GTR: The Year in Review

Not that you need a reminder, but 2022 has been one of the most volatile years on record. With most major equity indexes in bear market territory, investors have struggled to find relief from the pressure of rising interest rates and record inflation stubbornly weighing on markets. 

Cratering markets require creative solutions to keep portfolios afloat, which is why now is an opportune time to revisit the WisdomTree Target Range Fund (GTR), one year after its launch.

Option Mechanics: A Quick Refresher

In October 2021, in collaboration with Valmark, we introduced GTR as a potential solution for market volatility. More importantly, we attempted to address one of investing’s most fundamental concerns: how to attempt to limit downside exposure during steep sell-offs while retaining as much upside potential as possible during market rallies.

GTR is an options-based strategy that seeks to provide capital appreciation while attempting to hedge risk in equity markets through bull call option spreads. The options purchased and sold are both 15% in-the-money (ITM) and out-of-the money (OTM), completing a spread strategy that attempts to deliver performance for the year ahead in a prespecified “target range.” The ETFs underlying the options provide exposure to U.S. large- and small-cap, international, and emerging markets equities in the following proportions:

ETFs underlying GTR's Options

Since markets have declined substantially this year (i.e., by more than the 15% range indicated by the options), both options will expire worthless if nothing changes between now and the January 2023 option rollover. The investor’s loss is limited to the net premium paid for the long option position.

On the other hand, if markets rally into -15% to +15% territory since the January 2022 rollover, then the long option position will theoretically be exercised to purchase the asset at a price below the prevailing market value. If they rally beyond +15%, however, the option positions sold may be ITM and would require delivery of the underlying to the buyer (again, at a price below prevailing market value). This effectively caps an investor’s upside from the strategy when markets rise, while also limiting downside to the net premium paid when markets fall.

The Year in Review

The first year of the Fund’s infancy provided several intriguing insights.

Foremost, GTR delivered partial downside protection, despite roughly 25% declines in the broader markets, accessed via its option exposures. Evident in the Performance & Strategy Statistics section of GTR's web page, the Fund has outperformed by about 5% year-to-date and since inception. 

NAV Price Return for GTR & Exposures Underlying its Option Strategy as of 10/7/22

See GTR's web page for full standardized performance data and other important information.

Secondly, GTR provided a risk-return profile that outperformed both a 70% equity/30% fixed income portfolio and a 60/40 one-ticker solution. Consider the MSCI AC World and Bloomberg U.S. Aggregate Bond indexes as an asset class pairing:

Risk & Return Measures as of 10/7/22

GTR not only outperformed this traditional equity/fixed income portfolio by about 1%–2%, but did so with less risk, delivering better risk-adjusted returns and a more efficient portfolio in the context of modern portfolio theory.

As of October 7, equities remain deep in bear market territory. GTR’s outperformance is a testament to the efficacy of an options strategy to mitigate volatility while retaining upside potential. Options also allow the Fund itself to invest most assets in secure investments like cash and Treasuries, while retaining equity market exposure. 

Fund Composition as of 10/7/22

The first year of performance demonstrates that GTR can be a potential solution for volatility, without completely restricting the ability to participate in market rallies. Most importantly, this may help investors keep their portfolios positioned as an auxiliary allocation for whatever market events are on the horizon.  

Please take a look at GTR's web page for more information.