Tackling This Market Moment With "Return Stacking"

Tackling This Market Moment With "Return Stacking"

“Return stacking” is another way to diversify your portfolio in this period of all-time-high stocks and thin bond yields, writes Jason Zweig in The Wall Street Journal.

Zweig uses the example of the ETF WisdomTree U.S. Efficient Core (NTSX), which has $676 million in assets and 0.2% in yearly expenses. The fund keeps 90% of its assets in a portfolio of stocks similar to the S&P 500 index. The other 10% goes to cash and cash equivalents—which it uses as collateral to purchase futures contracts on U.S. Treasurys. Those futures then become a low-cost way of borrowing: for every dollar invested, the fund provides $1.50 in stocks and bonds exposure. This, Zweig explains, is the crux of this strategy, because 90 cents of that $1.50 goes into stocks while 60 cents goes into bonds. This creates a balanced fund, 1 1/2 times over.

NTSX has outperformed the S&P 500 for the last three years, since its launch, and the strategy of adding other return streams on top of it—known as return stacking—also gives investors a lot of flexibility. Because the fund leverages your money 1.5 to 1, you can invest less and put the rest of it towards other assets.

While high amounts of costly leverage caused companies like Lehman Brothers to implode, moderate amounts of low-cost leverage can reap returns without raising risks too high. And indeed, this approach isn’t new; even Warren Buffett has long relied on low-cost leverage in his investment strategy.

Pimco, DoubleLine, and Newton Investment Management are among the other firms who leverage portfolios of stocks and other assets using futures. It makes sense to return stack on top of a leveraged fund if you have a finite amount of money to work with in the long-term, like an IRA or inheritance. By taking the long-view, leverage can be an ally, Zweig concludes.