Our Investing Toolkit for Q2 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 direct access to these Model Portfolios.
WisdomTree’s Model Portfolio Investment Committee produces quarterly commentary on their latest asset allocation views. These views impact the trade and rebalance decisions of the Model Portfolio strategies the team manages. These views are outlined below and followed up with specific investment strategies that express those views. Financial professionals can access the complete list of strategies and trades as it relates to our Model Portfolios here.
We maintain our overweight position in U.S. equities going into the second quarter. Following the Georgia Senate runoff in early January, risk assets surged higher on expectations of a massive stimulus bill that was eventually passed in March. Vaccination efforts have accelerated in recent months, boosting market sentiment. Surging growth expectations have helped propel the long-awaited rotation from large-capitalization growth stocks into cyclical, value and small-cap stocks. In the meantime, sharply higher interest rates have weighed on the high-flying growth names that dominated cap-weighted equity indexes for the last several years. Quality tends to lag when value outperforms, and we continue to blend the two factors as anchors of our large-cap positioning. The move higher in small and mid-caps has been rapid—as has the subsequent move downward in late March—but following years of underperformance, we believe the run still has legs.
- WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
- WisdomTree U.S. LargeCap Dividend Fund (DLN)
- WisdomTree U.S. SmallCap Fund (EES)
Developed International Exposure
We remain underweight in international developed equity markets. The vaccination rollout has met with numerous issues in the EU, and the region now faces rising cases and renewed lockdowns as a result. The ECB continues to boost the liquidity it provides to the financial system, and the impact of the EU Recovery Fund may be felt later this year. In Japan, the vaccination effort has been slow to start but should not be plagued by the logistical issues observed in Europe. Earnings have surprised to the upside and look to be trending higher in 2021 as well. The global rotation from growth to value stocks stands to aid the developed world given the cyclical composition of its equity markets and reliance on global growth.
- WisdomTree Global ex-U.S. Quality Dividend Growth Fund (DNL)
- WisdomTree International Quality Dividend Growth Fund (IQDG)
Emerging Markets Exposure
We maintain an overweight position in the emerging markets (EM) region. After a blistering pace at the start of the year, EM has cooled off thanks to a combination of an unexpectedly strong dollar and increased scrutiny on China’s tech titans. China’s regulatory push targeting antitrust activities and debt reduction bears close monitoring over the coming months. Despite this, earnings continue to trend sharply higher and we think the asset class offers compelling long-term value, particularly when compared to developed market equities. Several commodity-linked countries and sectors have benefited in the global reflationary environment and small caps are seeing strong outperformance as well. The current environment gives us conviction in our positioning of barbelling non-state-owned enterprises with small-cap dividend payers.
- WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE)
- WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
Fixed Income Exposure
We maintain our positioning of overweight credit and shorter duration relative to the benchmark. The biggest story in fixed income and arguably all capital markets has been the spike in the U.S. Treasury (UST) 10-Year yield. While the 10-Year yield has risen by 120 basis points (bps) from its August low, roughly 80 bps of this increase occurred in just the first quarter of 2021 alone. The 2s/10s yield curve has visibly steepened to its widest level since mid-2015. The March FOMC meeting underscored the Fed’s intention to continue providing an extremely accommodative monetary policy approach over the next two years. Despite raising their median inflation forecast to at least their 2% threshold through 2023, the policy makers’ consensus view was for no rate hikes during this period, underscoring their intention to let the economy run. Inflation expectations have moved to the widest readings in a decade. We continue to see the potential for further upside in the UST 10-Year yield in the months ahead, leading to some additional steepening of the yield curve. U.S. investment-grade and high-yield spreads have retraced all of the peak widening from 2020 and are now back to pre-pandemic levels. We foresee both investment-grade and high-yield spreads settling into a trading range, with credit valuations, specifically within the high-yield sector, remaining reasonably attractive from a relative value perspective. A focus on screening for quality will remain of paramount importance. As we have seen over the last year, additional setbacks cannot be ruled out entirely, but unprecedented amounts of fiscal stimulus, ongoing support from the Fed, well-capitalized financial institutions and the ongoing vaccine rollout have created the potential for a robust economic setting in 2021.
- WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY)
- WisdomTree U.S. High Yield Corporate Bond Fund (WFHY)
For portfolios that include an allocation to alternatives, we swapped out our merger arbitrage strategy for a more diversified arbitrage fund that includes both event-driven and convertible arb, and should be able to take advantage of opportunities offered in the flood of recent SPAC launches. We also added an interest rate volatility strategy that should benefit from continued choppiness in bond markets and a further steepening in the curve. Put writing has been profitable as implied volatility remains elevated, and our anti-beta holding has performed as expected in a low-quality global equity rally. We think this alternatives sleeve delivers a unique stream of potential return drivers with the benefit of additional risk diversification.
- WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW)
- WisdomTree Continuous Commodity Strategy Fund (GCC)
Disruptive Growth Strategy
While we keep our conviction in the select themes underlying our disruptive growth strategy, we elected to swap our genomics exposure for a similarly focused but smaller strategy. We are taking profits following a remarkable run by our previous holding, but the strategy now operates at a scale that we think is too large to effectively and nimbly managed like it had done previously. Genomics remains a top theme in the Model, along with cloud computing, given the growth rates of its constituents and the future potential we see in the category.
Important Risks Related to this Article
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com to view or download a prospectus. Investors should read the prospectus carefully before investing.
There are risks associated with investing, including the possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or Funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Diversification does not eliminate the risk of experiencing investment losses. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see each Fund’s prospectus for a discussion of risks.
This material contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results.
WisdomTree Model Portfolio information is designed to be used by financial advisors solely as an educational resource, along with other potential resources advisors may consider, in providing services to their end clients. WisdomTree’s Model Portfolios and related content are for information only and are not intended to provide, and should not be relied on for, tax, legal, accounting, investment or financial planning advice by WisdomTree, nor should any WisdomTree Model Portfolio information be considered or relied upon as investment advice or as a recommendation from WisdomTree, including regarding the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy. In providing WisdomTree Model Portfolio information, WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor or end client, and has no responsibility in connection therewith, and is not providing individualized investment advice to any advisor or end client, including based on or tailored to the circumstance of any advisor or end client. The Model Portfolio information is provided “as is,” without warranty of any kind, express or implied. WisdomTree is not responsible for determining the securities to be purchased, held and/or sold for any advisor or end client accounts, nor is WisdomTree responsible for determining the suitability or appropriateness of a Model Portfolio or any securities included therein for any third party, including end clients. Advisors are solely responsible for making investment recommendations and/or decisions with respect to an end client, and should consider the end client’s individual financial circumstances, investment time frame, risk tolerance level and investment goals in determining the appropriateness of a particular investment or strategy, without input from WisdomTree. WisdomTree does not have investment discretion and does not place trade orders for any end client accounts. Information and other marketing materials provided to you by WisdomTree concerning a Model Portfolio—including allocations, performance and other characteristics—may not be indicative of an end client’s actual experience from investing in one or more of the funds included in a Model Portfolio. Using an asset allocation strategy does not ensure a profit or protect against loss, and diversification does not eliminate the risk of experiencing investment losses. There is no assurance that investing in accordance with a Model Portfolio’s allocations will provide positive performance over any period. Any content or information included in or related to a WisdomTree Model Portfolio, including descriptions, allocations, data, fund details and disclosures are subject to change and may not be altered by an advisor or other third party in any way.
WisdomTree primarily uses WisdomTree Funds in the Model Portfolios unless there is no WisdomTree Fund that is consistent with the desired asset allocation or Model Portfolio strategy. As a result, WisdomTree Model Portfolios are expected to include a substantial portion of WisdomTree Funds notwithstanding that there may be a similar fund with a higher rating, lower fees and expenses, or substantially better performance. Additionally, WisdomTree and its affiliates will indirectly benefit from investments made based on the Model Portfolios through fees paid by the WisdomTree Funds to WisdomTree and its affiliates for advisory, administrative and other services.
For retail investors: WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment adviser may or may not implement WisdomTree’s Model Portfolios in your account. The performance of your account may differ from the performance shown for a variety of reasons, including but not limited to: your investment adviser, and not WisdomTree, is responsible for implementing trades in the accounts; differences in market conditions; client-imposed investment restrictions; the timing of client investments and withdrawals; fees payable; and/or other factors. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree and the information included herein has not been verified by your investment adviser and may differ from information provided by your investment adviser. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange traded funds and management fees for our collective investment trusts.