If investors are looking for the markets to rebound or want to position their portfolios for the future with the traditional 60-40 equities and bond exposure, it pays to get strategic. One fund to achieve this goal is the WisdomTree 90/60 U.S. Balanced Fund (NTSX).

There’s been a lot of market experts denouncing the use of the 60-40 bond allocation in the extended bull run with such strategies as an 80% equities allocation paired with a 20% fixed income allocation touted as more ideal. However, given the market performance of equities and bonds during this coronavirus-laden market the past month, investors might want to rethink the 60-40 strategy.

In essence, good things take time and a 60-40 strategy could win out in the long run.

“No investment strategy is perfect, and 60/40 may be more of a default choice than true asset allocation, but investors would be wise not to let the search for perfection convince them to throw away something good,” wrote financial columnist Chuck Jaffe. “For most time-tested, common-sense investment strategies, “the end” is not near. They won’t work all the time, but they will pay off in due time.”

Given that, NTSX takes the traditional 60-40 exposure and adds a bit of juice–1.5x leveraged exposure that is–in order to create a 90% allocation to equities coupled with a 60% allocation to bonds.

Fund facts:

  • Gain enhanced exposure to traditional 60% equity / 40% bond portfolios
  • Use to help boost capital efficiency in asset allocation allowing for increased exposure to non-core / diversifying investments
  • Use to help satisfy demand for overlay strategies that remain highly correlated to common portfolio benchmarks

“WisdomTree’s approach applies 1.5x accounting leverage to a traditional 60/40 portfolio to create exposure equal to 90% equities, 60% bonds,” a WisdomTree investment case noted. “This exposure is created by investing 90% of Fund assets in equities and 10% in short-term fixed income. The 60% bond exposure is achieved by overlaying Treasury futures contracts to achieve the net 90/60 target. Through this higher-efficiency portfolio, investors can devote a smaller percentage of their assets (66.6%) to core holdings while still achieving their desired exposure.

NTSX Chart

NTSX data by YCharts

“In addition to boosting capital efficiency, we also believe that 90/60 provides investors with the ability to enhance returns with noncore assets such as long/short equities, risk parity, CTAs or true alternatives,” the case added. “By deploying an overlay strategy to boost capital efficiency, a 90/60 strategy has the potential to enhance total returns while also helping dampen volatility via alternatives.”

There are also tax benefits to be derived from the NTSX strategy.

In thinking of other ways to improve on 60/40, we believe 90/60 could also boost returns via greater tax efficiency. This is primarily driven by gaining exposure to fixed income via futures contracts as opposed to cash bonds. In instances where fixed income total returns are primarily driven by interest income and held in taxable accounts, any income distributions are subject to withholding tax rates of up to 39.6%. By comparison, capital gains on Treasury futures contracts are taxed at 60% long-term, 40% short-term capital gains rates. We believe this tax advantage could be particularly important during periods of rising rates.

Click here to read the full investment case.

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