Advisors looking to reduce risk for clients often put together 60/40 portfolios, but for clients really looking to dial back risk, that may not go far enough and the traditional 60/40 prescription may not provide adequate income.
The Conservative Allocation Model Portfolio, which is part of WisdomTree’s Modern Alpha series of model portfolios, can solve those riddles and more.
“This model portfolio is designed for investors with mid- to long-range time horizons who are willing to tolerate mild short-term price fluctuations,” according to WisdomTree. “The model portfolio seeks to balance the generation of income with the preservation of capital, and combines both passive and actively managed fixed income ETFs as well as a smaller allocation in U.S. and international equity ETFs. The model portfolio strives to deliver performance in excess of an 80/20 combination of a broad-based U.S. aggregate bond index and a broad-based global equity benchmark.”
Fixed Income Depth
The Conservative Allocation Model Portfolio features seven fixed income ETFs from three different issuers, including WisdomTree.
What makes the model portfolio relevant and useful in the current environment is its dept of fixed income asset classes, credit quality, and duration.
Balancing yield and credit quality can be a delicate endeavor, but this model portfolios does an admirable job of that mixing U.S. Treasuries, investment-grade corporate debt and junk bonds, among others.
One of the table setters in the portfolio is the WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (CBOE: WFHY).
WFHY’s underlying benchmark “uses a combination of factors to identify bonds with favorable risk/reward in high yield. Step one of the process is to exclude issuers that do not have publicly traded equities and thus may not report public financials. In our view, these companies are under less scrutiny to manage a healthy balance sheet. This approach has helped our Index avoid nine defaults so far this year,” according to WisdomTree.
WFHY’s fundamentally-weighted methodology could serve income investors well if defaults increase. The fund tracks the WisdomTree U.S. High Yield Corporate Bond Index, which uses a multi-step fundamental screen to steer investors away from the junkiest of the junk bonds. That’s important at a time when many high-yield issuers are under scrutiny due to financing needs.
Said another way, investors concerned about rising default rates among junk issuers may want to consider WFHY because its methodology can mitigate default risk.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
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.
