Introducing the WisdomTree Short Term Fixed Income Model
By Rick Harper, Kevin Flanagan and Scott Welch, CIMA
This article is for financial professionals who are considering offering model portfolios to their clients. If you are an individual investor interested in WisdomTree Model ETF Portfolios, please inquire with your financial professional. Not all finance professionals have access to these model portfolios.
Take a look at the following three graphics. The first shows the increasing duration of gross debt in the United States. Gross debt includes the debt of governments, households and non-financial corporations. As a reminder, duration is a measure of the sensitivity of bond prices to changes in interest rate, and it’s an inverse relationship: When rates go up, bond prices usually go down. The longer the term, the more sensitive bond prices are to changes in interest rates.
The second graph shows the evolution of interest rates over the last 12 months, especially the last three – a constant increase and which we believe will continue (with the 10-year cash flow perhaps reaching 1.75% to 2.00% by the end of the year).
For definitions of terms in the tables, please visit the glossary.
So higher rates and tight spreads. What is a poor bond investor supposed to do?
Introducing the WisdomTree Short Term Fixed Income Model
WisdomTree recently launched a short-term fixed income model, designed specifically to reduce interest rate risk without sacrificing too much in terms of performance, compared to the Bloomberg Barclays US Aggregate Bond Index. It can be used as a stand-alone bond model or as a complement to an existing bond allocation to reduce duration risk without disrupting existing allocations.
We’ve kept it simple and inexpensive: four tickers that provide diversification across all sectors while maintaining a low duration profile. While this is a straightforward construction, the four underlying funds incorporate some of our most sophisticated thinking to balance income opportunities and the risks they carry, fundamental filters within our investment strategies. cautious approach to improving the return built into our short-term core fund to our leverage. the in-depth expertise of Voya’s securitized debt team in finding opportunities in the securitized debt markets.
For the standardized and end-of-month performance of the funds mentioned above, click on here.
For a prospectus for the funds referenced above, click on here.
As of September 30, 2021, this model portfolio, using the weighted average return of the four underlying securities (since the model itself was launched a short time ago), showed a rolling 12-month return of 1.99% (with current yield – at worst 1.71%)1, while maintaining an average duration of 3.1 years.
In comparison, the Bloomberg Barclays US Aggregate Bond Index currently has an average duration of 6.71 years and offers a current yield of 1.56%. The rise in yield in the short duration model reflects that it takes more credit risk than the index.
Take a look at the following table. It shows the marginal increase in yield achieved as the duration increases. Historically, this relationship has been around 1: 1, or a 1% increase in yield for each additional year of life. This relationship is now at an all time low. Investors are simply not being rewarded at an appropriate level for taking additional interest rate risk, especially in an environment where we believe rates will continue to rise.
The compromise between duration and performance
With interest rates likely to rise and historically tight credit spreads, investors should not seek to take excessive interest rate risk in their fixed income allocations.
Our new short term fixed income model may be part of the solution. It can potentially help reduce interest rate risk (duration) while generating levels of return close to the index.
You can find out more about our Model adoption center. We hope you take a look.
1 “Worst return” is a measure of the lowest possible return achievable on a bond that fully meets its contractual obligations without default. It takes into account the bond provisions that allow the issuer to liquidate the debt before it matures (two examples are payability and the prepayment option on mortgages).
Initially published by WisdomTree on November 5, 2021.
For more news, information and strategy, visit the website Model wallet chain.
Significant risks associated with this article
There are risks associated with investing, including possible loss of capital. Fixed income investments are subject to interest rate risk; their value normally decreases as interest rates rise. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will not pay interest and principal on a timely basis, or that negative perceptions of the issuer’s ability to make money. such payments lower the price of this declining bond. Investing in mortgage and asset backed securities involves interest rate, credit, valuation, expansion and liquidity risks and the risk that payments on the underlying assets will be delayed, prepaid, subordinate or in default. High yield or “junk” bonds have lower credit ratings and carry greater risk to capital. Please read each Fund’s prospectus for specific details regarding the Fund’s risk profile.
For individual investors: The WisdomTree Model Portfolios are not intended to constitute investment advice or investment recommendations of WisdomTree. Your Investment Advisor may or may not implement the WisdomTree Model Portfolios in your account. The performance of your account may differ from the performance shown for a variety of reasons, including, but not limited to: your investment advisor, and not WisdomTree, is responsible for the implementation of transactions in the accounts; differences in market conditions; investment restrictions imposed by clients; the timing of client investments and withdrawals; the fees to be paid; and / or other factors. WisdomTree is not responsible for determining the suitability or suitability of a strategy based on the WisdomTree Model Portfolios. WisdomTree has no investment discretion and does not place trade orders on your behalf. This document was created by WisdomTree and the information it contains has not been verified by your investment adviser and may differ from the information provided by your investment adviser. WisdomTree does not undertake to provide impartial investment advice or to give advice in a fiduciary capacity. In addition, WisdomTree collects income in the form of advisory fees for our exchange-traded funds and management fees for our mutual funds.
For financial advisors: The information in the WisdomTree Model Portfolio is designed to be used by financial advisors only as an educational resource, along with other potential resources advisors may consider, to provide services to their end clients. The WisdomTree Model Portfolios and related content are for informational purposes only and are not intended to provide, and should not be relied upon for, any tax, legal, accounting, investment or financial planning advice by WisdomTree, and no WisdomTree’s model portfolio information should not be considered or relied on. as investment advice or recommendation to WisdomTree, including with respect to the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy. In providing information on the WisdomTree Model Portfolio, WisdomTree does not act and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any adviser or end client, and has no liability to in this regard, and does not provide individualized investment advice to any adviser or end client, including based on or tailored to the circumstances of any adviser or end client. Information on the Model Portfolio is provided “as is” without any warranty, express or implied. WisdomTree is not responsible for determining which securities to buy, hold and / or sell on behalf of any advisor or end client, nor is WisdomTree responsible for determining the suitability or suitability of any model portfolio or any title included therein for a third party, including end customers.
Advisors are solely responsible for making investment recommendations and / or decisions concerning an end client and must take into account the individual financial situation of the end client, the investment schedule, the level of risk tolerance and the objectives. investment to determine the suitability of a particular investment or strategy, without input from WisdomTree. WisdomTree does not have investment discretion and does not place trade orders for end client accounts. The information and other marketing materials provided to you by WisdomTree regarding a model portfolio, including allocations, performance and other characteristics, may not be indicative of the actual experience of an end customer of investing in a portfolio. or more of the funds included in a model portfolio. Using an asset allocation strategy does not guarantee a profit or protect against loss, and diversification does not eliminate the risk of incurring investment losses. There can be no assurance that investing in accordance with the allocations of a Model Portfolio will provide positive performance over any period. Any content or information included in or related to a WisdomTree Model Portfolio, including descriptions, allocations, data, fund details and disclosures, is subject to change and may not be modified by an advisor or other third party of any way.
WisdomTree primarily uses WisdomTree funds in model portfolios, unless there is no WisdomTree fund that matches the desired asset mix or model portfolio strategy. Therefore, the WisdomTree Model Portfolios should include a substantial portion of the WisdomTree funds, although there may be a similar fund with a higher rating, lower fees and expenses, or significantly better performance. In addition, WisdomTree and its affiliates will benefit indirectly from investments made on the basis of the Model Portfolios through fees paid by the WisdomTree Funds to WisdomTree and its affiliates for advisory, administrative and other services.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.