A New Way to Tackle This Market Moment
A strategy called ‘return stacking’ can free up part of your portfolio.
A strategy called ‘return stacking’ can free up part of your portfolio.
When there’s nowhere to run, nowhere to hide, what do you do?
U.S. stocks aren’t far from their all-time highs, while the income investors can earn from bonds is a pittance. So investing in stocks feels risky, and bond yields are too thin to do you much good.
The obvious solution is to diversify: outside the U.S., outside of stocks and bonds, and into assets that can protect you from bear markets or an inflationary shock. To do that, you’d normally have to sell some stocks or bonds to free up cash.
That isn’t the only way to diversify, though. Some investors engage in a tactic they like to call “return stacking.”
An illustration of this odd-sounding approach is an exchange-traded fund, WisdomTree U.S. Efficient Core, with $676 million in assets and 0.2% in annual expenses. Since its launch just over three years ago, it has slightly outperformed the S&P 500, after fees, with a smoother ride.
The fund takes a novel approach to diversification. It keeps 90% of its assets in a portfolio of stocks highly similar to the S&P 500 index. It keeps 10% in cash and cash equivalents. It then uses that cash as collateral to buy futures contracts on U.S. Treasurys.
Those futures are a low-cost form of leverage, or borrowing. This gives investors more bang for their buck. For every dollar you invest, the fund provides $1.50 in exposure to stocks and bonds.
And here’s the crucial point: Of that $1.50, 90 cents (or 60%) goes into stocks and 60 cents (40%) into bonds.
That creates the functional equivalent of owning a so-called balanced fund, with about 60% in U.S. stocks and 40% in U.S. bonds, one-and-a-half times over.
It also creates flexibility for an investor.
Imagine you have $3,000. You could stash it all in a balanced fund. Or you could achieve the same result by putting just two-thirds of it in a fund like this. That’s because the fund leverages your money 1.5 to 1. So you can invest less and use the rest of it to buy other assets.
“You get the same exposure for less capital,” says Jeremy Schwartz, global head of research at WisdomTree Investments Inc. in New York, the Efficient Core fund’s sponsor. This way, you still have $1,000 left over, and “that cash option is valuable,” Mr. Schwartz says.
Corey Hoffstein, chief investment officer at Newfound Research LLC, an asset-management firm in Wellesley Hills, Mass., calls this “return stacking.”
On top of your $2,000 stack of stocks and bonds, you could put your remaining $1,000 into assets that could hedge their risks—a commodity fund, perhaps, or inflation-protected I bonds from the U.S. government.
Wait a minute. Isn’t leverage dangerous?
Long-Term Capital Management, Lehman Brothers and China Evergrande all imploded because they borrowed too much money at too high a cost. So did speculators in the crash of 1929 and the South Sea bubble of 1720.
Moderate amounts of cheap leverage, however, can raise returns without sending risks through the roof. That approach isn’t radical, reckless or even new.
In the 1950s, economist James Tobin, who would later win a Nobel Prize for his research, demonstrated that investors could raise their return not only by buying riskier securities, but also by buying safer securities using leverage.
In a 1996 article, Cliff Asness, co-founder of AQR Capital Management in Greenwich, Conn., found that between 1926 and 1993, a 60/40 portfolio bought with about 50% borrowed money would have lost less in its worst month than an unleveraged 100% stock portfolio did. Those results have held up since then.
The world’s most renowned investor, Warren Buffett, has long relied on float, or insurance premiums that come in before claims have to be paid out, to amplify Berkshire Hathaway’s returns. Mr. Buffett has used that low-cost leverage—“money we hold but don’t own”—to crank up the capital he can deploy. That has given Berkshire “quite an edge,” he has said, “over our competitors.”
At least five years ago, several people with Twitter accounts, including the anonymous @Nonrelatedsense and @econompic, along with Mr. Hoffstein, began chatting about how investors could leverage Treasury bonds to improve the efficiency of their portfolios.
The anonymous author of the @Nonrelatedsense account died in 2019, but his tweets helped inspire WisdomTree to create the ETF, says Mr. Schwartz. (Besides its U.S. fund, WisdomTree also offers versions that combine the same cash and futures exposure with either international or emerging-market stocks.)
Other firms, including Pimco, DoubleLine and Newton Investment Management, offer funds that may use futures to leverage portfolios of stocks and other assets, although they are held primarily by institutional investors.
“Return stacking” on top of this kind of leveraged fund makes good sense when you have a finite amount of money to put to work for the long run—perhaps in your individual retirement account, a Roth IRA or a gift to one of your kids or grandchildren.
Over long horizons, interest-rate fluctuations should wash out, compounding should have time to work and diversification can do magic. Then a little leverage can be your friend, not your enemy.
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Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.