Efficient Core - a new era
of smart investing
Investors often grapple with the decision between low-cost building blocks or improved risk-return profile. The WisdomTree US Efficient Core strategy is designed to provide both.
By leveraging the traditional 60/40 portfolio, we aim to offer a portfolio with equity-like volatility, but with the superior Sharpe ratio of a 60/40 portfolio.1 Historically and over the long term, this resulted in:
Better long-term performance and a higher Sharpe ratio than a pure equity portfolio
Improved diversification leading to smaller drawdowns during volatile markets
Better than 100% equities: leveraging the 60/40 portfolio
Source: WisdomTree, Bloomberg, as from 31 Aug 92 to 31 Jul 23. Stocks are represented by S&P 500 net Total Return. Bonds are represented by the Bloomberg US Treasury Total Return Index. The 60/40 portfolio is a combination of 60% the S&P 500 and 40% US Treasury, rebalanced back to 60/40 annually. The levered 60/40 portfolio invests 150% each month in the 60/40 portfolio, and borrow 50% each month at a cost of one to three month T-bill. This is inspired by the original research from Cliff Asness, “Why Not 100% Equities”, The Journal of Portfolio Management, 1996.
Historical performance is not an indication of future performance and any investments may go down in value. You cannot invest directly in an index.
Boosting capital efficiency in the core
Investors often rely on the diversification potential of a 60% stock / 40% bond portfolio in their asset allocation. The WisdomTree US Efficient Core strategy incorporates this same logic to enhance the risk-return profile of a large-capitalisation US equity portfolio.
It aims to deliver a 90% exposure to large cap US equities and 60% to US Treasury futures, effectively delivering a leveraged position to the traditional 60/40 portfolio. To do so the index invests quarterly 90% of its assets in US stocks and uses the remaining 10% as collateral to a 60% notional exposure in a basket of US futures.
Classic 60/40 Exposure
Leveraged 60/40 Exposure
For illustrative purposes only.
For a complete overview of the US Efficient Core strategy, please refer to the investment case and index methodology.
Efficient Core in a portfolio: improving asset allocation via capital efficiency
An equity replacement
A low fee, core equity solution designed to replace existing core equity exposures. By offering return enhancement, improved risk management and diversification potential compared to a 100% equity portfolio, this strategy could also be used to complement existing equity exposures.
The WisdomTree US Efficient Core UCITS ETF represents a possible replacement solution for equities, aiming to maintain a similar level of risk but improved Sharpe ratio.
0.42
Sharpe ratio of US Equities
0.60
Sharpe ratio of Leveraged 60/40
Source: WisdomTree, Bloomberg, as from 31 Aug 92 to 31 Jul 23.
A higher Sharpe ratio indicates that an investment has generated a higher risk-adjusted return.
A capital efficiency tool
By delivering equity and bond exposure in a capital-efficient manner, the strategy can help free up space in the portfolio for alternatives and diversifiers.
In a classic 60/40 portfolio there is no space for diversifiers. If an investor wants to add broad commodities, gold or other alpha strategies, they would have to sell some bond or equity positions. However, in an enhanced portfolio, for example, using WisdomTree US Efficient Core strategy, only 66.7% of the capital is used to achieve the 60% equity and 40% bond exposure. This leaves one-third of the portfolio for diversifiers. The Sharpe ratio of the Enhanced portfolio can, therefore, be improved without missing out on potential returns.
Classic 60/40 Portfolio
Enhanced 60/40 Portfolio
Source: WisdomTree. For illustration purposes only.
Why WisdomTree US Efficient Core UCITS ETF?
ETF Resources
Latest insights
1 This is a concept first defined by Clifford S Asness in “Why Not 100% Equities: A Diversified Portfolio Provides More Expected Return per Unit of Risk”. 1996. The Sharpe ratio is a measure of risk-adjusted returns of an investment. A higher Sharpe ratio indicates that an investment has generated a higher risk-adjusted return.