Income, Income, Income!

Chief Investment Officer – Model Portfolios
05/18/2021

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.

Figure 1_UST Performance

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.

Figure 2_US corporate spread

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:

Figure 3_Current Yield 

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. 

Important Risks Related to this Article

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About the Contributor
Chief Investment Officer – Model Portfolios
Scott Welch is the CIO of Model Portfolios at WisdomTree Asset Management, a provider of factor-based ETFs and differentiated model portfolio solutions. In this capacity he oversees the creation and ongoing management of the WisdomTree model portfolio solution set. He is also a member of the WisdomTree Asset Allocation and Investment Committees. Prior to joining WisdomTree, Scott was the Chief Investment Officer of Dynasty Financial Partners, a provider of outsourced investment research, portfolio management, technology, and practice management solutions to RIAs and advisory teams making the move to independence. He remains an outside member of the Dynasty Investment Committee.  He sits on the Board of Directors of IWI, the Advisory Board of the ABA Wealth Management & Trust Conference, and the Editorial Advisory Boards of the Journal of Wealth Management and the IWI Investments & Wealth Monitor. Scott earned a Bachelor of Science in Mathematics from the University of California at Irvine and an MBA with a concentration in Finance from the University of Massachusetts at Amherst.