(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 » Thu Dec 06, 2018 9:11 am

So it’s benchmark appears to be:

50% equity
30% intermediate bond
20% long/short equity

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

Post by typical.investor » Thu Dec 06, 2018 9:23 am

columbia wrote:
Thu Dec 06, 2018 9:11 am
So it’s benchmark appears to be:

50% equity
30% intermediate bond
20% long/short equity
Why do you believe that?

I don't think long/short equity applies to the 90/60 fund.

The Principal Risks listed in the prospectus doesn't list Short Sales Risk.

So I don't believe that's the appropriate benchmark.
Last edited by typical.investor on Thu Dec 06, 2018 9:27 am, edited 1 time in total.

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

Post by columbia » Thu Dec 06, 2018 10:10 am

typical.investor wrote:
Thu Dec 06, 2018 9:23 am
columbia wrote:
Thu Dec 06, 2018 9:11 am
So it’s benchmark appears to be:

50% equity
30% intermediate bond
20% long/short equity
Why do you believe that?

I don't think long/short equity applies to the 90/60 fund.

The Principal Risks listed in the prospectus doesn't list Short Sales Risk.

So I don't believe that's the appropriate benchmark.
Basing that on this:
https://www.wisdomtree.com/blog/2018-08 ... -fund-ntsx

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

Post by international001 » Thu Dec 06, 2018 10:23 am

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

Link is telling me that '9060SIM'

How do you backtest with leverage in PV?

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

Post by typical.investor » Thu Dec 06, 2018 10:31 am

columbia wrote:
Thu Dec 06, 2018 10:10 am
typical.investor wrote:
Thu Dec 06, 2018 9:23 am
columbia wrote:
Thu Dec 06, 2018 9:11 am
So it’s benchmark appears to be:

50% equity
30% intermediate bond
20% long/short equity
Why do you believe that?

I don't think long/short equity applies to the 90/60 fund.

The Principal Risks listed in the prospectus doesn't list Short Sales Risk.

So I don't believe that's the appropriate benchmark.
Basing that on this:
https://www.wisdomtree.com/blog/2018-08 ... -fund-ntsx
Read it again. It's clearly not the benchmark.

What it is is a hypothetical portfolio with desirable characteristics offered by alternatives.

So by using the leveraged 90/60 fund, you can have full access to core holdings (stocks and bonds) but by using less capital. Thus you will have money left over to hold alternatives which sometimes be a drag on returns (commodities for instance) without having to worry about the drag because you are fully invested.

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2pedals
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by 2pedals » Thu Dec 06, 2018 11:28 am

Interesting fund, but I will not be investing in this fund. It would violate my self imposed rule that risks are to be taken on the equity side of the asset allocation and 90% equity is too much for me (I would be unable to sleep well at night). Entering the futures markets on the bond side will increase risks.

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

Post by vineviz » Thu Dec 06, 2018 12:06 pm

international001 wrote:
Thu Dec 06, 2018 10:23 am
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

Link is telling me that '9060SIM'

How do you backtest with leverage in PV?
I must have made a custom series, but I've since deleted it.

You can get an approximation by building a portfolio that is 90% stocks, 60% bonds and -50% cash.

https://www.portfoliovisualizer.com/bac ... ion3_1=-50
"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 Northern Flicker » Thu Dec 06, 2018 12:25 pm

nisiprius wrote:
Wed Aug 08, 2018 7:06 pm
This is weird. I thought maybe the prospectus would help me. On this page, it says
click here to view or download prospectus[/url]
When I clicked on that link, this is what I saw. How about you?

Image

Reproduced with both Safari 11.1.2 (13605.3.8) and Firefox 61.0.1 (64-bit), Mac OS X 10.13.6.
It’s a bug in the URL string the code invoked by that link is trying to execute.
Taking a break from Bogleheads.

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

Post by vineviz » Thu Dec 06, 2018 12:56 pm

2pedals wrote:
Thu Dec 06, 2018 11:28 am
Interesting fund, but I will not be investing in this fund. It would violate my self imposed rule that risks are to be taken on the equity side of the asset allocation and 90% equity is too much for me (I would be unable to sleep well at night). Entering the futures markets on the bond side will increase risks.
The fund is not really intended to be the only holding in a portfolio, so when used as designed you wouldn't necessarily have 90% equity exposure.

For instance, since 2004 simple 60/40 portfolio (e.g. VBINX, Vanguard Balanced Index) had 60% equity exposure with annual returns of 6.89% and a maximum drawdown of 32.57%.

Diversifying with 5% in gold (e.g. GLD, SPDR Gold Shares ETF) and 15% in international bonds (e.g. PFORX, PIMCO International Bond (USD-Hdg) ) would have reduced the drawdown to 27.45% and kept annual returns fairly steady at 6.88%. This portfolio had an equity exposure of 48%.

Keeping the 5% gold and 15% international bonds but using NTSX instead of VBINX creates a much more efficient portfolio. You'd only need 66.7% in NTSX to get back to the 60% net equity exposure you started with, freeing up 18.3% of the portfolio to go back into bonds (e.g. VFITX, Vanguard Interm-Term Treasury). This portfolio had annual returns of 8.31%, with is about 20% higher than with the original portfolio, with less downside risk: maximum drawdown was just 25.77%.

https://www.portfoliovisualizer.com/bac ... 9_2=-33.33

To recap, that's higher returns and lower risk with the same equity exposure.
"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 whodidntante » Thu Dec 06, 2018 1:50 pm

I evaluated investing in Treasury futures directly, since I don't really need a fund to do that for me. My conclusion is that buying Treasury futures provide most of the interest rate risk with only a small yield, with the yield curve as flat as it is right now.

I don't think this fund should be owned by anyone.

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

Post by vineviz » Thu Dec 06, 2018 3:08 pm

whodidntante wrote:
Thu Dec 06, 2018 1:50 pm
I evaluated investing in Treasury futures directly, since I don't really need a fund to do that for me. My conclusion is that buying Treasury futures provide most of the interest rate risk with only a small yield, with the yield curve as flat as it is right now.

I don't think this fund should be owned by anyone.
It's possible that there are at least some investors who have preferences and/or circumstances that differ from yours.
"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 ThrustVectoring » Thu Dec 06, 2018 3:24 pm

whodidntante wrote:
Thu Dec 06, 2018 1:50 pm
I evaluated investing in Treasury futures directly, since I don't really need a fund to do that for me. My conclusion is that buying Treasury futures provide most of the interest rate risk with only a small yield, with the yield curve as flat as it is right now.

I don't think this fund should be owned by anyone.
I've also been evaluating direct investment in Treasury futures, and think that's at least a significantly better option than this fund. My conclusions are somewhat different, though - the carry on the short end of the curve is significant at the risk level it represents, and a flat yield curve makes a long/short "steepener" trade pretty attractive. Like, the 2-year treasury futures contract right now is yielding 30 basis points above the implied repo rate - that seems to me like a reasonable price to be paid to take on that amount of interest rate risk.
Current portfolio: 60% VTI / 40% VXUS

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

Post by Taylor Larimore » Thu Dec 06, 2018 7:12 pm

This fund is not complicated and is potentially very useful to investors who want a portfolio a little more sophisticated than a straight market-cap weighted approach.
Bogleheads:
“Simplicity is the ultimate sophistication.” -- Leonardo da Vinci
In my opinion, and more importantly, in the opinion of Mr. Bogle and many others, "Simplicity is the Master Key to investment success."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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

Post by rhe » Thu Dec 06, 2018 7:39 pm

ThrustVectoring wrote:
Thu Dec 06, 2018 3:24 pm
whodidntante wrote:
Thu Dec 06, 2018 1:50 pm
I evaluated investing in Treasury futures directly, since I don't really need a fund to do that for me. My conclusion is that buying Treasury futures provide most of the interest rate risk with only a small yield, with the yield curve as flat as it is right now.

I don't think this fund should be owned by anyone.
I've also been evaluating direct investment in Treasury futures, and think that's at least a significantly better option than this fund. My conclusions are somewhat different, though - the carry on the short end of the curve is significant at the risk level it represents, and a flat yield curve makes a long/short "steepener" trade pretty attractive. Like, the 2-year treasury futures contract right now is yielding 30 basis points above the implied repo rate - that seems to me like a reasonable price to be paid to take on that amount of interest rate risk.
I reached a similar conclusion. I have a large position in 2 year treasuries, plus a steepener trade. I agree that the longer maturity treasuries look like a bad deal because the yield curve is so flat.

The position has been a good one to have this year.

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

Post by vineviz » Thu Dec 06, 2018 7:54 pm

Taylor Larimore wrote:
Thu Dec 06, 2018 7:12 pm
This fund is not complicated and is potentially very useful to investors who want a portfolio a little more sophisticated than a straight market-cap weighted approach.
Bogleheads:
“Simplicity is the ultimate sophistication.” -- Leonardo da Vinci
In my opinion, and more importantly, in the opinion of Mr. Bogle and many others, "Simplicity is the Master Key to investment success."
I agree, but there are many investors with enough financial knowledge to consider a fund like this to the epitome of simplicity.
"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 Theoretical » Thu Dec 06, 2018 10:52 pm

vineviz wrote:
Thu Dec 06, 2018 7:54 pm
Taylor Larimore wrote:
Thu Dec 06, 2018 7:12 pm
This fund is not complicated and is potentially very useful to investors who want a portfolio a little more sophisticated than a straight market-cap weighted approach.
Bogleheads:
“Simplicity is the ultimate sophistication.” -- Leonardo da Vinci
In my opinion, and more importantly, in the opinion of Mr. Bogle and many others, "Simplicity is the Master Key to investment success."
I agree, but there are many investors with enough financial knowledge to consider a fund like this to the epitome of simplicity.
Especially because it's not doing anything untoward with the treasury futures, by design. It's functionally doing the same trading practices as most index funds do to provide liquidity for redemptions by holding cash and e-mini S&P futures yet still being fully invested rather than have a cash drag.

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

Post by international001 » Fri Dec 07, 2018 5:19 pm

vineviz wrote:
Thu Dec 06, 2018 12:06 pm

I must have made a custom series, but I've since deleted it.

You can get an approximation by building a portfolio that is 90% stocks, 60% bonds and -50% cash.

https://www.portfoliovisualizer.com/bac ... ion3_1=-50
Oh.. negative CASHX.

Excuse my ignorance. What does this mean exactly? The fund is doing some leveraging, but what does it mean leveraging through CASHX

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

Post by vineviz » Fri Dec 07, 2018 5:25 pm

international001 wrote:
Fri Dec 07, 2018 5:19 pm
vineviz wrote:
Thu Dec 06, 2018 12:06 pm

I must have made a custom series, but I've since deleted it.

You can get an approximation by building a portfolio that is 90% stocks, 60% bonds and -50% cash.

https://www.portfoliovisualizer.com/bac ... ion3_1=-50
Oh.. negative CASHX.

Excuse my ignorance. What does this mean exactly? The fund is doing some leveraging, but what does it mean leveraging through CASHX
Mostly this is just the easiest way in Portfolio Visualizer to simulate a leveraged portfolio.

It's roughly analogous to the way you'd lever in real life (e.g. borrowing at some rate in order to purchase securities on margin, or holding cash as collateral on a futures contract), but I make no promises about whether shorting cash (i.e. borrowing at the 30-day Tbill rate) is a good approximation of the cost of leverage for NTSX. My guess is that it overestimates the costs fo leverage, but I don't know for sure.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by columbia » Fri Dec 07, 2018 7:31 pm

Dropped 3.94% today (vs. 2.29% for TSM).

That’s the kind of thing its owners are expecting?

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

Post by PlateVoltage » Sat Dec 08, 2018 9:43 am

columbia wrote:
Fri Dec 07, 2018 7:31 pm
Dropped 3.94% today (vs. 2.29% for TSM).

That’s the kind of thing its owners are expecting?
No, I was expecting it to lose about 0.63%.

https://finance.yahoo.com/quote/NTSX/

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

Post by hdas » Sat Dec 08, 2018 12:25 pm

PlateVoltage wrote:
Sat Dec 08, 2018 9:43 am
columbia wrote:
Fri Dec 07, 2018 7:31 pm
Dropped 3.94% today (vs. 2.29% for TSM).

That’s the kind of thing its owners are expecting?
No, I was expecting it to lose about 0.63%.

https://finance.yahoo.com/quote/NTSX/
This is indeed interesting and deserves an explanation. That kind of difference it's not normal. I would note that ultra bond futures (25+ years) were down a tad on Friday, but even with that....I don't think their duration target is that long....should be closer to 5yr. Definitely something for our in house detective Nisispirus to look into :wink:
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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

Post by vineviz » Sat Dec 08, 2018 3:56 pm

hdas wrote:
Sat Dec 08, 2018 12:25 pm
PlateVoltage wrote:
Sat Dec 08, 2018 9:43 am
columbia wrote:
Fri Dec 07, 2018 7:31 pm
Dropped 3.94% today (vs. 2.29% for TSM).

That’s the kind of thing its owners are expecting?
No, I was expecting it to lose about 0.63%.

https://finance.yahoo.com/quote/NTSX/
This is indeed interesting and deserves an explanation. That kind of difference it's not normal. I would note that ultra bond futures (25+ years) were down a tad on Friday, but even with that....I don't think their duration target is that long....should be closer to 5yr. Definitely something for our in house detective Nisispirus to look into :wink:
I think the point is that NTSX did NOT actually lose 3.94% on Friday. It was only down 0.63%.
"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 international001 » Sat Dec 08, 2018 4:44 pm

vineviz wrote:
Fri Dec 07, 2018 5:25 pm


Mostly this is just the easiest way in Portfolio Visualizer to simulate a leveraged portfolio.

It's roughly analogous to the way you'd lever in real life (e.g. borrowing at some rate in order to purchase securities on margin, or holding cash as collateral on a futures contract), but I make no promises about whether shorting cash (i.e. borrowing at the 30-day Tbill rate) is a good approximation of the cost of leverage for NTSX. My guess is that it overestimates the costs fo leverage, but I don't know for sure.
So at what rate at you borrowing? And how long do you have to pay?

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

Post by dalbright » Wed Feb 13, 2019 9:11 pm

Did anyone end up pulling the trigger on this fund? Wish it had a bit more volume by now...

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

Post by AlohaJoe » Wed Feb 13, 2019 10:09 pm

dalbright wrote:
Wed Feb 13, 2019 9:11 pm
Did anyone end up pulling the trigger on this fund? Wish it had a bit more volume by now...
Yikes, only $18,000 of volume a day. Makes it tough to build up a real position!

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

Post by BanditKing » Wed Feb 13, 2019 10:56 pm

I own 52 shares in my Vanguard account (it's a free-trade ETF), valued today at just under $1300. Performance has been "meh" and I don't expect to purchase more. I may dump it when I hit one year. Honestly, doesn't seem to be performing as one would expect.

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

Post by PluckyDucky » Wed Feb 13, 2019 11:11 pm

BanditKing wrote:
Wed Feb 13, 2019 10:56 pm
I own 52 shares in my Vanguard account (it's a free-trade ETF), valued today at just under $1300. Performance has been "meh" and I don't expect to purchase more. I may dump it when I hit one year. Honestly, doesn't seem to be performing as one would expect.
With an inception in August 2018 and a terrible December 2018, a fund with 90% equity isn't going to look fantastic.

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

Post by BanditKing » Wed Feb 13, 2019 11:13 pm

PluckyDucky wrote:
Wed Feb 13, 2019 11:11 pm
With an inception in August 2018 and a terrible December 2018, a fund with 90% equity isn't going to look fantastic.
Well that is very true. Time will tell.

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

Post by typical.investor » Wed Feb 13, 2019 11:16 pm

BanditKing wrote:
Wed Feb 13, 2019 11:13 pm
PluckyDucky wrote:
Wed Feb 13, 2019 11:11 pm
With an inception in August 2018 and a terrible December 2018, a fund with 90% equity isn't going to look fantastic.
Well that is very true. Time will tell.
And two rates hikes since its inception. For a fund 60% in bonds, that’s not good either.

Still, it’s done better than the S&P500.

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

Post by PlateVoltage » Wed Feb 13, 2019 11:18 pm

BanditKing wrote:
Wed Feb 13, 2019 10:56 pm
Honestly, doesn't seem to be performing as one would expect.
What were you expecting?

https://www.portfoliovisualizer.com/bac ... ion4_2=-50

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

Post by dalbright » Thu Feb 14, 2019 6:53 am

To me the perk is that vanguard hasn't "banned" this option compared to the other leveraged funds. It sure did have poor timing on when it got released...

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

Post by nisiprius » Thu Feb 14, 2019 9:20 am

WisdomTree's presentation, WisdomTree 90/60 US Balanced Fund NTSX says
WisdomTree’s approach applies 1.5x accounting leverage to a traditional 60/40 portfolio to create exposure equal to 90% equities, 60% bonds.
The obvious "expectation" for this fund, then, is that it will be a 1.5X-magnified copy of a 60/40 fund, minus the cost of leverage. A convenient comparison is to the Vanguard Balanced Index Fund, VBIAX, which is equivalent to a continuously-rebalanced portfolio of 60% Total Stock, 40% Total Bond, and we can use a money market mutual fund to represent the risk-free rate for a short-term investment or loan.

If I owned NTSX, my expectation or hope would be that if that it is doing its job, compared to VBIAX, it should have 1.5X the volatility as measured by standard deviation, and 1.5X the maximum drawdown.

As for return, since leverage can't be a free lunch, we would expect NTSX to have the same Sharpe ratio as VBIAX. The cost of leverage should be equal to 0.5X the return of a risk-free (in the sense of volatility-free) investment, and a money market fund would be a reasonable example of a such an investment.

Source
Image
Overall, the main picture is that overall, on a $10,000 investment, VBIAX made $51, NTSX lost $13, and the "riskless" VMMXX made $122. Our "expectation" is that NTSX = 1.5X VBIAX - 0.5X VMMXX. 1.5 x $51 - 0.5 x $122 = $76.5 - $61 = +$15.5. My personal judgement is, eh, it's all zero. But there was a shortfall relative to expectation, NTSX lost -$13 when it "should" have made +$15, so a $28 shortfall on a $10,000 investment over six months. The question is whether that pattern persists over meaningful periods of time and money.

The expectation is that drawdowns should be magnified by 1.5X. (Or more, due to the cost of leverage? I'm not sure). Anyway, between 9/31/2018 and 12/24/2018,
NTSX fell from $10,234 to $8,625 = -$1,609
VBIAX fell from $10,034 to $9,042 = -$992
My expectation was a 1.5X magnification, and 1,609/992 = 1.6X, so, close.

For standard deviation and Sharpe ratio, I will use PortfolioVisualizer, Source, and just treat the results uncritically.

(Sep 2018 - Jan 2019)
Standard deviation, NTSX 20.81%, VBIAX 15.32%, ratio 1.36X, expected 1.5X, so NTSX was less volatile than expected.
Max drawdown, NTSX -11.24%, VBIAX -8.21%, ratio 1.37X, expected 1.5X, so, again, less drawdown than expected.
Sharpe ratio, NTSX -0.52, VBIAX -0.57--expected equal, and this is a negative Sharpe ratio, so NTSX was better than expected.

Notice that this is a different time range than the Morningstar chart, and shows a time period over which both funds had losses.

In short... overall... you know, I hate leverage and clever-clever strategies and so forth, and six months is nothing at all, but so far I see nothing obvious to complain about in NTSX. It looks to me as if it is doing the job I would have expected it to do: 60/40, times 1.5, minus cost of leverage.

Of course, as I understand it, the idea is not to use this fund by itself, but to use it as part of a big-deal capital-s Strategy. If you must have boring old 60/40, which you could buy from anybody, instead you should buy this special thing you can only get from WisdomTree... and then you can use less of it, thus freeing up portfolio space that you can now fill with other stuff you can buy from WisdomTree. The result is supposed to be overall portfolio that is an improvement on 60/40 by itself. The real question is whether that strategy is performing as expected, but I'm sure it's much too early to tell.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by cheezit » Thu Feb 14, 2019 11:23 am

How much of this is explained by the difference between 60% TSM + 40% TBM vs 60% S&P 500 + 40% intermediate treasuries before the leverage is applied?

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

Post by EfficientInvestor » Thu Feb 14, 2019 1:08 pm

In the Asness, "Why Not 100% Equities," article from 1996, he states in the Modern Finance section that, "...an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Share ratio". He then goes on in the paper to suggest that leverage can then be applied to this optimal asset allocation (AA) to produce results that have a better return with comparable standard deviation (SD) than 100% equities. Then, in his conclusions, he states that, "Furthermore, this optimal mix of risky assets is the same for each investor." In other words, everyone should invest with the same asset allocation and then adjust risk up and down with leverage instead of adjusting risk by committing more allocation to stocks.

I agree with all of this. However, I'm confused as to why he presents data on a 60/40 portfolio (and why WisdomTree (WT) uses the same stock:bond ratio of 1.5:1) when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70. See backtest here using large cap stocks and int. treasury bonds: https://www.portfoliovisualizer.com/opt ... teTreasury

All that said, wouldn't it be best to forego the use of this WT fund and create your own leveraged fund? There can be debate over which type of product is best for obtaining leverage, but let's assume leveraged ETFs for now due to ease of use. Instead of buying the WisdomTree fund, you could do a 30/70 (or something between that and 40/60) of either SSO/UST (2X) or UPRO/TYD (3X). The backtest below approximates what these funds would have done in the past compared to what the WisdomTree 90/60 would have done. The backtest uses VFINX for stock, VFITX for bonds, and CASHX to represent the borrowing cost for leverage.

Nov 1991 - Jan 2019
1.5X 60/40 (WT 90/60) - CAGR = 10.9%, SD = 12.5%, Max DD = -40.9%
2X 30/70 - CAGR = 11.4%, SD = 10.0%, Max DD = -20.6%
3X 30/70 - CAGR = 15.5%, SD = 14.9%, Max DD = -30.5%
S&P 500 - CAGR = 9.4%, SD = 14.2%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... on3_3=-200

As the results show, the 2X 30/70 would have outpaced the WT fund by 0.5%/year with a lower SD and 1/2 the max DD. The 3X 30/70 would have greatly outpaced everything and would have still had less max DD than the WT fund. Nothing against WT, but maybe they should consider a WisdomTree 90/210 fund instead of 90/60?

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

Post by nisiprius » Thu Feb 14, 2019 2:42 pm

EfficientInvestor wrote:
Thu Feb 14, 2019 1:08 pm
...I'm confused as to why [people] presents data on a 60/40 portfolio ... when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70...
I've been wondering about that myself for quite a while. For 1926 through 2017, using SBBI "large company stocks" (S&P 500 and predecessors) and "intermediate-term government bonds," the highest Sharpe ratio was at 27/72:

Image

The origins of 60/40 as the "policy portfolio" gets more and more mysterious the more I've looked at it. You have to cherry-pick carefully to find any period of time over which 60/40 was the optimum. One theory that's been suggested in the forum is that, at the time when Harry Markowitz' work was becoming well known, 60/40 actually was the optimum over some data set that was easily available. (Note that "back to 1926" data you see everywhere is usually CRSP data, and the CRSP wasn't founded until 1960). Another theory is that since many investors don't want leverage... or, possibly, that it wasn't allowed in the pension funds and other institutional investments that were trying to apply MPT... 30/70 had a higher Sharpe ratio but not enough return, and 60/40 was some kind of psychological compromise.
...maybe they should consider a WisdomTree 90/210 fund instead of 90/60?...
Something in the general area of 20/80 or 30/70 not only has the highest Sharpe ratio, it is also about the ratio that would be dictated by "risk parity" if the only two assets were stocks and bonds.

I don't really know if "risk parity" makes sense as an idea, and the phrase was apparently coined by Ray Dalio and includes not only the concepts of equal risk contributions, but also four specific asset classes, so "risk parity using only stocks and bonds" might not be an appropriate use of the phrase.

Again, though, WisdomTree seems to be suggesting this fund, not as a plug-compatible replacement for 60/40, but as a building block they want to use for building specific strategies; that is, it's only intended as a component in some other strategy.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hohum » Thu Feb 14, 2019 9:18 pm

EfficientInvestor wrote:
Thu Feb 14, 2019 1:08 pm
In the Asness, "Why Not 100% Equities," article from 1996, he states in the Modern Finance section that, "...an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Share ratio". He then goes on in the paper to suggest that leverage can then be applied to this optimal asset allocation (AA) to produce results that have a better return with comparable standard deviation (SD) than 100% equities. Then, in his conclusions, he states that, "Furthermore, this optimal mix of risky assets is the same for each investor." In other words, everyone should invest with the same asset allocation and then adjust risk up and down with leverage instead of adjusting risk by committing more allocation to stocks.

I agree with all of this. However, I'm confused as to why he presents data on a 60/40 portfolio (and why WisdomTree (WT) uses the same stock:bond ratio of 1.5:1) when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70. See backtest here using large cap stocks and int. treasury bonds: https://www.portfoliovisualizer.com/opt ... teTreasury

All that said, wouldn't it be best to forego the use of this WT fund and create your own leveraged fund? There can be debate over which type of product is best for obtaining leverage, but let's assume leveraged ETFs for now due to ease of use. Instead of buying the WisdomTree fund, you could do a 30/70 (or something between that and 40/60) of either SSO/UST (2X) or UPRO/TYD (3X). The backtest below approximates what these funds would have done in the past compared to what the WisdomTree 90/60 would have done. The backtest uses VFINX for stock, VFITX for bonds, and CASHX to represent the borrowing cost for leverage.

Nov 1991 - Jan 2019
1.5X 60/40 (WT 90/60) - CAGR = 10.9%, SD = 12.5%, Max DD = -40.9%
2X 30/70 - CAGR = 11.4%, SD = 10.0%, Max DD = -20.6%
3X 30/70 - CAGR = 15.5%, SD = 14.9%, Max DD = -30.5%
S&P 500 - CAGR = 9.4%, SD = 14.2%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... on3_3=-200

As the results show, the 2X 30/70 would have outpaced the WT fund by 0.5%/year with a lower SD and 1/2 the max DD. The 3X 30/70 would have greatly outpaced everything and would have still had less max DD than the WT fund. Nothing against WT, but maybe they should consider a WisdomTree 90/210 fund instead of 90/60?
Somehow NTSX feels less toxic than the 3x leveraged ETFs though ...

Maybe 3x LETFs give you more bang for the buck, but no one is willing to really commit to them in size -- rational human fear.

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

Post by stemikger » Thu Feb 14, 2019 10:59 pm

Posts like this make me feel so dumb!!! : (

Thank God for Jack and Vanguard's products, I don't have to understand this stuff.
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Thu Feb 14, 2019 11:18 pm

EfficientInvestor wrote:
Thu Feb 14, 2019 1:08 pm
In the Asness, "Why Not 100% Equities," article from 1996, he states in the Modern Finance section that, "...an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Share ratio". He then goes on in the paper to suggest that leverage can then be applied to this optimal asset allocation (AA) to produce results that have a better return with comparable standard deviation (SD) than 100% equities. Then, in his conclusions, he states that, "Furthermore, this optimal mix of risky assets is the same for each investor." In other words, everyone should invest with the same asset allocation and then adjust risk up and down with leverage instead of adjusting risk by committing more allocation to stocks.

I agree with all of this. However, I'm confused as to why he presents data on a 60/40 portfolio (and why WisdomTree (WT) uses the same stock:bond ratio of 1.5:1) when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70. See backtest here using large cap stocks and int. treasury bonds: https://www.portfoliovisualizer.com/opt ... teTreasury

All that said, wouldn't it be best to forego the use of this WT fund and create your own leveraged fund? There can be debate over which type of product is best for obtaining leverage, but let's assume leveraged ETFs for now due to ease of use. Instead of buying the WisdomTree fund, you could do a 30/70 (or something between that and 40/60) of either SSO/UST (2X) or UPRO/TYD (3X). The backtest below approximates what these funds would have done in the past compared to what the WisdomTree 90/60 would have done. The backtest uses VFINX for stock, VFITX for bonds, and CASHX to represent the borrowing cost for leverage.

Nov 1991 - Jan 2019
1.5X 60/40 (WT 90/60) - CAGR = 10.9%, SD = 12.5%, Max DD = -40.9%
2X 30/70 - CAGR = 11.4%, SD = 10.0%, Max DD = -20.6%
3X 30/70 - CAGR = 15.5%, SD = 14.9%, Max DD = -30.5%
S&P 500 - CAGR = 9.4%, SD = 14.2%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... on3_3=-200

As the results show, the 2X 30/70 would have outpaced the WT fund by 0.5%/year with a lower SD and 1/2 the max DD. The 3X 30/70 would have greatly outpaced everything and would have still had less max DD than the WT fund. Nothing against WT, but maybe they should consider a WisdomTree 90/210 fund instead of 90/60?
60/40 simply isn’t the target for Wisdom Tree.

Using 90/60 let’s you get 100% stock/bond exposure and have 33% left over for alternatives.

60/40/33 is what they use to make their case and probably performs better in a rising rate environment than 90/210 does. Depends on your alternatives of course.

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

Post by klaus14 » Fri Feb 15, 2019 10:00 pm

Year to date, SP500 returned 10.06% and treasuries also appreciated. GOVT returned like 0.43%
How could NTSX can return only 8.93% ?

Isn't the math sp500*90% + GOVT*60% - Expense ratio?

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

Post by klaus14 » Fri Feb 15, 2019 10:06 pm

I was intending to increase my bond allocation. Now instead i am thinking replacing my existing US Large Cap allocation with this fund to achieve the same effect. Does it make sense?

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

Post by PlateVoltage » Fri Feb 15, 2019 10:32 pm

klaus14 wrote:
Fri Feb 15, 2019 10:00 pm
Isn't the math sp500*90% + GOVT*60% - Expense ratio?
No, you have to account for the cost of leverage.

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

Post by whodidntante » Fri Feb 15, 2019 11:02 pm

klaus14 wrote:
Fri Feb 15, 2019 10:06 pm
I was intending to increase my bond allocation. Now instead i am thinking replacing my existing US Large Cap allocation with this fund to achieve the same effect. Does it make sense?
It seems to me that this would effectively capture the term risk premium and equity risk premium while shorting cash if you believe the suggested model in this thread, which would not have been the right thing to do lately. It's not an inherently bad thing to do though. It's fine if you have enough conviction in the strategy to continue holding through a period of underperformance. The fund is low cost and well constructed for what it does.

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

Post by klaus14 » Fri Feb 15, 2019 11:07 pm

whodidntante wrote:
Fri Feb 15, 2019 11:02 pm
klaus14 wrote:
Fri Feb 15, 2019 10:06 pm
I was intending to increase my bond allocation. Now instead i am thinking replacing my existing US Large Cap allocation with this fund to achieve the same effect. Does it make sense?
It seems to me that this would effectively capture the term risk premium and equity risk premium while shorting cash if you believe the suggested model in this thread, which would not have been the right thing to do lately. It's not an inherently bad thing to do though. It's fine if you have enough conviction in the strategy to continue holding through a period of underperformance. The fund is low cost and well constructed for what it does.
So if interest rates rise, i would regret this move...

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

Post by columbia » Sun Mar 03, 2019 7:24 am

This fund has still only attracted 5 million dollars.

That *seems* low, but I’ll admit that I don’t know what a reasonable expectation would be at this point.

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

Post by rhe » Sun Mar 03, 2019 7:42 am

columbia wrote:
Sun Mar 03, 2019 7:24 am
This fund has still only attracted 5 million dollars.

That *seems* low, but I’ll admit that I don’t know what a reasonable expectation would be at this point.
My guess would be that anyone who understands why this fund would be useful also understands how to do this themselves at an even lower cost and without much trouble.

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

Post by columbia » Sun Mar 03, 2019 8:13 am

klaus14 wrote:
Fri Feb 15, 2019 11:07 pm
whodidntante wrote:
Fri Feb 15, 2019 11:02 pm
klaus14 wrote:
Fri Feb 15, 2019 10:06 pm
I was intending to increase my bond allocation. Now instead i am thinking replacing my existing US Large Cap allocation with this fund to achieve the same effect. Does it make sense?
It seems to me that this would effectively capture the term risk premium and equity risk premium while shorting cash if you believe the suggested model in this thread, which would not have been the right thing to do lately. It's not an inherently bad thing to do though. It's fine if you have enough conviction in the strategy to continue holding through a period of underperformance. The fund is low cost and well constructed for what it does.
So if interest rates rise, i would regret this move...

I’d like to know the answer to that.

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

Post by whodidntante » Sun Mar 03, 2019 11:23 am

columbia wrote:
Sun Mar 03, 2019 8:13 am
klaus14 wrote:
Fri Feb 15, 2019 11:07 pm
whodidntante wrote:
Fri Feb 15, 2019 11:02 pm
klaus14 wrote:
Fri Feb 15, 2019 10:06 pm
I was intending to increase my bond allocation. Now instead i am thinking replacing my existing US Large Cap allocation with this fund to achieve the same effect. Does it make sense?
It seems to me that this would effectively capture the term risk premium and equity risk premium while shorting cash if you believe the suggested model in this thread, which would not have been the right thing to do lately. It's not an inherently bad thing to do though. It's fine if you have enough conviction in the strategy to continue holding through a period of underperformance. The fund is low cost and well constructed for what it does.
So if interest rates rise, i would regret this move...

I’d like to know the answer to that.
Well, let's deconstruct it a bit until the answer falls out. If we replace "interest rates (what interest rates?)" with "yield to maturity" for the underlying then we are now talking about something relevant. What causes yield to maturity to rise for an existing bond? Demand for the bond is now weaker, most likely because newer issues pay a higher coupon, so the price of the bond has fallen. I.e., no rational investor would pay more for a bond that is guaranteed to return less than another easily purchasable bond.

The "cash" part tends to act as a buffer, taking some of the pain away from the falling price of the underlying bond. But we shorted cash, and are left with term risk exposure. So yes, if yield to maturity for the underlying bonds go up, you should expect to lose money.

But I don't think you should regret it, because you purposely built your portfolio to expose you to term risk, and then the risk showed up. You are playing results, not strategy. That kind of thinking will drive you crazy, because you need to accept the risks you take.

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

Post by turkeysub2011 » Fri Apr 19, 2019 10:44 am

EfficientInvestor wrote:
Thu Feb 14, 2019 1:08 pm
In the Asness, "Why Not 100% Equities," article from 1996, he states in the Modern Finance section that, "...an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Share ratio". He then goes on in the paper to suggest that leverage can then be applied to this optimal asset allocation (AA) to produce results that have a better return with comparable standard deviation (SD) than 100% equities. Then, in his conclusions, he states that, "Furthermore, this optimal mix of risky assets is the same for each investor." In other words, everyone should invest with the same asset allocation and then adjust risk up and down with leverage instead of adjusting risk by committing more allocation to stocks.

I agree with all of this. However, I'm confused as to why he presents data on a 60/40 portfolio (and why WisdomTree (WT) uses the same stock:bond ratio of 1.5:1) when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70. See backtest here using large cap stocks and int. treasury bonds: https://www.portfoliovisualizer.com/opt ... teTreasury

All that said, wouldn't it be best to forego the use of this WT fund and create your own leveraged fund? There can be debate over which type of product is best for obtaining leverage, but let's assume leveraged ETFs for now due to ease of use. Instead of buying the WisdomTree fund, you could do a 30/70 (or something between that and 40/60) of either SSO/UST (2X) or UPRO/TYD (3X). The backtest below approximates what these funds would have done in the past compared to what the WisdomTree 90/60 would have done. The backtest uses VFINX for stock, VFITX for bonds, and CASHX to represent the borrowing cost for leverage.

Nov 1991 - Jan 2019
1.5X 60/40 (WT 90/60) - CAGR = 10.9%, SD = 12.5%, Max DD = -40.9%
2X 30/70 - CAGR = 11.4%, SD = 10.0%, Max DD = -20.6%
3X 30/70 - CAGR = 15.5%, SD = 14.9%, Max DD = -30.5%
S&P 500 - CAGR = 9.4%, SD = 14.2%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... on3_3=-200

As the results show, the 2X 30/70 would have outpaced the WT fund by 0.5%/year with a lower SD and 1/2 the max DD. The 3X 30/70 would have greatly outpaced everything and would have still had less max DD than the WT fund. Nothing against WT, but maybe they should consider a WisdomTree 90/210 fund instead of 90/60?
Agree with this, but the demand for NTSX hasn't been as strong maybe as they would have expected, and the demand for the product you just mentioned would be even lower I'd imagine. There would also be a bit of an issue with margin requirements with that much notional in bond futures, and you likely wouldn't have enough cash to consistently hit 90% exposure to equities (unless they also bought equity futures!).

Having said that, I am hoping that the industry moves towards a direction where leverage isn't as scary as a concept and more ETFs offer retail investors an easy way to increase their sharpe ratio's while keeping expected returns the same. NTSX is a great step forward in that direction, but the demand to diversify away from equities just isnt there given returns in the last decade.

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

Post by TheJoelfather » Fri Apr 19, 2019 12:50 pm

I don't have interest much in NTSX as a "Balanced Fund", but I do find it a valuable option to add faux leverage in "better" balanced portfolios. For example, I was interested in NTSX as a component of an all-weather portfolio and found the right allocation so that my economic exposure was equivalent to an all-weather AA.

Image

If I did the math right, NTSX enables you to add leverage (1.2) to an all-weather portfolio in a non-margin account. Very cool!

There's not much volume, so you'll pay a few cents to a HFT for the privilege of buying but it's negligible if you plan to hold. I paid about a $.03 per share premium based on its implied value. Fidelity has real-time implied value calculations in the detailed quote which makes it easy to set a limit order.

(There's slightly wrong math in connection with the commodities exposure since most commodities hold gold, but I left it out for purposes of the NTSX conversation.)

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

Post by EfficientInvestor » Fri Apr 19, 2019 1:08 pm

turkeysub2011 wrote:
Fri Apr 19, 2019 10:44 am
EfficientInvestor wrote:
Thu Feb 14, 2019 1:08 pm
In the Asness, "Why Not 100% Equities," article from 1996, he states in the Modern Finance section that, "...an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Share ratio". He then goes on in the paper to suggest that leverage can then be applied to this optimal asset allocation (AA) to produce results that have a better return with comparable standard deviation (SD) than 100% equities. Then, in his conclusions, he states that, "Furthermore, this optimal mix of risky assets is the same for each investor." In other words, everyone should invest with the same asset allocation and then adjust risk up and down with leverage instead of adjusting risk by committing more allocation to stocks.

I agree with all of this. However, I'm confused as to why he presents data on a 60/40 portfolio (and why WisdomTree (WT) uses the same stock:bond ratio of 1.5:1) when the AA with the historical highest Sharpe ratio (at least since 1972) is closer to around 30/70. See backtest here using large cap stocks and int. treasury bonds: https://www.portfoliovisualizer.com/opt ... teTreasury

All that said, wouldn't it be best to forego the use of this WT fund and create your own leveraged fund? There can be debate over which type of product is best for obtaining leverage, but let's assume leveraged ETFs for now due to ease of use. Instead of buying the WisdomTree fund, you could do a 30/70 (or something between that and 40/60) of either SSO/UST (2X) or UPRO/TYD (3X). The backtest below approximates what these funds would have done in the past compared to what the WisdomTree 90/60 would have done. The backtest uses VFINX for stock, VFITX for bonds, and CASHX to represent the borrowing cost for leverage.

Nov 1991 - Jan 2019
1.5X 60/40 (WT 90/60) - CAGR = 10.9%, SD = 12.5%, Max DD = -40.9%
2X 30/70 - CAGR = 11.4%, SD = 10.0%, Max DD = -20.6%
3X 30/70 - CAGR = 15.5%, SD = 14.9%, Max DD = -30.5%
S&P 500 - CAGR = 9.4%, SD = 14.2%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... on3_3=-200

As the results show, the 2X 30/70 would have outpaced the WT fund by 0.5%/year with a lower SD and 1/2 the max DD. The 3X 30/70 would have greatly outpaced everything and would have still had less max DD than the WT fund. Nothing against WT, but maybe they should consider a WisdomTree 90/210 fund instead of 90/60?
Agree with this, but the demand for NTSX hasn't been as strong maybe as they would have expected, and the demand for the product you just mentioned would be even lower I'd imagine. There would also be a bit of an issue with margin requirements with that much notional in bond futures, and you likely wouldn't have enough cash to consistently hit 90% exposure to equities (unless they also bought equity futures!).

Having said that, I am hoping that the industry moves towards a direction where leverage isn't as scary as a concept and more ETFs offer retail investors an easy way to increase their sharpe ratio's while keeping expected returns the same. NTSX is a great step forward in that direction, but the demand to diversify away from equities just isnt there given returns in the last decade.
I think that is why it is important to figure out, as retail investors, how to create these higher sharpe ratio portfolios on our own without having to rely on the fund companies to do it for us. Futures contracts are the ideal tool due to lack of volatility drag caused by daily rebalancing of leverage, but can be cost prohibitive. Fortunately, CME group is about to come out with the micro e-mini contracts, so the notional value of the equities are about to reduce by a factor of 10. If you pair 3 of the new /MES contracts (~$44k notional) with a /ZF 5 year note contract (~115k notional), you would would need about $53k in an account to get to the 90/210 portfolio (3x 30/70) mentioned in my previous post. If that's still too rich, you could use a variety of combinations of futures, leveraged ETFs, options, etc. to hit the target leverage.

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