Reflation, Flation, What’s Your Nation?

Head of Fixed Income Strategy
Follow Kevin Flanagan
Chief Investment Officer, Model Portfolios

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.

Conjunction Junction, what’s your function?

I got “and,” “but,” and “or,”
They’ll get you pretty far…

Conjunction Junction, how’s that function?
I like tying up words and phrases and clauses

(From “Conjunction Junction,” School House Rock, 1973)

Investment Themes for 2021

As described in a previous blog post, WisdomTree has identified five primary investment themes that we believe have a high probability of playing out over the course of 2021 and beyond:

  • Emerging markets, both in equity and fixed income; 
  • A focus on quality and income, both in equity and fixed income; 
  • Disruptive growth; and 
  • Reflation (higher-than-expected inflation in the second half of the year) 

In this blog piece, we want to take a deeper look into this last theme—reflation

While official inflation indicators, such as the Consumer Price Index and the Personal Consumption Expenditures Price Index, are not yet showing any signs of a re-emergence of inflation, the U.S. bond market is preparing for a potential shift in the pricing outlook. In our “Inflate-Gate? Don’t Tell That to the Bond Market” blog post a couple of weeks ago, we highlighted how inflation expectations have been noticeably on the rise thus far in 2021

Figure 1_CPI

In addition, investors have witnessed rising price trends in purchasing managers’ surveys and, perhaps more importantly, in actual commodities. According to data from the International Monetary Fund, the Global Price Index of All Commodities has experienced a rather noticeable V-shaped recovery of its own, finishing 2020 at its highest level in more than two years… And guess what? According to real-time commodity gauges, both futures and spot prices have continued this ascending trajectory here into the first two months of the new year.

Figure 2_GPI all commodities

Product and Portfolio Implications

As we discussed a few weeks ago, WisdomTree offers a variety of fixed income product strategies that can help navigate inflation/interest rate risks. Another approach would be to focus exclusively on the commodity sector. 

WisdomTree recently completed the reorganization of the WisdomTree Continuous Commodity Index Fund into the WisdomTree Enhanced Commodity Strategy Fund (GCC). The Enhanced Commodity Strategy Fund is organized under the Investment Company Act of 1940, as amended, with no Schedule K-1 that provides broad exposure to a diversified basket of commodities.

GCC emphasizes a diversified nature of commodities compared to the traditional well-established commodity indexes like the S&P GSCI Index (SPGSCI), which could have as much as 70%–80% of risk driven by exposure to the energy sector. Our approach maximizes this diversification with strategic weights roughly balanced between precious metals, industrial metals, agriculture and energy. In addition, we dynamically manage the futures contract “rolls” to potentially mitigate the headwinds faced by the more traditional use of just the front month contract.

Within the WisdomTree Model Portfolios, specifically within the Siegel-WisdomTree Longevity Model Portfolio and our Endowment Model Portfolios, we took an explicit gold position last March, and that trade worked well for us, though gold has stabilized over the past 2–3 months.

Figure 3_SP Total Return Indexes

In addition, the Siegel-WisdomTree Longevity Model Portfolio is, by design, over-weight in equities versus fixed income. (We try to maximize current income via yield-focused equities instead of taking on excessive risk in our fixed income allocation.) Historically, equities have shown to be an effective hedge against modestly rising inflation:

Figure 4_Growth vs value

In our December Model Portfolio Investment Committee meeting, we made some additional changes. While maintaining our existing gold position within the Siegel-WisdomTree Longevity Model Portfolio, we reallocated from our fixed income position into a broader commodity complex position, specifically GCC. Within our Endowment Model Portfolios, we reallocated out of gold and into GCC to give us a broader exposure to the global commodity complex.


If we are correct in our views on global economic recovery, a weak dollar and a general “reflationary” regime in the second half of 2021, we believe WisdomTree has both the strategies and Model Portfolios to meet your needs and help deliver a differentiated end client investment experience.


Important Risks Related to this Article

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For more investing insights, check out our Economic & Market Outlook


About the Contributors
Head of Fixed Income Strategy
Follow Kevin Flanagan
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was Managing Director and Chief Fixed Income Strategist for Wealth Management. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.
Chief Investment Officer, Model Portfolios
Scott Welch is the Chief Investment Officer of Model Portfolios at WisdomTree, a provider of factor-based ETFs, differentiated model portfolios, and digital asset solutions. In his role as CIO, he oversees the construction and ongoing management of the WisdomTree model portfolio solution set. He chairs the WisdomTree Model Portfolio Investment Committee and is an active member of the WisdomTree Asset Allocation team. 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. Prior to Dynasty, Scott was a Co-Founder and the Chief Investment Officer of Fortigent, LLC, a provider of outsourced investment research, technology, and practice management solutions to RIAs and banks that targeted high net worth investors. Scott holds the Certified Investment Management Analyst (CIMA®) designation, and he sits on the Board of Directors of the Investments & Wealth Institute (IWI, formerly known as IMCA) and is an outside member of several RIA Investment Committees. 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.