Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to episode 59 of Risk Parity Radio. Today on Risk Parity Radio, we are going to start talking about an investment suggested by two of our listeners. And what it is, is an ETF called NTSX. it is the Wisdom Tree 90-60 US Balanced Fund and it is a leveraged ETF. Now this was suggested by Brandy W in an email that I received in early January and then also by a new listener, Mr. Andy Cole, who I spoke with last night. Andy is the principal of Laminar Capital Management. He is a financial advisor, a fiduciary financial advisor who recommends risk parity style portfolios. And we had a nice conversation and he had some things to say about this that I found interesting and thought that I would pick up on what Brandy had emailed me and look into this in more detail. And so what we will be doing is going through the way we analyze investments here on Risk Parity Radio which is to use David Stein's 10 Questions to Master Successful Investing. And we'll go through those questions. I think we'll do the first five today and then the next five next week in part two of this episode. And then we will decide how we might use this or not in a risk parity style portfolio. So, Question one, what is it? Well, it's an exchange traded fund. It is called NTSX, is the ticker symbol. The name of it is WisdomTree 90/60 US Balanced Fund. What essentially it is in a nutshell is a leveraged 60/40 portfolio that what they've tried to construct here is take your basic 60/40 portfolio and then add 50% in leverage so it behaves like a 90-60 portfolio, if you will. Now, how do they do this? They construct an equity portfolio that is essentially the S&P 500, and they actually hold the components of the S&P 500, all 497 of them right now, and it's usually around 500. And so 89% of this portfolio, 89.8%, according to this information I have in front of me, is in this S&P 500 portfolio part of this. And then for the bonds, for the 60 part of it, they use futures contracts on U.S. Treasuries. And those futures contracts go from the two-year all the way out to the 30-year bond. They pretty much divide that kind of equally through the two-year, the five-year, the 10-year and the long bond. And so that is the way they get the leverage by using the futures contracts. And that so 10% of the portfolio remains in cash that is used to support the futures contracts. And what that ends up looking like is behaving like you had a portfolio that was 90% stocks and 60% in these treasury bonds, and I will be linking to this in the show notes so you can take a look at this for yourself. Okay, question two. Is it an investment, a speculation, or a gamble? We would have to say that this is an investment. It is primarily stocks and bonds, and those are archetypical Investments. There is some speculative quality always when you're talking about futures or options contracts. But here it is not so much. And here, if you recall, our specific definitions for investment speculation or gamble. Investments are companies or debt instruments. Speculations are things that do not pay income or generate income, but might have different values at different times to different people. And gambles are things that have negative expectations. So this is a leveraged 60/40 fund that pays dividends and it falls squarely in the investment category. Okay, question three. What is the upside? Well, the upside is you're getting basically a 60/40 portfolio, but it is leveraged. So it is going to have about 150% in theory of the same performance that a 60/40 portfolio would have and it'll pay some dividends over the course of the management of it. It's also probably going to have some capital gains involved because the main holding is simply the stocks in the S P 500, which are generating dividends and may have capital gains as they rebalance this portfolio to continue to match the S P 500. And then they also have to roll over those futures contracts of the bonds. All right, what is the downside? Well, there are two downsides. The first is the fee that you have to pay, and it's not a bad fee. The expense ratio for this is 0. 2%, which is pretty low for something that is both managed and leveraged. So that's not bad. The other downside is obviously since it's leverage, you are taking additional risk. that you would have over a 60/40 portfolio. As we will see later on, the risk that is taken here makes this portfolio take about the same risk as a total stock market portfolio, which makes sense because it's 89% a total stock market portfolio and this bond overlay, which they call the futures contracts, really is uncorrelated or negatively correlated with the stocks. so you would figure that it would have some sort of risk profile that's similar to a total stock market portfolio with the leverage in there. So that is the downside. I suppose the other downside is that it is managed by WisdomTree and they might have problems or not be able to manage it well or screw up the management of it. I would not think that they would be doing that since they are a well-established firm with probably hundreds of funds and generally know what they're doing even though all their funds are sometimes expensive and not well constructed. This one does not seem to be one of those. It is a relatively new fund. It's only been around since about 2018. So we don't have a lot of data that goes back forever. although we do have a lot of data on the particularly underlying components of this, which we will get to later on in an analysis. All right, who is on the other side of the trade? This is just an ETF that is traded on stock markets, so your regular brokerage. So whoever wants to sell it is on the other side of the trade. In terms of the components, just the stock market. So there's no mysteries here. It's unclear who this is targeted at. It appears to be targeted at registered investment advisors or financial advisors who are trying to construct portfolios for their clients. It does not appear to be targeted at institutions, although institutions might use it. Institutions are generally suited to constructing these things on their own, whereas a average investor or a financial advisor managing something for an average investor would not be able to handle fooling around with all these features contracts in this manner. And since these questions are so easy to answer, I think we will go ahead and answer the next three of them and save the more interesting analyses for part two of the episode. But going to question six, what is the investment vehicle? The investment vehicle is an exchange traded fund. These things are well known and have prospectuses and a well established fund structure that is regulated by the securities authorities. And so it is an ordinary investment that you might buy and sell. on your brokerage. All right, question seven. What does it take to be successful? This is just a buy it and hold it sort of thing. You don't have to know anything more about it any more than you need to know about any kind of index fund other than to know what you're getting into and realize that there is a leveraged component to this. So it's not going to be as secure as a 60/40 portfolio, but it's probably not going to be as volatile or hazardous to your portfolio as some kind of speculative investment in growth stocks or stocks with very little revenue because it's holding the big ones, the apples and the Microsofts and everything else in the S&P. All right, question number eight, who is getting a cut? We have discussed this already. The only people that seem to be getting a cut here off the top are the people at WisdomTree who manage this fund and they get the expense ratio of 0. 2% annually. The only other people that might be getting a cut are if you still have brokerage fees or transaction fees and I hope you do not have those. Obviously if this is being managed for you through a financial advisor, the financial advisor will be getting some sort of cut for that, but it's not particular to this fund, NTsX. But now I see our signal is beginning to fade and we've gone through the first eight questions. Of course, the next two are the fun ones as to how it might affect your portfolio and whether it's a good investment. And we will be tackling those next time with some backtests and analyses from portfolio visualizer both for this fund itself and then reconstructing it as if it existed in the past with some other components that I think you'll find very interesting. I want to thank both Brandy and Andy for their suggestions. Interesting that they have names rhyme, I suppose, but that is just a coincidence. I enjoy very much interacting with people. One of the purposes for me of this podcast is the social aspect of it. And so if you have comments or questions, you can send them to me by email at frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparadioradio.com and fill out the contact form and send your message to me and I'll get it that way. And then maybe we'll have a Zoom call like Andy and I did last night, talking about all things risk parity for a couple hours, which was very interesting and very gratifying. And I thank him for his participation. he told me an interesting story that he's getting his practice going and he thought, well, I do risk parity and maybe I should have a podcast. And he thought in his way to work, yeah, maybe I should call it Risk Parity Radio. And so he went and looked it up and lo and behold, he found me, which led him to believe, well, maybe I should talk to that guy and see what he's doing. I thought that was also a funny story, but it's good to see that this is getting more out to more people the idea of risk parity and managing portfolios in this manner because I think that this is where management of individual portfolios ought to be going and probably will be going in the future as more advisors and more people understand it a bit better. But thank you for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [13:45]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.