Last year was a particularly bad one for the traditional 60/40 portfolio after one of the core investing principles banked the worst drawdown since 2008.
However, ETF investors still willing to bet on it making a comeback received an alternative way to manage their asset allocation last week, following the launch of the WisdomTree US Efficient Core UCITS ETF (NTSX).
Listed on the London Stock Exchange, Deutsche Boerse and Euronext Milan with a total expense ratio (TER) of 0.20%, NTSX mirrors the group’s US-listed strategy – which has amassed $825m since launching in 2018 – and is part of its four-strong ‘Efficient Core’ range.
The self-indexed ETF offers a leveraged version of the 60/40 portfolio – the first in Europe to do so – offering 90% exposure to US large caps and 60% to US Treasury futures, creating a more “capital efficient” portfolio that aims to reduce risk in the portfolio without damaging returns.
“It is a 60/40 portfolio leveraged to 90/60,” Pierre Debru, head of quantitative research and multi-asset solutions at WisdomTree, told ETF Stream. “It could work as a US equity replacement [for investors], or as a tool for portfolio construction.
“There is no such product in Europe, so this is the reason we brought it over from the US.”
The concept of the ‘Levered 60/40’ portfolio was first explored in a 1996 paper written by Cliff Asness, former Goldman Sachs Asset Management director of quantitative research.
According to Asness, leveraging a combination of equities and bonds allows investors to achieve competitive returns while managing risk more effectively through diversification, a concept born out of Modern Portfolio Theory.
Given the index is a leveraged multi-asset portfolio, how does it work in practice?
Methodology
NTSX will invest 90% in US equities selected from the 500 largest companies by market capitalisation with an ESG filter applied. The remaining 10% of cash will be used as margin for an exposure of 60% in a basket of US Treasury futures contracts overlaid on top.
The basket will be made up of five equally weighted futures contracts with a maturity of two to 10 years, which is then rebalanced quarterly depending on the performance of the equity and fixed income assets to bring it back to a 90/60 allocation.
Debru said the index rebalance also ensures it does not hold futures contracts that will expire over the coming quarter.
The index will undergo a “special rebalance” should the weightings deviate by more than 5% over the quarter.
“If at any point inside the quarter, you get a deviation of more than 5%, equities going above 95% or the futures contracts below 55%, then we will do a special rebalance to bring it back to 90/60,” he said.
Investor view
Despite launching after a year where many questioned the legitimacy of the 60/40 portfolio, there are some signs the launch could be well-timed.
The 2024 Long-Term Capital Markets Assumptions by JP Morgan Asset Management said it was the best entry point for the 60/40 portfolio in the last 14 years.
It forecasted an annual return of 7% for a USD 60/40 stock-bond portfolio over the next 10–15 years and noted an additional 25% allocation to alternatives could boost returns by 60 basis points and improve the Sharpe ratio by approximately 12%.
This supports Debru’s thesis NTSX can be used to “free up space for allocations to other diversifiers and alternative strategies”.
Despite this, multi-asset investors are unsure if a product like this would have a place in their portfolios.
Stephen Kemper, chief investment strategist, team advisory desk at BNP Paribas Wealth Management, said the asset allocation ETF would be a “hard sell” for its clients.
“We prefer to stay in the driver's seat, knowing our exact exposure in real time to act accordingly, if necessary,” he said. “I also conclude that the concept is not living up to its ambitions of greater risk management and diversification potential versus a 100% equity portfolio.
“It underperformed the SPX, has a weaker Sharp ratio and even experienced a bigger max drawdown during the last three years.”
Abdelhakim El Attar, multi-asset portfolio manager at Eres Gestion, agreed, adding he is unsure if the innovation in the 60/40 portfolio area was a “smart move”.
He said: “It would be more appropriate for retail clients as an alternative core allocation for their portfolio rather than fund allocators who appreciate building their portfolio with separate blocs that give more flexibility.”
