WisdomTree: Rising Rates Implementation Plan: “Core Plus” & Risk Management

Over the last several weeks, we have spent a great deal of time discussing what might be next for U.S. fixed income markets. While our view on rising rates has yet to meaningfully materialize this year, our underlying thesis has not changed. In our view, it may be time for investors to think about how a bond portfolio may perform as a result of changes in Federal Reserve (Fed) policy. From our discussions, we understand that some advisors believe that they already “made their trade” for rising rates last year. In our view, a great deal has changed since that time. As a result, we believe that investors should reexamine their current positioning and consider additional options to help manage interest rate risk.

In recent years, many investors have extended beyond investment-grade fixed income to incorporate satellite positions in high-yield corporate bonds. Money managers have employed these so-called “core plus” strategies as a way to potentially add value to investors’ portfolios. Ultimately, these strategies seek to balance income and credit risk in order to increase total returns.

When devising new alternatives, WisdomTree’s approach to rising rates has sought to avoid forcing advisors to fundamentally alter the way they run portfolios. Our goal was to maintain the exposures investors were familiar with while managing the risks. We believe that exchange-traded funds (ETFs) can provide a powerful tool for investors seeking to manage their exposure to credit. Through our suite of rising rate strategies, we believe that investors can mitigate interest rate risk in the same way.

While some investors may use our rising rate suite piecemeal, in our opinion, the real strength of the strategies is how they can be combined as part of an existing portfolio. By constructing portfolios using zero duration and negative duration tools, as shown in the tables, advisors can further refine their specific exposure not only to credit risk but also to a specific level of interest rate risk.

Impact of Incorporating Rising Rate Strategies in “Core Plus” Portfolios


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