The Strategy behind WisdomTree's Model Portfolio Lineup | ETF Trends

Reducing volatility remains a primary objective for many advisors, but arriving at that outcome can take on different forms.

The WisdomTree Strategic Model Portfolio helps with that objective via an expansive list of equity and fixed income exchange traded funds.

“This model portfolio is designed for investors with mid- to long-range time horizons who are willing to tolerate short-term price fluctuations,” according to WisdomTree. “The model portfolio seeks to balance growth of capital through domestic and international equity ETFs, with potentially volatility-reducing fixed income ETFs that also serve as a source of current income. The model portfolio strives to deliver performance in excess of a 60/40 combination of a broad-based global equity benchmark and a U.S. aggregate bond index.”

How Do the Portfolios Dodge Equity Concerns?

When the going is good, passive market-cap weighted methodologies can help investors ride the markets higher and diversify across a broad area. This also creates an unforeseen risk since the largest components or largest companies by market capitalization are also those that have performed the best. Consequently, investors overweight in these big companies in a market cap-weighted fund are exposed to the downside risks when these high-flying stocks suddenly take a turn.

The WisdomTree model portfolio skirts some of those equity concerns with a lineup that includes earnings- and dividend-weighted strategies as well as multi-factor funds. The model portfolio’s equity exposures run the gamut of large-, mid- and small-cap domestic equities as well as international dividend and multi-factor funds.

One of the equity holdings in the portfolio is the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS).

DGS YTD Performance

Bullishness for small-caps has not been confined to U.S. borders, indicating that investors should consider international small-cap exchange traded funds, some of which have delivered impressive returns this year. Still, international small-caps come with unique risks that have kept many investors at bay.

DGS is one of the largest dedicated emerging markets small-cap ETFs. The fund tries to mitigate some of the volatility expected with emerging markets small-caps by allocating about half its weight to Taiwan, China and South Korea. Taiwan and South Korea are two of the least volatile emerging markets.

What makes the model portfolio relevant and useful in the current environment is its department 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.

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.