NTSI: A Macro-Driven Leveraged 60/40 Strategy for International Exposure

The case for a leveraged, capital-efficient 60/40 strategy in developed international equities is being reshaped by two powerful forces: the erosion of the traditional bond hedge and the rise of Treasury yields. The WisdomTree International Efficient Core Fund (NTSI) is designed to navigate this new reality, offering a mechanism to access that classic risk profile with less initial capital.

The core of the 60/40 thesis has always been the negative correlation between stocks and bonds-a relationship that provided drawdown mitigation when equities fell. That dynamic has frayed in recent decades, with the two asset classes moving more in tandem. In this environment, simply holding a 60/40 portfolio may no longer deliver the promised risk reduction. NTSI's structure directly addresses this by using Treasury futures to create a bond overlay, aiming to replicate the duration and return profile of traditional bonds. The fund's design, which ladders futures across the 2- to 30-year curve, is intended to diversify interest rate risk and provide a more deliberate fixed-income component than a passive bond holding might.

The strategy's appeal is amplified by the current macro backdrop. As Treasury yields have climbed from their historic lows, the income component of the bond overlay has become more meaningful. NTSI's 30-day SEC yield of 2.39% is a tangible benefit, providing a steadier stream of return that can help offset equity volatility. This is a critical shift from the low-yield era where the income from bonds was negligible. In a higher-rate world, the income generated by the Treasury futures overlay adds a layer of return that wasn't present before.

Furthermore, the fund's structure is a capital-efficient play. By overlaying $60 of Treasury futures on top of a $90 equity position and $10 in cash collateral, NTSI aims to deliver the risk and return characteristics of a full 60/40 portfolio while requiring less initial outlay. For investors seeking developed international equity exposure, this offers a way to gain the strategic benefits of a diversified portfolio without tying up all their capital in the equity component. In essence, NTSI provides a leveraged, macro-driven tool to access a 60/40 risk profile at a time when the traditional mechanics of that strategy are being rewritten.

Portfolio Mechanics and Performance Metrics

The fund's construction is straightforward but deliberate. NTSI allocates approximately 90% of its assets to a market-cap-weighted basket of developed market equities outside the United States and Canada. The remaining 10% serves as collateral for a portfolio of U.S. Treasury futures. These futures, which range from 2 to 30 years in maturity, are actively managed to achieve a target duration of 3 to 8 years. This design is the core of the macro-driven overlay, aiming to replicate the risk and return characteristics of a traditional bond holding while providing the capital efficiency of a futures-based approach.

This structure directly enhances the fund's yield profile. NTSI offers a 30-day SEC yield of 2.39% and a trailing 12-month yield of 2.50%. This income stream is a tangible benefit over a pure equity exposure, which typically offers a lower dividend yield. For investors, this yield provides a steadier return that can help cushion equity volatility, a key feature in a higher-rate environment where the income from the Treasury futures overlay is more meaningful.

The fund's cost structure is lean, with a gross expense ratio of 0.26%. However, the net yield advantage must be evaluated against the cost of funding the Treasury futures positions. The collateral requirement and the mechanics of rolling futures contracts introduce a funding cost that is not captured in the expense ratio. The fund's yield numbers, therefore, represent the net return to shareholders after all fees and the implicit cost of the leverage. The fact that the yield is positive and meaningful suggests the income generated from the Treasury overlay is currently sufficient to offset these costs, delivering a net enhancement.

From a performance perspective, the fund's setup is designed for total return, not daily leverage. It is not a leveraged ETP in the traditional sense, meaning its returns are not intended to be a multiple of the underlying equity index each day. Instead, the strategy aims for a stable, macro-driven risk profile. The low portfolio turnover of 3% indicates a buy-and-hold approach to the equity basket, while the Treasury futures are actively managed to maintain the target duration. This combination of a stable equity core and a dynamic, yield-generating bond overlay is the mechanism through which NTSI seeks to deliver the risk-adjusted returns of a 60/40 portfolio in a new macro era.

Financial Impact and Structural Risks

The macro-driven overlay that enhances NTSI's yield also introduces a distinct set of financial impacts and structural risks. The embedded leverage from Treasury futures is a double-edged sword, magnifying both returns and losses relative to a pure equity basket. The fund's structure-using 10% of net assets as collateral to control a position in Treasury futures-is a classic form of financial leverage. This means the fund's total return is not simply the return of its 90% equity portfolio; it is amplified by the performance of the futures contracts. In a rising-rate environment, this can boost returns, but in a falling-rate or volatile market, it can accelerate losses. The strategy's sensitivity to interest rates is therefore heightened, making its performance more volatile than a straightforward international equity ETF.

The most critical risk is a breakdown in the historical negative correlation between international equities and U.S. Treasuries. The entire 60/40 thesis relies on this diversification benefit, where bonds rise when stocks fall. Evidence suggests this relationship has eroded in recent decades, with stocks and bonds moving more in tandem from 2010 onward. If a period of global stress were to see both international equities and U.S. Treasuries decline simultaneously, the Treasury futures overlay would fail to provide its intended drawdown mitigation. In that scenario, the leverage would work against the investor, compounding the equity losses with losses from the futures positions. This is the structural vulnerability that the fund's design aims to solve but cannot eliminate.

Finally, the mechanics of holding futures introduce counterparty and liquidity risks absent in a physical bond holding. The fund's net assets serve as collateral for the Treasury futures contracts, meaning the fund is exposed to the creditworthiness of the clearinghouse and the brokers involved in the derivatives market. While these are typically robust, they represent a different risk profile than holding a Treasury bond. Furthermore, the need to roll futures contracts as they approach expiration can create liquidity friction and potential slippage, especially in stressed markets. This is a key distinction from holding physical bonds, where the cash flows and principal are more straightforward.

The bottom line is that NTSI offers a capital-efficient, yield-enhanced 60/40 risk profile, but it does so by layering derivatives on top of a core equity position. The leverage multiplier effect and the dependence on a specific correlation regime introduce risks that are not present in a simple equity or bond holding. Investors must weigh the strategy's yield and capital efficiency against the potential for amplified volatility and the failure of its core diversification premise.

Suitability and Key Watchpoints

This strategy is not for the casual investor. It is a sophisticated, macro-driven tool best suited for those who understand its mechanics and are comfortable with its unique structure. The appropriate profile includes investors seeking developed international equity exposure who also desire the risk profile of a traditional 60/40 portfolio but are willing to accept the complexities of a futures-based bond overlay. These investors must be aware that the fund uses leverage, which amplifies both potential gains and losses. They should also be comfortable with the fact that the bond component is not a physical Treasury holding but a portfolio of futures contracts, introducing different operational and counterparty risks.

The single most critical watchpoint is the actual correlation between the fund's international equity basket and U.S. Treasury prices. The entire 60/40 thesis depends on this relationship, where bonds rise when stocks fall. Evidence shows this diversification benefit has eroded from 2010 onward, with stocks and bonds moving more in tandem. If a period of global stress were to see both international equities and U.S. Treasuries decline simultaneously, the Treasury futures overlay would fail to provide its intended drawdown mitigation. In that scenario, the embedded leverage would compound the losses, severely impacting the fund's risk-adjusted returns. Investors must monitor this correlation regime closely, as a persistent breakdown would undermine the core rationale for the strategy.

Finally, the fund's net yield is a key performance metric that is sensitive to its underlying costs. While the 30-day SEC yield of 2.39% is a tangible benefit, it represents the net return after all fees and the implicit cost of funding the Treasury futures positions. The primary cost driver is the roll of futures contracts, which can incur slippage and transaction costs, especially in volatile or illiquid markets. Any widening in the expense ratio, though currently low at 0.26%, would directly pressure the net yield. Therefore, investors should watch the fund's yield spread to Treasury benchmarks and the consistency of its income distribution to gauge whether the Treasury overlay's income is sufficient to offset these operational costs and deliver a true net enhancement.