By Scott Welch, CIMA ®, Chief Investment Officer – Model Portfolios
This article is relevant to financial professionals who are considering offering Model Portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your financial professional. Not all financial professionals have access to these Model Portfolios.
“Well, all I hear all day long at school is how great Marcia is at this or how wonderful Marcia did that…Marcia, Marcia, Marcia!”
(Eve Plumb as Jan Brady on “The Brady Bunch,” 1971)
We last looked at our income Model Portfolios in March. At that point in time, the 10-Year U.S. Treasury yield had finally reached the S&P 500 dividend yield for the first time in more than a year. Here we are, two to three months later, and every client or prospect we have is asking about generating risk-controlled yield in the current market environment. In response, we recently launched HYIN, our alternative credit ETF.
But we also offer several yield-oriented Model Portfolios, specifically our Global Dividend, Global Multi-Asset Income and Siegel-WisdomTree Longevity models. Given our current yield-starved market regime, let’s check in with them. Financial professionals can find details on all these models via our Model Adoption Center (“MAC”).
Rates and Credit Spreads
Let’s start with rates and credit spreads. After rising sharply over the first two to three months of the year, U.S. interest rates have stabilized over the past several weeks.
We continue to believe that rates will “grind higher” as the economy improves, but the rapid increases we saw earlier in the year appear to have abated, for now.
At the same time, credit spreads continue to “grind tighter” and trade at the “tights” of their pre-pandemic ranges.
So where does that leave us? Because of aggressive price appreciation in the stock market, dividend yields have also fallen. Using the above indicated Treasury rates and “OAS” credit spreads as a “sample” outcome, here are indicative yields available in the equity and credit markets:
Not much to go on for income-focused investors. Many corporations are reinitiating or increasing their dividends and stock buybacks following the pandemic-induced cutbacks, so the yield from equities may improve over the course of the year.
We also think corporate balance sheets are in good shape, so default rates should be reasonably low, and investors can probably feel safe about their coupons.
But the total return picture for fixed income is not great, and we certainly would not recommend “stretching for yield” by taking on excessive duration or credit exposure. That defeats one of the primary purposes for owning bonds to begin with—to hedge equity risk.
WisdomTree Income-Focused Model Portfolios
Many of the WisdomTree products have a yield or income “factor tilt” associated with them. Income generation is one of “our lanes” from an investment perspective.
We have three publicly available Model Portfolios designed specifically to optimize current income in a risk-controlled manner: Global Dividends, Global Multi-Asset Income and Siegel-WisdomTree Longevity. In each of these, we focus on yield-producing equity investments versus taking excessive risk in our fixed income allocations. Here are how the yields on those portfolios stack up versus more “traditional” models, as of March 31, 2021.
For standardized performance of model portfolios in the table, please click the respective model: Siegel WisdomTree Model Portfolio, WisdomTree Global Dividend Model Portfolio, WisdomTree Global Multi-Asset Income Model Portfolio.
Conclusions
In an income-starved world, there is no free lunch. If you want to generate current income, you must take risk. But we continue to believe the better way to do so is by seeking to generate income via the equity market, and not by taking excessive duration or credit risk.
Our income-focused Model Portfolios are designed for exactly this purpose—“Income, Income, Income!”—but without the teenage angst Jan Brady experienced all those years ago.
Originally published by WisdomTree, 5/18/21
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