The Efficiency of "Return-Stacking" In Your Portfolio

Four years ago, WisdomTree debuted an ETF that employed a concept that many hedge funds, pension funds, and endowments had been using for years. They gave it the ticker symbol NTSX, short for 90/60—which is the ratio of stocks-to-bonds in the ETF. But wait – that adds up to 150%!?!?

What some people call leverage, others have coined “return-stacking”. The 1980s Dire Straits would sing it like: “you get your stocks invested, and your bonds for free”. WisdomTree does this by utilizing U.S. treasury bond futures.

While leverage typically amplifies returns on both the upside and downside, return-stacking—if done correctly—provides you the opportunity for increased diversification without reducing your stock exposure—potentially lowering volatility. 

The typical “balanced fund” is based on decades of history showing that a 60/40 stock/bond portfolio provides you the highest reward for a given amount of risk. Stocks and bonds are typically negatively correlated in times of market stress; so when stocks soar, bonds do their thing (pay interest...yawn). But when stocks swoon, bonds continue to do their thing, which provides the portfolio ballast, offsetting some of the declines in stocks. 

NTSX (spotlighted in our January issue of Money Matter$) allows you to match a typical balanced fund in terms of risk and reward (aka returns) — using only two-thirds of your portfolio:  [90/60 * 2/3] = 60/40 — voila! Math. But we’re not done.

So if we can match the historic “ideal” stock/bond allocation using only 67% of a portfolio, what shall we do with the other 33%? We stack returns, of course!

We like to stack non-stock and non-investment-grade bond investment alternatives on top of the balanced portion of the portfolio. We call this our “alternatives” bucket. These should provide some additional (stacked) investment return with risks not correlated to stocks and bonds. 

What we like to “stack” on top of NTSX:

· Commodities (gold or oil, anyone?)

· Private Real Estate & Private Stock

· Buffered-ETFs

· Inflation-Protected Treasury Bonds

· Merger Arbitrage & Long/Short

· Trend Following / Volatility Futures

· Crypto-Currency (bitcoin, anyone?)

· Senior Loans & Private Credit

· Convertible & High Yield Bonds

· Preferred Stock (5% yields!)

Depending on your comfort with volatility as well as the dynamics present in the economy, we hope to build you the most efficient portfolio possible. We can even tilt your stacked portfolio toward low-cost/liquid, income-focused, low-volatility, or social-impact investments.  

Adam Sommers is the Chief Investment Strategist and Lead Planner at Sommers Financial Management. You can find him online at www.SommersFinancial.com