Irene:

Hi everyone. Thank you for joining WisdomTree Office Hours on 2024 Outlook for Option Strategies where you'll hear from WisdomTree's Jeremy Schwartz, Global Chief Investment Officer, Michael McClary, Chief Investment Officer at Valmark Financial Group, and Dan Corcoran, Founder and President at Volos.

Jeremy Schwartz:

Well, thank you, Irene. Dan, Michael, it's a pleasure to be here with you as we're thinking about the outlook for 2024, how to think about things, how to use options in a portfolio. It's been one of the hottest topics I'd say in ETFs in the industry. There's a lot of market oriented things happening in the option world that we're following closely, and it also could be one of the more confusing areas if you're not a deep expert in options, how do each of these different options, strategies compare to each other can get quite confusing. You've got sometimes people launch 12 of them for the same type of strategy, different months. I think that's one of some of the things we try to address when we collaborated with Michael and Dan's team. But yeah, we want to make this very interactive, so please don't hesitate. Use the chat function, use the Q and A function.

We want to hear what's on your mind as you're thinking about both for the markets, and we have another CIO with Michael sharing his views on the world and how to think about options as part of that. And then we'll get deep in the weeds with Dan on what the index looks like. I've known Michael and his team at ValMark for... Michael, it's got to be a decade that we've been talking to Valmark.

Michael McClary:

At least. Yeah.

Jeremy Schwartz:

And you guys have been one of the foremost building ETF model portfolios using ETFs. We've always tried to find ways to work with your firm. And then you were telling me a number of years ago at the ETF conference about using options within SMAs and the challenges. Some of those things were hard and we said, yeah, we're seeing all this new ETFs, but they've got their issues, and so we licensed an index that you created. We'll talk through what goes in there. But maybe for people learning about Valmark for the first time and a little bit about your role, maybe just introduce yourself briefly and how you thought about building these types of strategies for your clients.

Michael McClary:

Sure, I appreciate it, Jeremy. As always, in this business, one of the things that's been most gratifying for me is to form the relationships that we've been able to form with people like yourself and others who really are growing together in this business. And I started 21 years ago managing ETF portfolios, and at that time there was only about 150 ETFs out there, and I don't know what the number is. You might know off the top of your head now is what, 8,000 or if you had in the global ones, maybe more than that. We've always used portfolios of ETFs, but this is our first ETF that we've actually helped to partner and bring to market. And I think it fits in line with what we do as a firm. We oversee about $9 billion and my team and I, and we have to go to sleep every night in charge of those assets and making those decisions.

And there's two things I always say drive us. Number one, we want our clients to actually make money. And number two, we want people to have statistically the best chance for success. And one of the ways we go about that is we look at it and we say, all right, we're not going to mention the word return without mentioning risk in the same sentence. Everything we do, we come at with a risk lens and something we've seen in the industry, and I always say I love choice. So I never denigrate anybody for putting a new ETF out in the marketplace as long as it's approved by the SEC and not the right way obviously. But I love choice, but we're not going to use all of them. And what we tend to be most attracted to is ETFs that really add value on a risk return basis. Fit in line with the things we believe in, diversification, risk management, risk return correlation, all those type of things and really provide value.

And this was the first time in my career, after watching what the ETF industry has done after the initial building blocks were built, a lot of what we've seen is people throwing something out there and saying, this might work, or more importantly, this might sell. But I'm coming at this from a chief investment officer perspective and saying, we built this because it was something, number one, I wanted for myself. It's something that I thought made sense for myself as an investor that wasn't out there.

And number two, it's something that I thought could fit inside of our portfolios and for a lot of the portfolios of our investors, and it really wasn't in the marketplace yet. So that's really, Jeremy, what kind of got us into this, and it fits in line with our expertise on we have four areas: asset allocation, ETFs, derivatives, and fixed income. And this kind of fits all of those. So we were just thrilled when you and I had the conversation that we could figure out a way to do this inside of an ETF and really democratize it for more people than what we were trying to do inside of SMA accounts.

Jeremy Schwartz:

That's great. So Dan, maybe you could just show your screen. We'll talk through some of the details of what the index is and we'll get to all the, we'll touch on how to use it in portfolios throughout the conversation. But just to set the stage for everybody in terms of what this index that we licensed from Valmark is, there's this TOPS Global Equity Target Range Index. I think one of the things you look at, a lot of the exposures today is just an S&P 500. There's NASDAQ. There's these buffer funds that say we're going to protect you from a certain loss percentage, then you got to have a whole monthly series of them. The target range is an interesting way so that you're going to get some of the downside protection that Michael talked about, but also then what are the drawbacks of that?

Usually you have to cap your upside. We're going to talk through the nuances of how that works through this strategy, but it talks about a systematic call spread strategy. Now look at the exposures on the table here. 50% for S&P 500, 20% for Russell 2000, so that's 70% US, and then you have 20% in the international developed markets with the EFA, and then emerging markets 10. So it's 70-30 developed EM is 20-10. So for sure, this is a global strategy. Most of the funds today are focused on just the US or just the NASDAQ often.

So it's a global approach. It's a call spread approach. We will talk through why that is, but effectively what you own in the fund that we license this index for, in the fund and what we'll show on the details page, how you can understand what's in the fund, but it's effectively cash plus some options. And options are what gives you the upside, also helps what tells you what your downside is because you have, call it 80% of the funding cash that's collateralizing all these options exposures, and that's what makes those options can only go to zero. So that's what helps you determine your downside on that.

Michael, as you thought about the specifics on here, are there things that you would think to highlight just as we start off this conversation?

Michael McClary:

Yeah. As we look at this, we're using options to get our base exposure as well as the risk management. So that's something that's a little bit unique. Some of the strategies that you may see out there may buy the actual underlying ETFs or underlying funds or whatever, and then they'll buy a put option on that position. This strategy holds simply options and effectively some treasuries and cash. That's it. It doesn't actually hold the underlying ETFs.

So what the basic idea of this strategy is, Jeremy, is we run it off the calendar for options that expire each January. So around the third week in January, we will roll this index each year and Dan's going to go through the details of what this really looks like. But ultimately, let's say that, let's say that SPY was at a hundred, just to make it an easy example.

We would buy a one year call option at about 85 on S&P. If the value of SPY, excuse me, was it a hundred, we would buy a one-year call option at 85 on SPY. We would do the same if you assume that IWM has a share price of a hundred. We would buy a call option at 85. Similarly, we will sell a call option at about 115. Okay, and I'm using some basic numbers here, but just to give people the example. And by doing this, we're able to get exposure to the underlying equity movements of those ETFs and we're able to also protect against the downside. So we know that as we're buying this, and you could run these numbers... Dan will show you how this works each day. I love it. I call it surgical precision, which in my business, one of the things I started early on was never trust anybody.

If you start with the basic concept of that, then you have to trust some people. But if you start the basic concept of don't trust anybody, it enables you to really protect your investors. So we're buying this, we have an 85% downside or 15% downside because of the 85% call spread we bought. And on the upside, we looked at this and we said, you know what? There's some products out there that have these caps and they really frustrate me because I don't want to be stuck in a situation where I get into this and the best I could do in a given year is 15% gain. Well, what we do is we look every single month except for December and January, January, we do an annual restrike anyway, but every month we look at each of these underlying positions, and if any of the underlying positions has finished the month above its cap, so if we had a 115 cap on SPY and it finished February at one 20, we would re-strike that position.

And what that means is we would go out and we would buy a new call spread on SPY for the remainder of the one-year period. So all of our options always expire on that third week in January of the next coming year. And by doing this, we increase our floor and we increase effectively our cap. And so it's a really dynamic strategy that kind of mixes those things for us of having that downside protection. Also, the opportunity to participate beyond 15%. And if you get fortunate, and Dan will kind of explain this a little bit, we always say you might get lucky and we get a re-strike at the right time. If that really happens that we're holding this for a long time, that could really add value as well. So when you build this all together, what you get is you get an underlying diversified portfolio with about a 15% floor.

Now that's also you have to include some options costs in there, but a little more than 15% downside floor for the one-year period. You get upside at 15% plus. You get a re-strike opportunity. And then the key to this is to buy that whole options package only costs us somewhere in the 15 to 18% range, roughly. So the other 82%, 83% of the money sits in effectively short-term treasuries and cash.

And when we launched this a couple of years ago, Jeremy. Something that's been really interesting is that we were earning I think 10 basis points on that collateral and now we're earning over 5%. So it's become really, really attractive as a dividend play, too. We're now paying the dividend quarterly because people can get dividends on this collateral. So you mix all this in. I really like the fact that you get an opportunity to optimize risk adjusted return, which is the holy grail I've been searching for my entire career is optimizing risk adjusted return.

You get a different type of way to augment traditional stock bond allocations. You don't have to go into alternative investments. You don't have to bet on private credit. You can get a different exposure without getting outside of the basic ingredients of the market. You get a definitive downside protection. So one of the most frustrating things in my career is meeting people that were already in the end zone financially. They already had enough money. And because of some strategy they were sold, they came back out of the end zone. With this, you know what your risk is at any given time and Dan will show you how that works every single day.

Also, it's a tremendous diversifier. So where I see a lot of people use this is instead of having a hundred percent of your money in a 60-40 or 70-30 allocation, maybe you parse off 25% of it and put it into a strategy like this. So you have 75% in your 70-30 and 25% in this. And you're not getting up your base investment strategy, but you're getting something that's going to look and act and smell a little bit differently. So I really have been excited. Obviously, I was involved in putting this together, but those are some of the things that we were thinking about when we designed this and the basic idea of how this worked of getting underlying diversified global exposure with this target range around it. That's what really excites us about it, Jeremy.

Jeremy Schwartz:

We got one of our first questions that was submitted here real time from Satya who talked about sample losses for structures like what we talked about. But so Satya, we're going to come to both the hypothetical, as Michael put together this index, Dan, we've got a whole history that we can talk to. I think what's interesting about having this conversation today... Well A, Michael talked about this strike happened the third week of January. We're fresh off of the latest strike. So you have brand new option positions in the fund that rolled just basically in the last week. So you're right now is a really good time to be looking about this fund and getting exposure because you got very fresh strikes. But the whole point of this was that you didn't have to just buy it in January. The sort of continual evaluation throughout the year makes it, you don't have to think about just like the innovator funds that have a series of 12 different funds, but it is good to look at it right after the fresh strikes.

I think the other thing about just where we are in the global market environment, you all hear about magnificent seven leading in NASDAQ for sure at its peak, but the Russell 2000s not at all time highs. Russell 2000s still want to draw down emerging markets in a big drawdown. EFA is closer to the highs than say the Russell 2000 or emerging markets, but we're not here after a major loss telling you need to get protection. Where very often what happens is after a major loss, you talk about getting protection and then you get cap your upside, you don't participate in the rally. Here we're saying global markets generally the S&P, for sure near all time highs, you should be thinking about this ahead of any downside and there's all sorts of things that can not go perfect.

Michael, I don't know if you had a view on the downside potential, as you think about the market outlook, we have a sort of constructive view on the S&P this year. We think seven 8% sort of normal real returns. We like small caps assets, so the 20% small cap exposure, one of our themes for the year has been broadening participation in the rally. We think there's less of a probability of recession because of the fed pivot and things, and that's good for small caps. We like international valuations, but things can go astray, things can go awry. If you were to put on your risk list, what's on your global hat from a CIO perspective, how are you thinking about global portfolios today?

Michael McClary:

A couple quick things and I'll touch on some nuances to what you discussed there, Jeremy, because I agree with the fact everything he just said, but we like Ardini mega cap eight, he calls it. And I write a monthly commentary and I've talked a lot about that of these eight stocks are acting a lot different. First day of the year, CNBC, all they did all day, they had everybody come on every 10 minutes and talk about the mega cap eight and everybody gave their different opinions. And I got to the end of the day and I said, well, I didn't really learn anything. It's kind of a little bit of a guess, of whether they're going to continue to lead. Obviously valuations have built in a really good result for the mega cap eight. I say to people, "Well they sound great, but are you willing to bet on them with a three touchdown spread? Because in order for you to make money, you have to overcome that because the valuations are so high."

And maybe they will, and we still have them as a big component of our portfolio, but we believe having diversification makes sense. So I think that that's a key component. When you look at these valuations, we run valuations, Jeremy, on eight different indexes, over eight different valuation metrics going back monthly for 20 years. So price to book, price to sales, Ford P, historical P, all that stuff. And when you look right now at S&P growth, we have it in our Bloomberg research, we have it in the 93rd percentile compared to the last 20 years. So S&P 500 growth is more expensive than it's been 93% of time in the last 20 years. The S&P six is in the 28th percentile.

So how could I as a long-term investor, not mention that to investors, implement that in my portfolios. And you're seeing some of the similar nature with EFAs towards the middle from a valuation perspective. Emerging markets are a little bit higher than you might expect, but also emerging markets, the earnings components always a little bit more questionable I think from an earnings estimate perspective, forward-looking. So you build this all together. Number one, I think there's a lot of advantage to what we're talking about here of a diversified portfolio versus something that's just based on the S&P 500 because if the underlying, we can have as many options as we want around it for risk protection, but the underlying component doesn't have enough juice to drive this thing forward, it's going to be a dead investment, right? So I like us from a diversification perspective.

I like the fact that we've got income coming from the collateral because what if we do get in a more flattish type market? We've got some income there to help offset the cost of these options and the overall mix. So I think that makes a lot of sense and it ties into the fed rate cuts. We don't really know exactly what the fed's going to do. There's obviously a free rosy financial scenario built in, but this can take a little bit of pressure off the bond component of your portfolio. What if interest rates go the opposite way? What if we see credit spreads bust out? Investing in bonds includes risk. Now maybe not the same risk we had over the last couple of years, but investing in bonds does include risk. And by doing this, we're putting a risk protection around the underlying engine is equities.

We're saying we're going to trust the equity market and we're going to bondize it to some degree by using options and create some income and create some protection. So I think that makes a lot of sense, and as we look at markets going forward, really like WisdomTree, encouraging people to highly consider diversifying this other asset classes that are a little less loved right now. And then, also, why wouldn't you want to take some chips off the table? If you've gotten fortunate and you're one of those people who, I always say investing a hundred percent in equities is inhumane. Not too many people can really take that amount of risk, full equity risk, and even a higher percentage of people don't need to.

So even if you can take it, you probably don't need to take it. So none of us really should be investing a hundred percent in the S&P 500 because if you've been there for the last few years, you probably made enough money, you don't need to do it anymore. But ultimately, I think this all fits into the... This becomes a prudent strategy for people when you really look at the diversification, the income component, and then why wouldn't you want to add some risk management right now, but stay invested in the markets.

Jeremy Schwartz:

Well, I'm just going to say one more thing I want to bring Dan in, because he's been very patient as we go on the sort of introduction and the macro environment for this. The one thing I would say, just to emphasize extra what Michael just said, one of the charts that I've been showing in a lot of my presentations is the correlation between stocks and bonds is back to levels that you saw in the seventies and eighties where we were spoiled... The last three decades, bonds were a great insurance asset for stocks. If something bad would happen, terrorist attack, financial crisis, recession, all these things were bad for stocks, good for bonds and bonds act as a hedge.

With inflation top of mind bonds are not acting as the same hedge. And so you have correlation spiking. By the way, this should mean that rates stay higher for longer. When we look at some of the long-term data, there's as much as a 300 basis point spread between some of the highest correlation periods and the lowest correlation periods. So that is one of the forces that leads to higher rates. And if you said the tenure went from four where we are today to five or above, that could be negative for stocks. You have losses and bond losses and stocks. Those are the things that-

Michael McClary:

Exactly.

Jeremy Schwartz:

You have to start thinking about other alternatives. Now Dan, let's bring you into this conversation maybe for 30 seconds.

You are Volos. People who aren't familiar with your firm where you're calculating this index in real time. You guys have some option background, one of the few people who can even do these calculations from an index perspective. But you also have done a white paper on this topic. Maybe you could talk through for this question about historical analysis. You could point to some of the work you did in your white paper, but give people an intro to yourself, your firm, and the index.

Dan Corcoran:

Yeah, thanks Jeremy. Michael. Again, Dan Corcoran from Volos. I, again, really think it was probably five or six years ago that we met Jeremy through a mutual friend in the industry. And for background on Volos, what we do is really calculate benchmark indexes for option strategies as well as provide software for institutional investors to essentially back test and benchmark custom option strategies.

And so that's where we've specialized and I really started the business with a few classmates really about 10 years ago and have brought on really a team of professionals in the quant and technology space as well as investors and clients. Really through partnership, we did about four years with the NASDAQ for really getting into primetime index development with some leading financial institutions. So really WisdomTree has been one of our longest clients in the space and really I think that a lot of thought went into the development really, primarily with Michael from Valmark in 2020 and 2021 into the TOPS GB Equity Target Range Index.

And there's really a lot I think that you guys both spoke to already that, hopefully, we can put some data around. And that's essentially what we did when we took what Michael was already running in house and with his clients and SMAs and thought about how can we generalize this, how can we put it into a benchmark that you don't have to reallocate to and basically could be part of a strategic asset allocation but could also potentially be used tactically as well. And so, that was really part of the development process, but I really think that I got to compliment Michael on the thoughtful design of the strategy and the simplicity that it has as well I think is really nice.

Jeremy Schwartz:

Why don't you go through some of your slides to talk about the market environments, how it's performed. It gets to some of the first question that we got on performance. But why don't you walk through a few of your slides on the exposures and the performance?

Dan Corcoran:

Yeah. That sounds great. Now I'll speak to a lot of the points on this slide as well, again, just as far as a review of how the index works. Again, we have the four call spreads on spy IWM, EFA and EM with these notional weights. And I'll share an example and highlight how we would look at that at the index level being the index sponsor with Valmark. So we actually took this snapshot about an hour ago, and this is just looking at the index really since inception in 2007. And you can see really from a starting value at 100, right now the index is at 198. And on an annual basis that's about 4.14% and volatility of around 11%.

And again, I'll refer to the white paper, but there's a white paper on the index website as well and Jeremy that you referenced that we could potentially circulate. But really looking historically versus the long only equivalent, really the drawdown profile of TOPS GB versus a long only equivalent is something that I think is pretty attractive.

And from a Volos standpoint, historically it's been about 10% less annual of vol than a long only and about 50% of the max drawdowns. Again, we look all the way through the financial crisis as well as a long only. And again, this is empirically for the index, about 3% less annual returns. But you get that explicit protection and you get that growth profile. And so, that's basically what this is as far as what the objective is. And we can really see that I think through some of these charts I'm going to show, but I'll pause here for a second and then you can keep going through the slides. But I would just encourage any Q and A that people have about how this index works. Really the way that Michael designed it, we really were pretty thoughtful to make sure it was like clockwork as he referenced.

Jeremy Schwartz:

Well, Michael, from a CIO perspective, when you hear, sometimes volatility is tough to understand what it means for a portfolio location. When you hear, well the index had a 21 vol and this is have 11 vol, what does that mean to you in terms of what you would be comfortable allocating to in portfolios or how the target equity range, the target range fund that we have, when you think about that, how it gets closer to a stock bond combination, then you got to take into the fact that bonds are clearly higher stocks, but how do you think about what it means in portfolio allocations?

Michael McClary:

Yeah, when I look at historical standard deviations for my 70-30 model, 60-40 model going back 20 years, we're in that 10, 11, 12% range, standard aviation. So you take a standard aviation a little bit less than 11 with this. And what I look at is that generally over time, this is like a balance to a 70-30 type model. So first of all, it's not designed on a risk neutral basis to outperform the S&P 500. That's not what this is designed to do. It can do that. Obviously, in periods where the S&P is down or if we get fortunate on an upside or we get other performance if you're comparing it versus a global benchmark if we get those risk metrics as well. But ultimately the way I look at this, the way it was designed, Jeremy, is to say as I look at our, I manage money for, we're in charge of over a hundred thousand investors.

Really when you boil it down between the 20 insurance companies we manage money for and the sub managed accounts and everything, and it's a bell curve. The majority of our investors are closer to a 70-30 risk perspective. And that's why I talked a little bit earlier that a hundred percent equity risk is inhumane for a lot of people. And so I look at this as a different way to do a 60-40, 70-30 type risk. Different than that as what you just mentioned we've all experienced before. It gives us more certainty on that downside in situations where bonds fail us and stocks fail us, maybe at the same time, and we've seen that before. That could happen, it will happen again at some point. And it gives us that more certainty and it's going to look and act and smell a little different than a 70-30, 60-40 because of that. So yeah, we look at it overall risk wise similar to that range.

Jeremy Schwartz:

Okay. And keep going on how these options work inside of the index.

Dan Corcoran:

Yeah. Michael, I think you hit it well. The objective here isn't risk adjusted performance. The objective here is to have really an explicit floor of really knowing that the portfolio only really consists of treasuries and call spreads. And really what we're showing here is the total index value really in those two components, what part of it is options and what part of its collateral account. And you can see that there are so many times throughout this history where it basically either hits the floor or comes close to hitting that floor. But if you had an equivalent long only portfolio, technically all of that capital is at risk. Where we're here, we can look at it as a percentage typically really no more than 20, 25% at a given time of the portfolio is fully at risk. Again, assuming that the rest of the portfolio just being in t-bills. Three months ago-

Jeremy Schwartz:

Which is interesting that you're getting a 70-30 risk profile, but being actually allocated the reverse, right? You have 80% in cash, you have upside through options, but you get the risk profile, the 70-30 stock bond. That is a fascinating dichotomy in both the exposure where you can know if you have a little, Hey, what happens if something really goes wrong? Well, I know I got 80% in cash, but I'm getting my upside through the options.

Michael McClary:

And Jeremy, something else just to mention real quickly because I'd be remiss if I didn't. We talk about other products that involve options or options type exposure. And what really got me excited was we were able to do this through an ETF structure. And you compare this to structured products for example, which have illiquidity concerns, a lot of baked in expenses you don't see. There can be highly complicated. You compare this to some of the other ETFs that are out there, and again, I love choice. I got a lot of friends that are running great choices that are out there, but as an asset allocator, if I wanted to get into individual S&P, individual EFA, individual emerging markets and put all this together one time we looked at it and said, if we really wanted to do this right, we'd have to put together 240 portfolios to really do what I wanted to do.

I can get this what we feel is a very competitive solution and arguably better in many situations by using this one ticker and we can buy it at any given day. And like you said, sometimes your risk will change a little bit if you buy it in March versus January, but because the options are always priced, the options literally ETFs we use, I think we looked at it in the white paper, Dan had over a trillion dollars of notional at any given time on them. We're using the most highest traded vehicles out there and you're getting the appropriate risk versus return price any day you buy it. So it's pretty cool how you can use this one ticker. You can actually allocate 20% to your portfolio and leave it there for 20 years, as opposed to that fiduciary risk you take as an REA, if you buy the February version of a product and then six months later, what if the March version's better, and somebody comes to you and says, should have bought the March with this one, we really make it actually usable for people.

Jeremy Schwartz:

All right Dan, so you were showing the percentages of the option value. So the actual notion of the option rotates around 80% or at least certainly 80% today because we just rolled the options. And then you showed how the global component.

Dan Corcoran:

Yeah. Exactly. I think that Michael, what you're speaking to as far as just knowing on a given day, what's the percent of my portfolio that is at risk, in absolute terms, that's really what this quantifies and it's really just that portion that's held in options which is shown here. But you're not necessarily limiting that cap to. And you can see this happen a few times as you see the collateral account increase through these periods. We can look at where you have the re-strikes, you have the upside re-strikes.

And so these call options, they're basically on a monthly basis evaluated if they're above that upper strike. And we can look at this, I'll move on to the next chart and if anyone has questions, again, please leave them in the Q and A. And again, this chart that I had up a bit earlier is just looking at of the options portfolio, what is the composition of EM options versus EFA options, IWM options and SPY options. And you can see for example in the financial crisis, IWM was, I guess, the only call spread that retained its value. And so as percentage of all the options exposure that was there. Everything that else went to their floors. That's kind of what that's showing. Whereas most of the time it's mostly the SPY.

Michael McClary:

Well, that chart shows, Dan, just for 10 seconds, that chart shows why you'd want a diversify options piece versus just picking one index. That chart shows that... That shows multiple periods where you would be embarrassed or you would lose if you were an asset manager if you pick just one. And where we kind of mix these all together and try to get the best result for the investor. So that was a very important part of our research. So please carry on.

Dan Corcoran:

Yeah. I think ultimately having exposure to, basically, thousands of stocks as opposed to the high concentration that most equity components to the portfolio a lot have today. I think that's definitely a benefit that you touched on well earlier. And to just get into mechanically what the index at the underlying levels for the call spreads were in the index, historically... These are the strikes over time, the long call strike in orange and the short call strike in green. And you can see, for example, in COVID the spot price of SPY falls below that floor. I believe the floor was 279 and I believe the low for the SPY, again, just during that period was 223. And so just to kind of put it in perspective, and today, just after this re-strike, a lot of these plots are all as of January 25th at the index level.

The spot really was kind of in between its range of 405 and 550 for the spot. And so we can look at that for the other ones as well, for IWM, for EFA, for EEM. And so why don't I just, again, perhaps we can pause on any one of these if you guys want or we can always go back to them. But essentially, it's showing the same thing for the other underlying assets. And this is really where I want to make sure we can get to as far as highlighting the examples. These call spread payoffs are very explicit at maturity, what the value of the call spread is. And really what we've put together with Michael and the index website is really an illustrative, essentially payoff of the value of these call spreads for each EEM, EFA IWM and SPY. And we'll pause on the SPY and just use it as an example to just show what the value of that call spread is at maturity.

Again, this assumes no re-strikes. The re-strikes again move the floor up so there're only upside re-strikes, but if basically there were no re-strikes from now to maturity, that dot is basically in index points the value of the call spread. And then we know at maturity that brown line is what the value of the call spread is going to be as a function of the SPY price. And then the green line in the middle is basically in mid-June, June 16th. Basically, the model estimated value of what that call spread is. We can get into that in a second, but let me just pause here. And those are really most of the illustrations I wanted to walk through.

Jeremy Schwartz:

We've talked a lot about the index. I want to take the screen share for a second Dan, and I'm going to show a few things on the fund page, but also just so people can start getting comfortable with what the fund looks like, what are some of the holdings. So hopefully it's going to take one second. Do you all see... You see the ticker that we've been talking about here is the WisdomTree target range fund is tracking that TOPS Global Equity Target Range Index, the TOPS GB that Dan and Michael are talking about. When you go to, there's a lot of different ways you could view holdings, but if you go to this all holdings, you'll be able to see some of the exposures. And so we talked about the collateral, the very first line item, you see 74% in treasury. Both that's part of the collateral that's earning the 5% that Michael talked about.

There's also this US dollar exposure. It's basically like a cash position. But here you see the call, the first line item for a call, which is the 405 call for Jan 2025. So this is that level of the strike that's in the fund is the 405 strike, that's the 15%. When Michael was given the example of a hundred, you're buying 85. The strike that was relevant at the re-strike was 405 for the Russell 2000. The strike level was 163 for the Jan 2025. EFA was at January 63. And emerging markets you see here at Jan 25 was a 33 level. So you could see the strikes that are particularly in the fund. We have a few pieces of information about the specific calls. Was there a long call, a short call? You could see some of that information on the fund page as well. Dan, Michael, anything on this? Just when people look for the fund details, anything you would highlight, point out for people?

Dan Corcoran:

Well, as a matter of protocol, the benchmark provider, technically not supposed to comment on the fund and always can speak to the index. But I think those analytics as far as how far away this spot is from the upper strike and from the lower strike, I think that those are really valuable metrics for getting familiar with how this works and how it's able to participate in upside performance while basically having a known maximum loss in floor level. I think you guys have done a really nice job with the website at the fund level as well. And on the index, definitely a lot of the analytics that were pulled up earlier. Happy to answer any questions, but I think that's helpful, Jeremy.

Jeremy Schwartz:

So GTR is the ticker. Is there an index page you want to show people about where they can find your white paper and some of any other analytics that you guys do at the index level?

Dan Corcoran:

Yeah. I will and I'm happy to share that quickly as well, as well as if it would be helpful just share the link as well in the chat. So I'll do that quickly. And again, this is just an example of the white paper that's on the site. Again comparing to [inaudible 00:40:30] onlys. We have a US only version of the index as well called TOPS US. But this is comparing basically the drawdowns, the ball-

Jeremy Schwartz:

Stop there for a second because we talked about how we've been in a very good market through S&P close all time sitting new hall time highs every day. But go to that down market that you had there where you had the global and the US version. So the global index in 2020 was down 35% and this sort of cut off the losses, basically half the loss during that drawdown. That's one of the things you're showing there.

Dan Corcoran:

Yup. It has call spreads and treasuries and the maximum loss from the call spread is just the value of the call spread. So those sort of sharp drawdowns, sharp declines, having that floor protection I think is really valuable. For example, the markets didn't recover as quickly as they did in COVID and they stayed down. Having basically a fixed level of absolute losses is maybe peace of mind that investors that if they're worried about a sharp decline, know that they don't want to sustain and minimizing a drawdown is part of their portfolio objective. I think it speaks well to it.

Michael McClary:

Yeah. I think one thing, Jeremy, again, I'm speaking from index staple as well, so be careful, but it is there on your website, the one-year trailing return for GTR from ending in the roll period we just had around the 18th was just shy of 9%. And if you compare that to this has kind of been a unique market where it was relatively good for us, but there's also some things in the last year it wasn't a perfect scenario for the index and it still outperformed many people's growth allocations where we looked at it versus a lot of 85-15 global portfolios and it outperformed a lot over the trailing one-year period ending in the most recent roll date.

So this is something also that we really worked hard in designing it that we didn't want a bunch of bells. Remember my number one thing I told you I do with my portfolios is make sure people can actually make money. And we didn't want a bunch of bells of whistles that people got to the end and that portfolio didn't have any room to grow. So I think it is important to see that what Dan has shown in the downside environments, but also the fact that this thing actually is designed to grow. We want to make money with this is our ultimate goal.

Dan Corcoran:

And last point just to speak to this, the index website is index.volossoftware.com/topsgb. And so I can share this link in the chat and there are some interactive plots, again for illustrated purposes around the index. And then the website Jeremy showed I think, as well, is obviously the reference for the fund. But again, just at the index level you can see what the positions are, the strikes, and then the various historical levels and caps and floors.

So again, I think that just that example with COVID, we can zoom into it and again it speaks to it pretty well. Yeah, there's that long call strike at 279 and the market went all the way down to 222. If it had stayed flat down there and didn't recover I think that, especially for liability driven investors as well, they don't pay in relative returns. They pay in real dollars. So I think knowing what the max loss is for investors that really care about those drawdowns, I think GTR, it's a solution where the transparency really is a value.

Jeremy Schwartz:

Michael, we've touched on this a few times because we're trying to wrap up. As I think about final closing summary thoughts, we talked a little bit about or you could use, you think about the target risk level of this target range. GTR really proxying like a 70-30, but now you oversee multi-asset portfolios. When you think about how... And we talked about the correlation stocks and bonds being challenging for allocations. When you think about how this would compliment somebody's existing 70-30, how have you talked about sizing this in terms of a traditional allocation when people think about other alternatives they could do to diversify, how have you thought about this as a anchor to portfolios?

Michael McClary:

Yeah. A couple quick things here. One of which is it is great if it could be great if you've got a specific goal. So somebody's got money they need to put away for a certain situation. I can't do worse than this. And we've able to have a range there of what that could do. So specific goal use for a bucketing situation and we see that a lot. Number two, diversification within your overall portfolio. So again, instead of putting a million dollars in your 70-30, put seven 50,000 in your 70-30, put 250,000 in something like this would be maybe a prudent solution to get that.

We see it as an alternative to a balanced fund for some people look and act could smell a little different than that and could be used as an alternative to that, potentially. And then, getting that potential for income as well as the exposure in the indexes. So it is not just an equity play, there is also some dividends that are paid from this due to the interest on the collateral. And I think lastly, it's a very viable solution to the many good choices that are out there now in options based ETF and option based strategy world. And I think we've designed this to hopefully make up some shortfalls or some maybe things that make it difficult to use other solutions. We've made this very usable for people.

Jeremy Schwartz:

So Jim asked the question with a hundred percent in cash, why does the fund need call options? So Jim, the fund is effectively 80% in the collateral and then 20% is then buying the call option. The call options are giving you the direct exposure to the market sort of call spreads. And we touched on it a few times, but one of the reasons why it's not capping the upside is it's selling a call to help fund the long calls or you're selling upside.

But we're looking at that every month and if it broaches to the upside, this sort of 15% goes through the barrier of the strike you sold, you'll reset these things higher. And that has a function of stepping up what your downside could be. Because if you didn't step up the bottom, you could go all the way back down 30% instead of only going down 15% that we're trying to keep it within this range of 15% up, 15% down.

So Jim, we could talk more offline if you want to keep drilling into all the details, but that's the basics. That it's 80% effectively in collateral on this roll date. 20% in the options. The options is what gives you the upside to the market. You need the option to get the upside to the market. And so we can talk a lot more about all the details, but that's the basics.

Michael McClary:

Yeah. The options have... So if we took a million dollars in the index and we put a million dollars just in options premiums, we would have exposure well beyond a million dollars. So the reason the collateral exists is so you get the correct exposure across the fund to offset the leveraging options.

Jeremy Schwartz:

Yeah. We're happy to talk much more in detail if you want to follow up with us off the webinar, Jim. All right, well this has been fun. Michael, I always enjoy getting your updates. We're definitely going to do this again this year. Keep people updated on how this is going and all the different exposures options has definitely been one of the hottest topics.

So Dan, I know we'll be talking to you again, too. It's a big year for options. And then there's some questions about what they can use with end clients. A lot of our stuff is financial professional only. We'll have to think about what kind of commentary we could put together for Jim to help him with end client conversations. Good feedback, Jim, that we need to make some of that stuff available for your end clients.

Thanks, Michael. Thanks, Dan.

Michael McClary:

All right. Thank you.

Dan Corcoran:

Thank you.

IMPORTANT INFORMATION

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/investments 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.

You cannot invest directly in the index.

WisdomTree Target Range Fund (GTR) Risk Information: The Fund is actively managed and implements a strategy similar to the methodology of the TOPS® Global Equity Target Range™ Index (the “Index”), which seeks to track the performance of a cash-secured call spread option strategy. There can be no assurance that the Index or the Fund will achieve its respective investment objectives, or that the Fund will successfully implement its investment strategy. Moreover, while the Fund seeks to target returns within a prescribed range thereby minimizing downside investment loss, there can be no guarantee that an investor in the Fund will experience limited downside protection, particularly short-term investors, investors that seek to time the market and/or investors that invest over a period other than the annual period. The Fund’s options strategy will subject Fund returns to an upside limitation on returns attributable to the assets underlying the options. The Fund’s investments in options may be subject to volatile swings in price influenced by changes in the value of the underlying ETFs or other reference asset. The return on an options contract may not correlate with the return of its underlying reference asset. The Fund may utilize FLEX Options to carry out its investment strategy. FLEX Options may be less liquid than standard options, which may make it more difficult for the Fund to close out of its FLEX Options positions at desired times and prices. The Fund’s use of derivatives will give rise to leverage and derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. Investment exposure to securities and instruments traded in non-U.S., developing or emerging markets can involve additional risks relating to political, economic, or regulatory conditions not associated with investments in U.S. securities and more developed international markets. These and other factors can make investments in the Fund more volatile and potentially less liquid than other types of investments. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

This material contains the opinions of the speakers, 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. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise, the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

Jeremy Schwartz is a registered representatives of Foreside Fund Services, LLC.

WisdomTree Funds are distributed by Foreside Fund Services, LLC in the U.S.