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Well that’s really great. I’ll be coming back to this several times.
Thinking of further consolidating all of my TF funds (except AQR Alternative Trends, as that seems a bit different) into the Winton Trend Equity Enhanced for the reasons you discuss above.
How does sequence of return risk impact this? I’m thinking, as an example, of a leveraged volatile part of the portfolio going down a disastrous 50% soon after implementing the strategy and then having to double to get back to par. Can the less volatile element of the portfolio really compensate for that? I must admit to having only skim read the article.
@Willian Hugo Jenney — I don’t think you can really skim read an article like this. 🙂
But to answer your question, such a portfolio would suffer a bigger loss than with an un-levered 60/40, at least in the short-term. It would have increased volatility due to the leverage. More volatility = a bigger drawdown (and, um, hopefully ‘draw-ups’!)
The hope is over time equities’ tendency to go up and rebalancing will see the portfolio come good, but there are no guarantees.
But really I’d suggest reading the article for a better understanding.
p.s. To reiterate the wealth warning at the top of the article, this should be filed under ‘educational but not directly applicable read’ for many readers, even Moguls, pending their own further research etc.
We obviously can’t know exactly who is reading or what their level of knowledge is.
That is why this more advanced stuff is NEVER a personal recommendation to take action. That’s not just legal / regulatory verbiage, it’s a well-meaning statement of the truth.
Please take it to heart! 🙂
Superb article @Finumus.
Basically I’m with @Algernond #1 on this and this is what I do and intend to do more of (see earlier this week here:
https://monevator.com/defensive-asset-allocation/#comment-1918400
from #60 to #62, esp. the final para. of #61.)
For me at least, return stacking / capital efficiency using the WGEC (LSE) (/ NTSG (NYSE)) ETF’s and the Winton Trend-Enhanced Global Equity Fund’s ‘model’ are the way to go.
But of course YMMV / DYOR and all that.
IMHO, it would indeed be wonderful if there were a UK version of GDE ETF to add another axis of diversification (gold) to bonds and trend following.
Although the daily reset ETFs can get a rebalancing bonus from ‘Shannon’s Demon’, they also get volatility drag. I just don’t think that they’re suitable for this kind of thing (B&H).
But return stacking products that use rolling futures for the low / no / anti correlated asset alongside physical holding the risk on (i.e. global equities) asset are a very different beast.
But they’re not a magic wand either.
Case in point, global and US equities are down a few percent this week and both plain vanilla VWRL ETF and (slightly more exotic) WGEC ETF are both down by the same.
If WGEC ETF gives any Sharpe and/or CAGR advantage (net of frictions, financing costs and fees) then it’ll only manifest over long timescales.
The real advantage of WGEC ETF and of the Winton fund, as I see it, is to, in effect, ‘free up’ more capital to be able to buy both more potentially diversifying assets (than just bonds and trend following) like listed global macro hedge funds (e.g. BHMG investment trust), infrastructure ITs, commodities, uncorrelated nieche ideas (e.g. listed litigation finance, like Burford Capital); alongside higher expected return ideas, like small capitalisation value (e.g. AVSG, ZPRX and DGSE ETFs) and multifactor ETFs (e.g. JPLG, HWWA, IQSA and FSWD ETFs).
Wow just wow what an eye opening article. I always walked away from leverage mentally but I now understand that with diversification it’s not that leverage is bad it’s that you need to consider what it’s being invested in. Also explains why many investment trusts deploy this to boost returns over the long term. (Decades). Will have to digest more but for example my percentage of infrastructure investments as diversification could be improved by leverage of the portfolio in other areas. Mind you the current budget rumours seems to be picking on infrastructure cpi vs rpi vs cpih argh
So I don’t think its explicitly mentioned in the OP, but would using these leveraged products be a sensible alternative to other routes to leverage like mortgages and margin loans? I guess its a question of which is cheaper to implement? And maybe some of the edge case risks are different? For example – would I be better off scrapping my IO offset mortgage and buying leveraged ETFs instead? Would FvL/SavingNinja be better off ditching their margin loans in the same vein?
That sounds a little bit like I’m asking for advice, I’m not, just floating the general principle for discussion..
@Rhino — personally I think a cheap interest-only mortgage is better if you can do it. No mark to market issues with the debt.
As you’ll recall I run mine and it’s increasingly for these reasons, versus paying it off. (I also keep hold of it to keep the ISA shelters long term…)
I hold some bonds and cash for example which might seem pointless when running the mortgage, but if you see it through the portfolio theory lens the leveraged diversification is potentially valuable.
At scale / size though a mortgage isn’t going to cut it. And a lot of people hate explicit debt so this kind of embedded leverage does launder it a bit. 🙂
I know I should be able to do this, but how do you compute the Sharpe ratio as 0.33 for a leveraged 60/40 portfolio. My maths is reasonably sound (or at least I thought it was!) and I have spent longer than I would have expected to keep getting the wrong answer. Apologies for the dumb question.
This post comes at a perfect time as I have been looking at Trend and return stacked products.
I am 100 equities but looking to change that as I’m 5 years away from FIRE at 45. I have been considering adding trend, bonds (Individual Gilts in the GIA) and SCV to my portfolio whilst also tilting slightly away from the US equity (using xuse to reduce to 50%) , while being tax efficient (I’m in the lucky/ unlucky position of also having a big chunk in my GIA).
Winton Trend Equity Enhanced and NTSG seem like a smart way to get me in that direction , as it enables me to leverage inside the ISA and SIPP.
I have an offset mortgage I could use but Vs leveraged products in my ISA/SIPP that would just make my “GIA problem” worse.
I’m 17 years away from accessing my SIPP so could also take a different strategy in there…
Does winton enhanced+ XUSE + NTSG + AVSG make sense? Is there an alternative to XUSE I should consider?
Or are people thinking the extra diversification reduces the focus on reducing the US allocation?
Also can you buy this on Iweb? I can’t seem to find Winton Enhanced, just the “normal” Trend UCITS…
@J #10: have a look at @Mack’s comments #32 and #33 here (and also at my appreciative response to him at #40 in that January 2025 thread):
https://monevator.com/fixing-my-portfolio/#comment-1856422
NTSG is the US listing. You will be charged FX to buy it and then not be able to hold it in ISA/SIPP because of the PRIIPs / UCITS reg’s.
Fear not though, because this ETF has a GBP denominated LSE equivalent (same product, same name, same provider, but different ticker, as different exchange listing and different currency); namely “WGEC”.
Both Winton Trend-Enhanced Global Equity Fund (which is an OEIC, not an ETF) and WGEC ETF are on both HL and AJB. I can’t speak for iWeb.
[NB: The WGEC ticker is mentioned after the NTSG ticker in the table in @Finumus’ article above. The “L” after it just means that the ticker is for the London listing (i.e. rather than NTSG)]
David Stevenson’s Substack (“the Adventurous Investor”) has a free to read piece including a review of WGEC, and both of pictureperfectportfolios.com and optimizedportfolio.com have reviewed the somewhat similar idea of the 90/60 (i.e. a 1.5x 60/40) S&P 500 / US intermediate duration Treasuries NTSX ETF (which is available as WTEF ETF in the UK).
FWIW I recently switched everything I had in WTEF into WGEC (and then some).
It’s a shame that @Mack is not (yet, AFAIK) on Moguls, as he seems to have some really great ideas re: maximum intra asset class diversification.
@JPGR: are you taking into account the risk free rate? The maths definitely checks out if you do.
@J #10
We need a campaign to get Winton Trend Equity Enhanced on iWeb (+Lloyds/Halifax).
I’ve asked several times, but the answer is always no.
They do AQR Alternatives Trends, so would be perfect if could add the Winton fund also.
Amundi have recently launched a 2x MSCI world ETF (listed in France / 0.60% OCF) – but, they have filed for a LEI on the LSE – so I’m hopeful that a GBP / LSE listing is coming.
That would be extremly useful for portfolio construction.
@ Delta Hedge #11
Thanks for your comment. I have taken into account the risk free rate. I get a Sharpe ratio of 0.25. Not asking you to perform the calculation for me (!), but these are my assumptions. If any of them scream out as incorrect I would be grateful to be put straight:
166 invested in equity and bonds (60%/40%) with 66 of leverage. I assume that the debt carries a rate of 5% and that the bonds earn a return of 5% with a volatility of 0%. I assume that the risk free rate is 5%. I further assume that the equities earn a return of 10% with a volatility of 20%.
@JPGR. The 1.66 times leverages 60/40 portfolio maths. The 60/40 portfolio has a return of 9% and a volatility of 12%. If I leverage it the (gross) return is 14.94%, but financing is (5%*0.66 = 3.3%), so net returns are 11.64%. Rf if 5%, so the returns over the risk free rate are 11.64%-5% = 6.64%. The volatility is 1.66*12% = 19.94%. 6.64%/19.94% = 0.33. Ergo the Sharpe is the same.
On the “vs mortgage” question. That’s a great question! My opinion has evolved a bit as a result of the availability of these products. (I’m diverging from the “house” view here) With a mortgage, there’s some combination of house price decline, job loss, interest rate hike, portfolio decline – that has you losing your home. When using embedded leverage at the product level (instead!) then there’s NO risk of this happening. If mortgage financing is cheaper, than there’s a trade off. However, it’s not particularly obvious that the implied funding rate in these products is more expensive than a mortgage, it may well be cheaper. For me personally this has moved the away from mortgages (and indeed, to some extent, margin loans) towards “embedded leverage” products as my leverage mechanism of choice.
@Finumus #15
That’s extremely helpful, thank you.
If I’ve understood this (and I’m now starting to doubt myself) your numbers assume bonds return 7.5%. If that’s the case then I agree a leveraged 60/40 stock/bond portfolio has a Sharpe ratio of 0.33. I see where I went wrong.
Thanks @Finimus and all, these are really interesting articles and follow up discussion.
I spent a bit of time trying to understand the failure modes of NTSG and what kind of decline would cause irreversible harm – on a basic level I understand that if leverage is boosting positive returns, it’ll also amplify losses, but it took me a bit to understand how that happens in practice.
Firstly, the following example *isnt’* what NTSG is doing, but it’s fairly easy to understand: If I have £100k, borrow 66% (66k) from somewhere, shove the whole lot in a 60:40 portfolio and the whole thing declined by >60% (>£100k decline, leaving <£66k value) I'd be wiped out as soon as debt became due as debt now greater than assets. However, I didn't have a good mental model for how this would play out in practice for a portfolio like NTSG using futures rather than directly borrowing the money. I'd be grateful for corrections if I've misunderstood things (which I almost certainly have).
NTSG has ~90% in physically sampled equities, no leverage in this bit.
The remaining 10% is cash, some of which is tied up as margin for the futures contracts. I think most of my not understanding it was because I'm a bit hazy on what bond futures are, but AIUI, you provide some margin (e.g. 3-5% of the 60% bond exposure, 2-3% of the total portfolio) and every day, your margin is credited/debited according to a) movement in bond prices and b) any carry effects. This P/L is reflected immediately as a change in margin – if rates go up steeply, you still have a contract for the total amount of exposure, but your margin is depleted and you need to put some cash in (possibly selling equities) to replenish it.
While equities and bonds are negatively correlated, you get the usual rebalancing bonus – selling high, buying low – if you need to put up more margin because rates have gone up, but equities have also done well, that's not a problem (or vice versa).
Like any equity/bond mix, if both go down in value simultaneously, it's worth less than it was before, but in this instance you risk being a) a forced seller of equities to fund the margin and b) forced to close out futures contracts to reduce your exposure. So rather than being able to ride out a simultaneous decline of both assets, you're forced to sell both at low valuations and now you have less of both, so when they bounce back you miss a lot of the bounce – this might not be recoverable.
I'm moderately confident the bit above isn't too far off the mark, the following I'm very unqualified to calculate, again feedback/corrections much appreciated:
I tried to do some back of the envelope calculations, with the assistance of a certain LLM, but I think about a 40% equity draw down *and* a simultaneous 250bps interest rate shock would exhaust the cash buffer and force deleverage while values were low (locking in big losses). I think this is probably reassuring – it looks like this strategy would have survived 2022 without being a forced seller, but it was a bit tight? Again, I'm far outside of my comfort zone analysing this! 🙂
@FL – https://www.wisdomtree.eu/-/media/eu-media-files/other-documents/research/whitepapers/wisdomtree-efficient-core.pdf?sc_lang=en-gb
Figure 26 shows the model drawdown in 2022.
It’s worth having a read of the documents on this page:
https://www.wisdomtree.eu/en-gb/strategies/efficient-core
@FL #17: NTSG’s/WGEC’s sister fund, also from WisdomTree, is NTSX/WTEF.
Exactly the same idea – 90% physical shares and the 60% bonds via rolling futures contracts – just with US large caps only for the share side rather than Global large caps, and US Treasuries rather than highly rated Global government bonds (so less diversified, and, therefore, IMHO, not as ‘good’ as NTSG/WGEC).
There’s no daily reset, and, therefore, as with NTSG/WGEC, it has lower funding costs, more liquidity, and not the same issues with volatility drag as you get with 3x LETFs like UPRO/3LUS (or even with a merely 2x MSCI world LETF, such as mentioned above by @SkinnyJames #13).
NTSX (the US listing) went through 2021-22 and 2022-23 just fine IRL. No structural issues.
The excellent optimizedportfolio.com gives this useful summary of the possible downsides in its review of NTSX as follows:
“The downfall of NTSX would be what I would argue is a rare simultaneous combination of economic factors: rapidly rising interest rates, runaway inflation, and slow economic growth. But this scenario would also wreak havoc on virtually any diversified portfolio that holds mostly stocks and bonds. This concern can also be mitigated with an allocation to things like TIPS, international stocks, managed futures, and gold, as I suggested above. I actually think that’s why it’s also important to note that the effective duration of the bond allocation is intermediate (about 7 years), not long-term, posing less interest rate risk. This is why NTSX still outperformed the S&P 500 during periods where interest rates rose slowly. There also tends to be more roll yield to be captured in the middle of the yield curve.”
Thanks very much @skinnyjames and @dh – will go and digest the links.
Thanks Finumus for a thought provoking article.
I’ve been running one of my accounts at roughly 150% global equities given my long time horizon and no plans to touch the money. All of the leverage is in XS2D.
I’m now wondering if I should run this account at ‘only’ 100% equities, with some diversifying overlays instead – especially with where CAPE is.
I am keen on WGEC but would like to tilt away from the USA. I notice from the WisdomTree website that they also do a Eurozone version via NTSZ (which is only available in the USA), which I could split 50/50 with WGEC.
Does anyone know the equivalent version of NTSZ which is available in the UK?
@DH – re: the optimised portfolios snippet “The downfall of NTSX would be what I would argue is a rare simultaneous combination of economic factors: rapidly rising interest rates, runaway inflation, and slow economic growth.”
Isn’t that what we have just experienced from ’22 onwards?
Another question I’m afraid if anyone can help…
I am in the deaccumulation phase and my method thus far is to withdraw from my defensive assets (e.g. bonds) whilst leaving the equities alone. Would there be any method to implement something similar if I held just WGEC (not that I intend to do that)? The way I see it is that if I sold some, I’d be effectively cashing in bonds and equities in a 40:60 ratio, thereby depleting my equity holdings.
@Rhino #22: indeed. And the point is that it (NTSG and NTSX) didn’t blow up, and didn’t under perform a conventional 60/40.
Now, obviously, one would have been better off not holding any bonds in 2022, but that’s a different issue about the merits of bonds per se at different levels of valuations / rates; rather than an issue about the relative merits and demerits of a conventional 60/40 v a capital efficient 90/60.
@DH – ah ok, I see what you mean. Provides confidence that using those financial instruments is a reasonable idea.
Particularly interesting to me as I need to remortgage in Oct 2026, not sure what rate I’ll be able to get but it’s certainly going to be >> current fixed rate of 1.29% – so this could be an alternate route to continuation of the leveraged portfolio?