90/60 portfolio with NTSX – the best of both worlds

There’s an ETF that caught my eye recently – the WisdomTree US Core Efficient Fund (NTSX). It offers a prudent 1.5x leverage on a traditional 60/40 US portfolio with investments in both US equities and US treasuries to create a more optimal portfolio.

Here’s why it’s interesting:

  • It takes a traditional 60/40 portfolio and applies 1.5x leverage on it
  • Inherent leverage within the ETF means no margin calls from your broker
  • It has a higher Sharpe ratio compared to a 100% equities portfolio

Every investor looks for ways to balance risks and returns. The traditional sweet spot is the 60/40 portfolio – 60% to stocks (equities) and 40% to bonds (fixed income). This allocation has been tried-and-tested over multiple decades and has resulted in decent results for those that have stuck with it.

Over the past 25 years, the simple 60/40 portfolio returned about 9% annually. However, we are moving towards an environment of lower yields for both equities and bonds, potentially making retirement a greater challenge for investors.

Traditional 60/40 investing usually invests 60% of one’s portfolio into equities and 40% of the portfolio in bonds, typically government bonds, which offer lower volatility and lower returns, stabilising one’s portfolio from drastic swings.

During volatile or bear markets, a 60/40 portfolio tend to outperform a 100% equities portfolio since the bond allocation can offer some respite from the negative returns of the equity portion of the portfolio, preventing one from buying high and selling low.

However, in the age of low interest rates, a 60/40 portfolio might be too conservative for many young adults who might have a long investment horizon to grow their portfolio and stomach volatility. On the other hand, going 100% equities might be deemed too volatile as well.

NTSX offers a 1.5x leverage on a traditional 60/40 portfolio, creating effectively a 90/60 exposure to equities and bonds respectively.

It does this as follows for every $100 invested in the ETF:

  • 90% invested in US equities weighted by market cap
  • 10% cash collateral with returns similar to US treasury bills
  • 60% invested in bond futures laddered across 2,5,10 and 30-year segments of the yield curve to diversify interest rate risk. The average duration is ~7 years.

Key facts about NTSX

  • Expense ratio: 0.2%
  • AUM: US$1.01b
  • Inception date: 08 Feb 2018
  • Dividend yield: 0.91%
  • Price/Earnings: 27x
  • Price/Book: 5.3x
  • Price/CF: 19x

Historical Performance

Based on the above graph, NTSX (in blue) outperforms both the S&P 500 (in orange) and 60/40 portfolio (in green).

The dips are also less severe, offering a quicker rebound from lows while offering the upside potential of a traditional 100% equity allocation towards the S&P 500. This gives investors the upside of investing in the S&P 500 while mitigating some of the severe drawdowns a 100% equities portfolio might have.

Portfolio Holdings

NTSX can offer high returns to risk ratio

NTSX may offer higher returns to risk compared to a traditional S&P 500 index, demonstrated by a higher sharpe ratio (0.66 vs 0.52).

This of course, is based on historical data and might not be applicable going forward.

Overall, if you’re looking to boost efficiency in your core holdings, do consider looking deeper into NTSX, or combine it with a traditional total world stock market (VWRA) allocation to get a nice blended risk/return profile on your portfolio that providing upside potential during bull markets, with lower volatility and smaller drawdowns during market corrections.

0 Shares:
3 comments
  1. Just came from looking at your 2022 Investment Strategy, would you consider NTSX as a possible investment you are looking towards? Currently I’m invested in VWRA as my core and 10% with Crypto. If combining NTSX & VWRA is possible, what would you ratio be?

    1. There will be some overlaps and if you decide to keep it simple then there’s no need to buy NTSX. I personally have a 80/20 split between VWRA and NTSX but no specific reasons why I split it that way. Between crypto and equities I’m 50/50 currently.

      1. Thank you for the reply, you’ve helped me quite a lot with your articles! Really appreciate this and continue doing what you are doing!

Leave a Reply

You May Also Like