WBAL: The Problem-Solving ETF of ETFs
Published April 2, 2018
Head of Equity Strategy
The Known Quantity
What defines a “balanced fund” is in the eye of the beholder. For some mutual funds, a 60%/40% equity/fixed income mix one year might be 50%/50% the next year. Who knows? No one knows. How boldly a fund may deviate from the original mandate is guesswork.
Hard-and-fast rules can help solve the problem. Our new ETF, the WisdomTree Balanced Income Fund (WBAL), is a 60%/40% equity/fixed income ETF of ETFs. Only market drift will take it away from 60/40. And even if that does happen, we rebalance it.
Addressing the Problem of Weak Managers
A benefit of WBAL’s ETF-of-ETFs structure is that, despite the current weighted-average expense ratio of WBAL’s 12 underlying ETFs being 32 basis point (bps), we structured it so that its all-in cost will always be 35 bps, or 3 incremental basis points beyond what would be incurred from owning the 12 ETFs individually.
Those 12 ETFs are all rules based, so they tap into classic WisdomTree smart beta methodologies such as weighting equity holdings by dividends, not market capitalization. That is one of the nice benefits of a balanced fund that comes from a smart beta-oriented firm.
Early last year, S&P Dow Jones Indices published research that exposed the pressure that has been building on active money managers. It found that only 30.8% of U.S. large-cap mutual funds outperformed their benchmarks over three years.1 Perhaps more disturbingly, of those funds, only 5.2% went on to outperform in the subsequent three years.
According to Morningstar, the asset-weighted median expense ratio for U.S.-domiciled allocation funds is 0.64%.2 So many mutual funds cannot compete; they trip over their own expense ratios.
Consider those 64 basis points in the context of the 2.68% yield of WBAL’s benchmark.3 Take out that fee—or more—and a large chunk of any portfolio’s income can get gobbled up in a low-yield environment. In contrast, WBAL’s 0.35% expense ratio is considerably lower than the aforementioned norm.
Common Sense
WBAL has a threefold engagement with prudent investing concepts: For one, it buys equities and liquidates bonds after the former underperforms, and vice versa. Second, it buys beaten-down asset-class sleeves at the underlying ETF level at rebalancing time. Third, its subcomponent ETFs engage value screens at the individual security level.
WBAL also picks up on the tendency of smaller companies to potentially outperform large companies. Again, this happens on several planes: The underlying ETFs ritually liquidate expensive companies by nature of not being cap weighted. Then WBAL reallocates to asset classes whose weights have drifted lower, and those asset classes tend to be populated by relatively smaller companies.
WBAL’s Layers
As we dig into WBAL, built-in common sense jumps out. It engages in disciplined rebalancing, its expense ratio is nearly half the cost of the typical allocation fund, it taps into smart beta factors and, of course, it comes in an ETF structure. That brings with it tax, transparency and liquidity benefits, a key part of the reason trillions of dollars have flowed into ETFs over the last two decades.
In March 2018, WBAL was named Best New Asset Allocation ETF at the ETF.com Awards.4
1Source: “Active Fund Managers Rarely Beat Their Benchmarks Year After Year,” CNBC, citing Fleeting Alpha: Evidence From the SPIVA and Persistence Scorecards, 2/17.
2Source: Morningstar 2017 Global Fund Investor Experience Study.
3Source: WisdomTree, as of 3/8/18. Past performance is not indicative of future results. Benchmark represents a 60% weight to the MSCI ACWI and 40% to the Bloomberg Barclays U.S. Aggregate Index. You cannot invest directly in an index. Dividend yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
4For more information please click here.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. The Fund invests in other ETFs, and the investment performance and risks may be directly related to the investment performance and risks of such ETFs. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors may be more vulnerable to any single economic or regulatory development. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
Categories
About the contributor
Head of Equity Strategy
Jeff Weniger, CFA, has been with WisdomTree since 2017 and serves as the Head of Equities. He shapes the firm’s market outlook through a combination of macroeconomic and fundamental analysis. With more than two decades in investment strategy, Jeff is known for his work on market cycles and valuations. Before joining WisdomTree, Jeff was with BMO Private Bank and BMO Global Asset Management for 11 years. At BMO, he sat on the firm’s Asset Allocation Committee and co-managed ETF model portfolios across the U.S. and Canada. In 2013, at age 32, he became the youngest member of BMO’s Global Investment Forum. When he left BMO to come to WisdomTree, his final role was Director, Senior Strategist in the Office of the CIO in 2017.
Jeff is a frequent television guest on networks such as CNBC, Bloomberg, and Schwab, with regular print appearances in The Wall Street Journal, Barron’s and Reuters. He also appears weekly on the Behind the Markets podcast and is a regular on SiriusXM’s The Business Briefing. On X, Jeff has developed one of the larger followings in financial media. He earned a B.S. in Finance from the University of Florida and an MBA from the University of Notre Dame. He has held the CFA charter since 2006.