Investing - Theory, News & General • WisdomTree 90/60 US Efficient Core Fund [NTSX] (formerly US Balanced Fund)

b) Stocks drop 30%, and treasury futures drop 30%?

- Nothing

This is not correct. It's a levered fund, you need to think in levered terms. For simplicity sake, say you have $1,000 in an account that is structured the same as NTSX.

$1,000 equity
$900 stocks
$600 treasury futures.

30% drop across both means:
$900 stocks → $630 ($270 loss)
$600 treasury futures → $420 ($180 loss)
Account equity now at $1000 - $270 - $180 = $550

Exposure ratio to stocks is now $630/$550 = 114%
Exposure ratio to treasury futures is now $420/$550 = 76%

So you'd trigger a rebalance and sell both to get back to 90%/60%.

Ok thank you, that makes sense. I made an Excel and was able to model how the rebalancing would look.

I'm guessing the reason they will always try to rebalance at +/- 5% thresholds is because that way the leverage never gets close to being "impaired" (which would mean raising further cash to pay off the lost leverage).

And they would keep rebalancing (I assume automatically) if the assets keep dropping in price past the +/-5% threshold.

Of course they have to sell equities as well to help bring the ratio back in-line and this selling of equities also helps raise new cash to get back to the margin requirements.

However I am seeing a risk here:
- If both stocks and treasuries decline - they would be selling treasury futures and stocks in a declining market
- If NTSX is big enough (currently $1.2bn AUM) and they are selling stocks and futures in a declining market - their own selling could push the market further down

We have recently experienced the market regime where stocks and treasuries can become correlated and drop together. So this is a real risk over the long-term in my view. But someone correct me if my thinking is off?

I'm also thinking that if one was planning to add gold to their portfolio anyway (in addition to equities and bonds), then maybe using GDE is better than NTSX if seeking to add leverage. As gold has little correlation to stocks.

Statistics: Posted by cawrlkxn — Thu Sep 19, 2024 1:14 am — Replies 877 — Views 171129

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