NYSE The Exchange: WisdomTree Efficient Core Strategy
September 20, 2021
During this edition of The Exchange, WisdomTree’s Global Head of Research, Jeremy Schwartz provides a high-level overview of our Efficient Core Strategy. Interested in learning more? Tune-in now for an in-depth overview of how advisors and investors can begin to explore the possibility of implementing our Efficient Core Strategy into their portfolios, Efficient Core ETF tax implications and more.
Video Transcript
Douglas Yones:
Hello, and welcome to today's edition of The Exchange, brought to you by the New York Stock Exchange. I'm Douglas Yones, your host. As a reminder, the NYSE does not recommend investments or investment strategies.
Douglas Yones:
Today's edition we're talking to Jeremy Schwartz. He is the Global Head of Research for WisdomTree Investments. Jeremy, thanks for being here.
Jeremy Schwartz:
Thanks for having me, Douglas.
Douglas Yones:
I was hoping you could explain what you mean when you tell us the term Efficient Core Strategy.
Jeremy Schwartz:
Well thanks. The Efficient Core Strategy is something we're very excited about at WisdomTree. We just had our three-year anniversary in August of our first Efficient Core Strategy, and that's something we're going to do a lot more with over time. Efficient Core stands for capital efficient at the core, and it's being really used to replace traditional equities, traditional...exposure for core asset classes like stocks, or stocks and bonds.
For every hundred dollars that we get in this Efficient Core Strategy we're getting $90 of stock exposure, something like the S&P 500 large cap basket. We have 500 stocks in our basket, where we get $90 of exposure to that, as well as $60 of bond futures that are laddered on top of that, so traditional, what you would add to your total aggregate bond type exposure, we're laddering treasury futures along that curve, and when you do that, for every hundred dollars, we get $90 of stocks to go to our bond futures, you're able to free up capital in your portfolios for other diversifying strategies. You would use it to more optimize your portfolio, find things that complement this Efficient Core well.
We're finding a lot of attraction from people who are seeing in the last three years this Efficient Core has delivered higher returns and lower risk than something like the S&P 500, and it's freeing up creative thinking for how they're surrounded in their portfolios.
Douglas Yones:
So for investors, for advisors that are watching, how would they actually go about implementing this into their portfolio?
Jeremy Schwartz:
Let's take an example. If you took the S&P 500, let's say you had a large cap fund, and you took 10% of that and swapped into NTSX, this Efficient Core Strategy, what you're getting is 9% of equities and 6% of bonds, so our main suggestion would be find a bond strategy as well that you would reduce that allocation by 6%, and then you're still resulting with some of that bond exposure that you had before, but now you have 6% that you could do whatever you thought might be more diversifying.
We think where you are in the cycle, you have higher stock valuations, probably meaning lower future returns, you have some of the lowest bond yields of all time, and so people, when they think about where they're going to fund diversifying strategies, they say, "They're complex. Where do I find room for it in portfolios?" and they're loathe to give up some of the things like bonds, this lets you find diversifying strategies, maintain your bond exposure, even though it has very low yields today, you get the diversification from bonds, but then you can find more interesting diversifiers, be it a commodity strategy, a managed future strategy, things that can go short, long/short strategies. Maybe it's a higher income strategy you want to supplement things with. It's really... you're putting more of your capital to work, but getting this bond diversification that you don't want to just lose for finding these other more interesting diversifiers.
Douglas Yones:
Of course, taxes being top of bond, seemingly every day in the news, I am curious though, a strategy like this, these types of instruments, how are they taxed?
Jeremy Schwartz:
You know, when we first did the Efficient Core ETF, and we were really the first ETF to package this idea, and we are representing beta of equities and beta of bonds with this treasury ladder bond future, there were other active managers who were doing active versions of bonds, adding a swap or a future on the equities on top of that, and what we say is, "We have the best taxation that you could possibly get in a taxable account for both stocks and bonds." Whereas these other active managers are getting traditional ordinary income tax rates on their traditional fixed income instruments, we have bond futures taxation for our bond futures, so that's 60% long term cap gains on the futures for long term gain distributions, and 40% short term capital gain distributions for futures. That's a better taxation than traditional fixed income.
And then equities, we're the traditional equity taxation, whereas some of these other active managers, when they use swaps, that has negative consequences compared to traditional buying, traditional stock. To us, there is a tax angle compared to some of the other ways of executing these package combinations, capital efficient combinations, that might use equity swaps or futures, compared to owning the equities and doing the bond futures. We think we have the better combination on that.
Douglas Yones:
Well, thank you very much Jeremy, for explaining the Efficient Core Strategy.
That's a wrap on today's episode of The Exchange. As a reminder, you can find this episode and many more educational episodes on our website, homeofetfs.com, that's homeofetfs.com, brought to you by the New York Stock Exchange, the home of ETFs.
Hello, and welcome to today's edition of The Exchange, brought to you by the New York Stock Exchange. I'm Douglas Yones, your host. As a reminder, the NYSE does not recommend investments or investment strategies.
Douglas Yones:
Today's edition we're talking to Jeremy Schwartz. He is the Global Head of Research for WisdomTree Investments. Jeremy, thanks for being here.
Jeremy Schwartz:
Thanks for having me, Douglas.
Douglas Yones:
I was hoping you could explain what you mean when you tell us the term Efficient Core Strategy.
Jeremy Schwartz:
Well thanks. The Efficient Core Strategy is something we're very excited about at WisdomTree. We just had our three-year anniversary in August of our first Efficient Core Strategy, and that's something we're going to do a lot more with over time. Efficient Core stands for capital efficient at the core, and it's being really used to replace traditional equities, traditional...exposure for core asset classes like stocks, or stocks and bonds.
For every hundred dollars that we get in this Efficient Core Strategy we're getting $90 of stock exposure, something like the S&P 500 large cap basket. We have 500 stocks in our basket, where we get $90 of exposure to that, as well as $60 of bond futures that are laddered on top of that, so traditional, what you would add to your total aggregate bond type exposure, we're laddering treasury futures along that curve, and when you do that, for every hundred dollars, we get $90 of stocks to go to our bond futures, you're able to free up capital in your portfolios for other diversifying strategies. You would use it to more optimize your portfolio, find things that complement this Efficient Core well.
We're finding a lot of attraction from people who are seeing in the last three years this Efficient Core has delivered higher returns and lower risk than something like the S&P 500, and it's freeing up creative thinking for how they're surrounded in their portfolios.
Douglas Yones:
So for investors, for advisors that are watching, how would they actually go about implementing this into their portfolio?
Jeremy Schwartz:
Let's take an example. If you took the S&P 500, let's say you had a large cap fund, and you took 10% of that and swapped into NTSX, this Efficient Core Strategy, what you're getting is 9% of equities and 6% of bonds, so our main suggestion would be find a bond strategy as well that you would reduce that allocation by 6%, and then you're still resulting with some of that bond exposure that you had before, but now you have 6% that you could do whatever you thought might be more diversifying.
We think where you are in the cycle, you have higher stock valuations, probably meaning lower future returns, you have some of the lowest bond yields of all time, and so people, when they think about where they're going to fund diversifying strategies, they say, "They're complex. Where do I find room for it in portfolios?" and they're loathe to give up some of the things like bonds, this lets you find diversifying strategies, maintain your bond exposure, even though it has very low yields today, you get the diversification from bonds, but then you can find more interesting diversifiers, be it a commodity strategy, a managed future strategy, things that can go short, long/short strategies. Maybe it's a higher income strategy you want to supplement things with. It's really... you're putting more of your capital to work, but getting this bond diversification that you don't want to just lose for finding these other more interesting diversifiers.
Douglas Yones:
Of course, taxes being top of bond, seemingly every day in the news, I am curious though, a strategy like this, these types of instruments, how are they taxed?
Jeremy Schwartz:
You know, when we first did the Efficient Core ETF, and we were really the first ETF to package this idea, and we are representing beta of equities and beta of bonds with this treasury ladder bond future, there were other active managers who were doing active versions of bonds, adding a swap or a future on the equities on top of that, and what we say is, "We have the best taxation that you could possibly get in a taxable account for both stocks and bonds." Whereas these other active managers are getting traditional ordinary income tax rates on their traditional fixed income instruments, we have bond futures taxation for our bond futures, so that's 60% long term cap gains on the futures for long term gain distributions, and 40% short term capital gain distributions for futures. That's a better taxation than traditional fixed income.
And then equities, we're the traditional equity taxation, whereas some of these other active managers, when they use swaps, that has negative consequences compared to traditional buying, traditional stock. To us, there is a tax angle compared to some of the other ways of executing these package combinations, capital efficient combinations, that might use equity swaps or futures, compared to owning the equities and doing the bond futures. We think we have the better combination on that.
Douglas Yones:
Well, thank you very much Jeremy, for explaining the Efficient Core Strategy.
That's a wrap on today's episode of The Exchange. As a reminder, you can find this episode and many more educational episodes on our website, homeofetfs.com, that's homeofetfs.com, brought to you by the New York Stock Exchange, the home of ETFs.
