WBAL: The Problem-Solving ETF of ETFs

The Known Quantity

What defines a “balanced fund” is in the eye of the beholder. For some mutual funds, a 60%/40% equity/fixed income mix one year might be 50%/50% the next year. Who knows? No one knows. How boldly a fund may deviate from the original mandate is guesswork.

Hard-and-fast rules can help solve the problem. Our new ETF, the WisdomTree Balanced Income Fund (WBAL), is a 60%/40% equity/fixed income ETF of ETFs. Only market drift will take it away from 60/40. And even if that does happen, we rebalance it.

Addressing the Problem of Weak Managers

A benefit of WBAL’s ETF-of-ETFs structure is that, despite the current weighted-average expense ratio of WBAL’s 12 underlying ETFs being 32 basis point (bps), we structured it so that its all-in cost will always be 35 bps, or 3 incremental basis points beyond what would be incurred from owning the 12 ETFs individually.

Those 12 ETFs are all rules based, so they tap into classic WisdomTree smart beta methodologies such as weighting equity holdings by dividends, not market capitalization. That is one of the nice benefits of a balanced fund that comes from a smart beta-oriented firm.

Early last year, S&P Dow Jones Indices published research that exposed the pressure that has been building on active money managers. It found that only 30.8% of U.S. large-cap mutual funds outperformed their benchmarks over three years.¹ Perhaps more disturbingly, of those funds, only 5.2% went on to outperform in the subsequent three years.

According to Morningstar, the asset-weighted median expense ratio for U.S.-domiciled allocation funds is 0.64%.² So many mutual funds cannot compete; they trip over their own expense ratios.

Consider those 64 basis points in the context of the 2.68% yield of WBAL’s benchmark.³ Take out that fee—or more—and a large chunk of any portfolio’s income can get gobbled up in a low-yield environment. In contrast, WBAL’s 0.35% expense ratio is considerably lower than the aforementioned norm.

Common Sense

WBAL has a threefold engagement with prudent investing concepts: For one, it buys equities and liquidates bonds after the former underperforms, and vice versa. Second, it buys beaten-down asset-class sleeves at the underlying ETF level at rebalancing time. Third, its subcomponent ETFs engage value screens at the individual security level.

WBAL also picks up on the tendency of smaller companies to potentially outperform large companies. Again, this happens on several planes: The underlying ETFs ritually liquidate expensive companies by nature of not being cap weighted. Then WBAL reallocates to asset classes whose weights have drifted lower, and those asset classes tend to be populated by relatively smaller companies.

WBAL’s Layers

As we dig into WBAL, built-in common sense jumps out. It engages in disciplined rebalancing, its expense ratio is nearly half the cost of the typical allocation fund, it taps into smart beta factors and, of course, it comes in an ETF structure. That brings with it tax, transparency and liquidity benefits, a key part of the reason trillions of dollars have flowed into ETFs over the last two decades.

In March 2018, WBAL was named Best New Asset Allocation ETF at the ETF.com Awards.⁴

¹Source: “Active Fund Managers Rarely Beat Their Benchmarks Year After Year,” CNBC, citing Fleeting Alpha: Evidence From the SPIVA and Persistence Scorecards, 2/17.
²Source: Morningstar 2017 Global Fund Investor Experience Study.
³Source: WisdomTree, as of 3/8/18. Past performance is not indicative of future results. Benchmark represents a 60% weight to the MSCI ACWI and 40% to the Bloomberg Barclays U.S. Aggregate Index. You cannot invest directly in an index. Dividend yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
⁴For more information please click here.