wrote:
Thu Aug 09, 2018 3:06 pm

it really does not seem that complicated, and it is a strategy that I would not feel comfortable doing myself (that is, managing the futures).

its just 90% SP500 with some super liquid futures on the side. doesn't seem that crazy at all to me and has tax benefits.
Agreed. This is basic CAPM/efficient frontier theory. The real question is to what degree the implementation of leverage using treasury futures has unforeseen consequences.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Thu Aug 09, 2018 5:17 pm

vineviz wrote:
Thu Aug 09, 2018 2:47 pm
FireProof wrote:
Thu Aug 09, 2018 9:50 am
Is the real expense ratio (loss relative to index) 0.2%, including borrowing costs, or are there additional hidden costs?
Like all other funds the ER does not include trading or borrowing costs nor lending income.
Maybe a quibble, but the fund doesn't actually borrow money. It gains leverage through futures.

A large investor/fund can post T-bills as collateral for a futures contract, which is going to make the leverage quite cheap.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Thu Aug 09, 2018 5:35 pm

Take me through the mechanics of a 40% drop in the market. This fund performs better than Vanguard Balanced Index because ________.

(I think I know why, but would be interested in the real answer.)


Thanks

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by triceratop » Thu Aug 09, 2018 5:41 pm

columbia wrote:
Thu Aug 09, 2018 5:35 pm
Take me through the mechanics of a 40% drop in the market. This fund performs better than Vanguard Balanced Index because ________.

(I think I know why, but would be interested in the real answer.)


Thanks
It isn't designed to perform better than the Balanced Index in this scenario.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Thu Aug 09, 2018 5:42 pm

whodidntante wrote:
Thu Aug 09, 2018 5:17 pm
vineviz wrote:
Thu Aug 09, 2018 2:47 pm
FireProof wrote:
Thu Aug 09, 2018 9:50 am
Is the real expense ratio (loss relative to index) 0.2%, including borrowing costs, or are there additional hidden costs?
Like all other funds the ER does not include trading or borrowing costs nor lending income.
Maybe a quibble, but the fund doesn't actually borrow money. It gains leverage through futures.

A large investor/fund can post T-bills as collateral for a futures contract, which is going to make the leverage quite cheap.
Yes, you’re right. I was listing some general types of expenses that the ER doesn’t cover, but I should have made the distinction that this fund isn’t actually borrowing.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Thu Aug 09, 2018 5:45 pm

triceratop wrote:
Thu Aug 09, 2018 5:41 pm
columbia wrote:
Thu Aug 09, 2018 5:35 pm
Take me through the mechanics of a 40% drop in the market. This fund performs better than Vanguard Balanced Index because ________.

(I think I know why, but would be interested in the real answer.)


Thanks
It isn't designed to perform better than the Balanced Index in this scenario.
This. It MIGHT perform better than a 100% stock fund, but it would definitely underperform a 60/40 fund that invested in the same stock and bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Thu Aug 09, 2018 5:47 pm

Thanks :)

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by rhe » Thu Aug 09, 2018 6:13 pm

whodidntante wrote:
Wed Aug 08, 2018 10:10 pm

Futures do not provide perfect exposure to the underlying asset. For one thing, you're paying something for the leverage, 3 month LIBOR as a rule of thumb. So the leverage is cheap, but is not free. I believe you need a Bloomberg terminal to know exactly what you are paying. Someone will be along shortly to correct me.
I believe this is correct for equity futures, but not for treasury futures. The price of the treasury future is set by some trader who goes short the future, hedges this by buying the right ("cheapest to deliver") treasury on the cash market, and borrows to pay for this purchase. They can borrow at a rate better than libor, though, because libor is for unsecured loans whereas here the trader can offer good collateral (the treasury that they're buying).

I believe the appropriate rate is the repo rate:
https://www.newyorkfed.org/markets/trea ... ence-rates

You can check how close this is on any given day by looking at
https://www.cmegroup.com/tools-informat ... ytics.html

Unfortunately I haven't been able to find any alternative to bloomberg for other countries' government bonds.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by bgf » Thu Aug 09, 2018 7:04 pm

I think what might be throwing people is that this is not designed to act like a 60/40 portfolio from a volatility standpoint. It still has a 90% equity exposure and all that goes with that. The difference is going to be that over the long term you get the upside of 90% equity as opposed to only 60% while also getting the consistent return on the Treasury ladder through the futures exposure, which is a notional amount of 1.5x the bond exposure of a 60/40.

The expense ratio is a bit higher than a 60/40 but not by leaps and bounds (.20 is pretty low for a "managed account"). Also, rolling over Treasury futures will be incredibly cheap. As for benefits, in a taxable account this is more tax efficient than a 60/40.

If I invest in this, it would not be to replace a 60/40 portfolio; I would include it as part of my US Equity allocation in my taxable account.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Jacobkg » Thu Aug 09, 2018 7:45 pm

Here is my question:

Is this fund getting any interest payouts for its bond exposure? Or in other words, is it tracking the price of bonds excluding coupons or is it tracking the total return of bonds including coupons.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Aug 09, 2018 7:52 pm

bgf wrote:
Thu Aug 09, 2018 7:04 pm
I think what might be throwing people is that this is not designed to act like a 60/40 portfolio from a volatility standpoint. It still has a 90% equity exposure and all that goes with that. The difference is going to be that over the long term you get the upside of 90% equity as opposed to only 60% while also getting the consistent return on the Treasury ladder through the futures exposure, which is a notional amount of 1.5x the bond exposure of a 60/40.

The expense ratio is a bit higher than a 60/40 but not by leaps and bounds (.20 is pretty low for a "managed account"). Also, rolling over Treasury futures will be incredibly cheap. As for benefits, in a taxable account this is more tax efficient than a 60/40.

If I invest in this, it would not be to replace a 60/40 portfolio; I would include it as part of my US Equity allocation in my taxable account.
I agree, but you can't ignore the impact rate hikes would have on the large bond holdings.

I would consider it 90% equities, and 10% bonds when making new purchases for and rebalancing my portfolio. And I'd note that 10% was leveraged to remind myself I need to pay attention to rate increases and duration if I needed to sell some for say expenses until I start using retirement accounts.
columbia wrote:
Thu Aug 09, 2018 5:35 pm
Take me through the mechanics of a 40% drop in the market. This fund performs better than Vanguard Balanced Index because ________.

(I think I know why, but would be interested in the real answer.)

Thanks
I guess that depends on how you used it.

If you wanted to benchmark it against a 60%-40%, you'd only have 67% of NTSX in your portfolio. That should approximate returns from a fully invested 60%-40% (a little less after NTSX's higher ER and futures cost).

So perhaps how well you do depends on what you did with the other 33%. If there is an asset class out there that will do well in rising rates and also in market crashes, then I imagine that's what you want. Gold or some other alternative?

For me, I'd consider NTSX to be 90% equities and 10% bonds that really need to be held to their duration to avoid loss if rates rise because the leverage is going to magnify the loss.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Aug 09, 2018 7:54 pm

Jacobkg wrote:
Thu Aug 09, 2018 7:45 pm
Here is my question:

Is this fund getting any interest payouts for its bond exposure? Or in other words, is it tracking the price of bonds excluding coupons or is it tracking the total return of bonds including coupons.
Coupons included but they are taxed as 60% long term and 40% short term capital gains I believe.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by MnD » Thu Aug 09, 2018 9:56 pm

So for example in a 1960's style market of poor stock returns and poor bond returns from rising interest rates, does the $10K invested have the downside exposure of $9K invested in stocks and $6K invested in Treasury bonds? If so and considering how bad 60/40 did in that environment, 90/60 could get really ugly.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Taylor Larimore » Thu Aug 09, 2018 10:13 pm

hdas wrote:
Wed Aug 08, 2018 4:36 pm
Excellent new addition:

https://www.wisdomtree.com/etfs/asset-allocation/ntsx

Expense Ratio: 0.2
hdas:

Whenever I am tempted with a new and complex investment product, I remember these words:
"As a mathematician I know when mathematical-sounding analyses are little more than elaborate sales pitches, designed to thoroughly obscure the simple fact that smart investing is non-mathematical and accessible to everyone." -- Michael Edesess, author of "The Big Investment Lie"
Best wishes.
Taylor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by unclescrooge » Thu Aug 09, 2018 11:27 pm

vineviz wrote:
Wed Aug 08, 2018 9:10 pm
columbia wrote:
Wed Aug 08, 2018 7:52 pm
Historically since 1930, a portfolio like this would have theoretically had returns about 24% higher than a 100/0 portfolio with 8% less annual volatility. So I think it is interesting in principle.
Out of curiosity: link?
Here's a link to a backtest in PortfolioVisualizer (with the caveat the quick 1.5x simulation I made may or may not match what this new ETF actually produces.

NOTE: I did NOT simulate expenses, though at 20bps I don't think that matters an awful lot.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Portfolio 1 is 100% large cap stocks (the SBBI total return series).

Image

Interestingly, the drawdowns for the 90/60 portfolio were slightly smaller than those for the 100/0 portfolio but it remains to be seen how well the futures contracts perform for this fund is a truly stressful market.
Why would a 5x leveraged bond exposure be a good thing in a rising or flat interest rate environment?

I can understand it did well over the past 40 year bull market in bonds, but I fail to understand why it's so great now?

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Theoretical » Fri Aug 10, 2018 12:16 am

So here's a comparison using live funds as follows:

Fund 1 is the standard Vanguard S&P 500
Fund 2 is PIMCO's Stocks Plus Institutional Class fund. This fund combines S&P 500 futures with their active bond strategy. More importantly, it's been live since the early 1990s
Fund 3 is 90% Vanguard S&P; 60% Northern Trust Treasury Index (a Total Market Treasury index fund); and -50% Cash (the 3 month t-bill rate), a simulation of this fund. Given the notes above regarding the repo rate, this is probably too much of a rate penalty since the repo rate is closer to a 1 month t-bill than the 3.

https://bit.ly/2vxKu4X

Looking at Tyler 9000's Portfolio Charts.com, what you see is the portfolio is definitely closer to a 90% equities standard deviation and ulcer index level, but has no worse length of drawdown. Combine it with something like TIPS (on the most cautious) or Commodities/Gold/Managed Futures (on the riskier) and its definitely a more efficient portfolio without taking on undue liquidity risk on the strategy side (well assuming the ETF itself gains assets). Also, in a rising environment, this will be a lot more tax-efficient due to the futures tax treatment.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Theoretical » Fri Aug 10, 2018 11:34 am

Something else to consider is that this is a very tax-efficient way to go for people or trusts in the top tax bracket, particularly trust beneficiaries. Their white papers explicitly talk about tax efficiency on deferring the capital gains on equities and taking advantage of futures rates on the bonds.

Let’s say you’re running a trust and you want to accumulate income. You need tax efficient equities and to minimize the risks of loss on the fixed income side. But you don’t want to invest exclusively in municipal bonds due to credit risk.

Say you’re targeting 50% equities downside risk.We will ignore international for simplicity’s sake and just do us and bonds.

You’d use this for 55% of the portfolio, giving you 49.5% S&P 500 and 33% treasuries. Then you’d invest the rest in municipal bond funds.

50% stocks
33% treasuries (42% of bonds)
45% municipal bonds (58% of bonds)
(28%) repo rate - 1 mo tbill

The stocks’ dividends are taxed at 23.8%.
The treasuries are taxed at a combined 31.6%
The munis are 0% (assume a 0 tax state)

Your combined bond portfolio now has a two rate of 13.28% AND is 40% treasuries. Especially since prerefunded bonds (post 2017) are no longer tax exempt, this approach gets you to the same place.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Fri Aug 10, 2018 11:46 am

unclescrooge wrote:
Thu Aug 09, 2018 11:27 pm
vineviz wrote:
Wed Aug 08, 2018 9:10 pm
columbia wrote:
Wed Aug 08, 2018 7:52 pm
Historically since 1930, a portfolio like this would have theoretically had returns about 24% higher than a 100/0 portfolio with 8% less annual volatility. So I think it is interesting in principle.
Out of curiosity: link?
Here's a link to a backtest in PortfolioVisualizer (with the caveat the quick 1.5x simulation I made may or may not match what this new ETF actually produces.

NOTE: I did NOT simulate expenses, though at 20bps I don't think that matters an awful lot.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Portfolio 1 is 100% large cap stocks (the SBBI total return series).

Image

Interestingly, the drawdowns for the 90/60 portfolio were slightly smaller than those for the 100/0 portfolio but it remains to be seen how well the futures contracts perform for this fund is a truly stressful market.
Why would a 5x leveraged bond exposure be a good thing in a rising or flat interest rate environment?

I can understand it did well over the past 40 year bull market in bonds, but I fail to understand why it's so great now?
Are you saying one should not own bonds?

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by unclescrooge » Fri Aug 10, 2018 7:12 pm

whodidntante wrote:
Fri Aug 10, 2018 11:46 am
unclescrooge wrote:
Thu Aug 09, 2018 11:27 pm
vineviz wrote:
Wed Aug 08, 2018 9:10 pm
columbia wrote:
Wed Aug 08, 2018 7:52 pm
Historically since 1930, a portfolio like this would have theoretically had returns about 24% higher than a 100/0 portfolio with 8% less annual volatility. So I think it is interesting in principle.
Out of curiosity: link?
Here's a link to a backtest in PortfolioVisualizer (with the caveat the quick 1.5x simulation I made may or may not match what this new ETF actually produces.

NOTE: I did NOT simulate expenses, though at 20bps I don't think that matters an awful lot.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Portfolio 1 is 100% large cap stocks (the SBBI total return series).

Image

Interestingly, the drawdowns for the 90/60 portfolio were slightly smaller than those for the 100/0 portfolio but it remains to be seen how well the futures contracts perform for this fund is a truly stressful market.
Why would a 5x leveraged bond exposure be a good thing in a rising or flat interest rate environment?

I can understand it did well over the past 40 year bull market in bonds, but I fail to understand why it's so great now?
Are you saying one should not own bonds?
No. I'm 20% in bonds. I'm just unsure why using this fund to replace my existing allocation is better.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by stlutz » Fri Aug 10, 2018 8:23 pm

What is the advantage of using this fund to lever up my fixed income holding as opposed just using long-term zeros (i.e. EDV)?

Both approaches are making a big bet that stocks and bonds will not both do poorly at the same time.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Fri Aug 10, 2018 9:19 pm

stlutz wrote:
Fri Aug 10, 2018 8:23 pm
What is the advantage of using this fund to lever up my fixed income holding as opposed just using long-term zeros (i.e. EDV)?

Both approaches are making a big bet that stocks and bonds will not both do poorly at the same time.
This fund is providing more overall exposure to the markets, and its fixed income exposure (although levered up) has much shorter duration than EDV.

To get the same 90% equity exposure using an S&P 500 index fund, you'd be limited to 10% in EDV.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by triceratop » Fri Aug 10, 2018 9:57 pm

Another way to state this is that it would work well for those who wanted aggressive term and market beta exposures but don’t trust the market to accurately price long-term nominal bonds (for the usual reasons).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by stlutz » Fri Aug 10, 2018 10:26 pm

Isn't the whole bit about having 90% stocks just a gimmick?

Why not just have a Treasury fund that's levered 6x and then I'll chose the mix of equities that I want (might be a mix of total US, total international and maybe smallcap value)?

EDV doesn't lever at 6x vs., say GOVT (total treasury market), so I can see where the futures are useful in that case.

I agree that the price tag on the fund is reasonable and that it's really not that complicated. Treasury futures aren't any more complex to explain than how many of the bonds in Total Bond work (actually they're more straightforward).

So, I don't have any real objection to the fund--I just don't see the use unless you're pursuing one of those strategies of mixing a bunch of highly risky assets and expecting a low risk portfolio overall.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Fri Aug 10, 2018 11:20 pm

stlutz wrote:
Fri Aug 10, 2018 10:26 pm

Why not just have a Treasury fund that's levered 6x and then I'll chose the mix of equities that I want (might be a mix of total US, total international and maybe smallcap value)?
Do you know of any such funds? And I don't mean funds that reset leverage daily. I don't see any.

I could be totally wrong about this, but I think the stocks would be used for margin calls. Since the fund needs to maintain a certain amount in a margin account which I believe gets adjusted per current bond value, if the value of the bonds drop, the fund would need more money in that account.

How could a 6X bond only ETF maintain it's margin level if the bonds lost value due to rising rates? If it had to liquidate holdings to do so, it couldn't maintain 6X could it?

The Widsom Tree fund is 90%-10% and set to rebalance when that is 5% off. So in cases of large bond losses, you'd have cash moving from stocks into bonds.

Just my guess of course...not really sure if that is a necessary mechanism for the fund to work, but margin calls are a fact of leverage life right so how is the fund dealing with it?

Of is the 10% cash holding sufficient to leverage 6X without the risk of ever facing a margin call. I can't see how it could be or why wouldn't everyone do it? I think stock value is the fallback if circumstanced require it.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Theoretical » Sat Aug 11, 2018 12:24 am

From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Iridium » Sat Aug 11, 2018 12:37 am

Theoretical wrote:
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
I'm not sure that margin calls would be a major factor in this fund. If the fund does poorly on its futures, it will have less than 10% cash and thus sell stocks for cash anyway to maintain its target asset allocation. No margin call needed.

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