An Efficient Core Idea for International Exposure | ETF Trends

The 60/40 portfolio structure had its day in the sun. Actually, it was decades in the sun, but these days, advisors need to offer clients more.

That’s particularly true at a potentially perilous time in the fixed income market. The Federal Reserve could easily raise interest rates next year. Bond yields are low, implying the potential of limited upside from here, and many of the longer-dated bonds that advisors lean on in 60/40 portfolios are increasingly correlated to equities, essentially defeating the purported protective properties of bonds.

WisdomTree has solutions for those problems by way of its suite of 90/60 portfolio exchange traded funds. The WisdomTree U.S. Efficient Core Fund (NTSX) was the original member of that group and was then followed by two international funds, one of which is the International Efficient Core Fund (NTSI).

“The WisdomTree International Efficient Core Fund seeks total return by investing in international equity securities and U.S. Treasury futures contracts,” according to the issuer.

With traditional 60/40 portfolios, the problem is often that the structure is highly correlated to equities, but won’t deliver comparable returns to all-equity allocations. Translation: 60/40 doesn’t always risk on par with expectations, and its returns can disappoint, too.

“Therefore, we believe larger fixed income exposures would be needed to effectively reduce equity market correlations and deliver. On the other hand, some investors may want to maintain high correlations to participate in equity bull markets, despite the threat of higher equity volatility and drawdowns. This creates a portfolio paradox, where high return potential coupled with reduced risk seems fundamentally incompatible,” according to WisdomTree.

NTSI’s fixed income exposure comes by way of U.S. Treasuries, but its equity holdings are comparable to what’s found in the widely followed MSCI EAFE Index. Owing to the inclusion of bonds, NTSI’s country weights differ from those found in the MSCI EAFE Index, but the exposures are comparable. For example, Japan, the U.K., France, and Switzerland combine for about 35% of NTSI’s equity allocation.

90% of NTSI’s roster is devoted to equities. Predictably, that means clients are likely to ask how it’s a 90/60 fund. As noted, 90% is allocated to stocks and 10% is directed to short-term Treasuries. To get to that 60% figure, Treasury futures contracts are included, which is a point of interest because futures can act as portfolio diversification tools. Remember the aforementioned portfolio paradox? Futures exposure can improve that scenario.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.