Finally, the day has arrived.
With slightly less fanfare (and universal interest) than the Jake Paul—Mike Tyson fight, WisdomTree launched the Global Efficient Core UCITS ETF, aka NTSG.
As per the title, NTSG is the Global version of NTSX, WisdomTree 90/60 ETF with exposure to US assets only. If you do not know what NTSX is, here is the link to a previous post (at this point I think the link basically works only for SEO stuff, you know what NTSX is).
Do I really need to write a review about it? Maybe.
The global exposure in the stock bucket is pretty uncontroversial: we (sorry MAGAs) want to have some diversification outside the US and the reason is not that complex to understand. In my real-life portfolio, I am running a 60/30/10 split between NTSX, NTSI and NTSE. NTSG makes it more straightforward.
The big questions are all around the bond bucket.
How is it built?
For stocks, the ETF follows the weightings of FTSE All-World Index. The bond sleeve employs only futures denominated in four currencies: USD, GBP, EUR and JPY; the weights for each currency are derived by the ones employed in the stock bucked and then rescaled accordingly (it should lead to the following, more or less, USD: 79.4%, GBP: 4.3%, EUR: 9.0%, JPY: 7.3%).
The target duration is the same as NTSX and the classic 60/40, between 7 and 10.
Why only four currencies?
The ETF manager needs to use liquid contracts to contain costs. Considering the weight of USD, adding a fifth currency would only increase complexity without any tangible benefit.
Why NOT a single currency?
I had a few conversations about this on Twitter. By a single currency, everyone meant EUR: either the ETF should use only Bund futures or FX-hedge the bond bucket.
Let’s look at a practical aspect. UCITS products are used globally, not only in Europe. If WT hedged the bond part against EUR, all non-EUR-based investors would not buy it. There are not enough potential clients for different versions of the ETF hedged in all the different currencies: in a pure commercial sense, this is the only way (as things stand today).
Is this an issue?
From an FX risk point of view, it is not different from having a VT exposure, more or less. But this goes against the mainstream mantra of “hold your stocks unhedged and your bonds hedged”.
Here is a conversation that provides relevant discussion points.
“FX has 0 expected returns but the hedge has a cost, so why bother”: this is the naive explanation. The crucial part is FX volatility, not returns. FX volatility is a “Sharpe ratio destructor”, if you are a stan of the concept, but it is also the reason behind the above-written mantra: it morphs an asset that is supposed to be low-vol, bonds, into a high-vol one.
So what can we do about it?
Hedging is complicated. If you are a retail investor, you can only limit the universe of securities you buy (and do not forget that any constrain in this sense for sure equals to lower expected returns. Same thing ESG investors do not want to understand) by either choosing only EUR-denominated assets or EUR-hedged ones. The availability of the latter depends on commercial appeal, not strictly investment acumen so…not ideal.
If you are an institutional investor, you can overlay an FX hedge to your portfolio but you need to allocate cash to manage margins, which means…lower returns. Retail investors can do something similar by using those FX trading platforms that offer decent leverage…but I am not sure I would advocate it. They would still have to manage cash/margins, costs (embedded in the rates applied to the FX positions), counterparty risk…
Total risk is the constrain
Diversification is again the best solution. When you have a portfolio of diversified “risks”, you do not have to hedge all the FX-related ones because, after a certain point, diversification does its job. If you are a EUR-based investor, you only need some EUR assets to “get there”. You will never have a 0-vol portfolio but one where volatility is compensated by appropriate returns. The video I linked explains the concept well: a portfolio with a 10% volatility, built in a way that the ensemble looks like normally distributed, should incur a 25% drawdown in a 3-standard deviation event (go check how much Govies lost in 2022 to get a reference point of you typical risk-free asset to match medium-term outflows).
I tried to prove the concept with this post here. A well-risk-diversified portfolio can wash away a lot of FX-driven volatility by simply employing market cap weightings.
Being exposed to foreign currencies is also a hedge against high inflation in your currency. On top of this, I have the personal conviction that there is a carry risk premium: as long as I live in places with low-yielding currencies (Switzerland and Europe), my unhedged portfolio gets that carry.
Is NTSG better than RSSB?
RSSB has higher leverage but it is more expensive. The “official” Net Expense Ratio is 0.36% vs 0.25% but, based on a backtest I run, it has as well a higher tracking error (or higher funding costs). Still, it might be worth the cost, considering that there are no cheaper alternatives to get that type of leverage.
RSSB invests only in Treasuries, which is less optimal for non-US investors compared to NTSG. On the other side, NTSG adopts ESG criteria for stock selection: borderline relevant but I would have preferred otherwise.
Overall, I like NTSG more. I would run an 80/20 split between the two going forward, considering they are both pretty young and the above considerations might change in the future.
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