Nasdaq TradeTalks: WisdomTree Target Range Strategy

Jill Malandrino:
Welcome to Nasdaq TradeTalks. I'm Jill Malandrino, Global Market Reporter at Nasdaq. Joining us for this segment, we have Jeremy Schwartz, Global Head of Research at WisdomTree. Jeremy, it's great to see you again. Welcome back to TradeTalks.

Jeremy Schwartz:
Thanks for having me, Jill. Good to see you.

Jill Malandrino:
All right, let's talk some strategy today. What is a target range strategy?

Jeremy Schwartz:
So a target range strategy is an innovative new risk management tool that WisdomTree just launched that's really trying to help investors participate in equity upside, but do it in a very risk controlled way, using sophisticated option strategies. In particular, what they're getting in the WisdomTree target range strategy is call options and call spreads that are both 15% in the money call options, and then selling 15% out of the money call options on a portfolio of global ETFs from large caps (S&P 500), small caps (Russell 2000), international with the developed markets of the EAFA and the emerging. That's a 70/30 balance. It helps you hedge on the downside, using these 15% in the money call options where in a nutshell, those call options can expire worthless. So you lose all the premium in those call options, but you still have the cash and collateral on the fund. That's what helps hedge you on the downside, so it's really a unique new risk management tool.

Jill Malandrino:
So Jeremy, why should one consider using a target range strategy within their portfolio?

Jeremy Schwartz:
Well, I think the market environment we have right now is actually very well-suited for this type of a strategy, and by that market environment, I mean fixed income looks like it has very challenging dynamics with very low historical interest rates. We have a view that inflation is not just a transitory phenomena, it's with us for three to five years. So you have negative after inflation cash, you have bonds that look challenged and investors are being forced to take more equity risk. The question is, can they afford the volatility that comes with taking more equity risk? So having something that helps hedge on the downside, but that still gives you that equity upside participation, we think is a very, very timely thing right in this current market environment.

Jill Malandrino:
Jeremy, how can GTR fit into a portfolio?

Jeremy Schwartz:
I was just alluding to, in today's market with this challenge of low returns, and bonds, and potential more equity, it could replace really traditional core equity allocation. So if you allocate to a global equity basket, I mentioned it's a 70/30 combination of US and foreign stocks, and so it could really take some of that global equity piece. We've talked with investors who want to do 10% to 20% as a core long-term allocation, and then they surround their portfolio with all the other things. The question is, where is it being funded from? Is it being funded from other stocks just to lower your volatility? Is it being funded from bonds just to help you get more equity risk? We've said the 75/25 is the new 60/40, and this could be for those who are trying to up their equity from a 60/40 to the 75/25. This could be a great way to get that extra 15% if that's your world view like ours.

Jill Malandrino:
All right, Jeremy, appreciate the insight as always. Thanks for joining us on TradeTalks. I'm Jill Malandrino, Global Market Reporter at NASDAQ.

Jeremy Schwartz:
Thanks, Jill.