Verification of the WisdomTree Short Duration Fixed Income model

Band Rick Harper
CIO, fixed income,
Kevin Flanagan
Responsible for fixed income strategy, and
Scott Welch, CIMA®
Chief Investment Officer – Model Portfolios

This article is for finance professionals who are considering offering model portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your finance professional. Not all finance professionals have access to these model portfolios.

Just over a year ago, WisdomTree launched its Short Duration Fixed Income Model Portfolio. Given the from the fed running rate hike regime and the corresponding rise in short-term rates, it is time to review it.

Let’s look at the current first duration usa profile bond market. As a reminder, duration is a measure of the sensitivity of bond prices to changes in interest rates: the longer the duration, the more sensitive it is. The current duration of the Bloomberg US Aggregate Index is about 6.5 years, and that of top quality US companies is even longer – almost 8 years. Also note that the duration of the Bloomberg US Treasury Floating Rate Bond Index is essentially zero, meaning little or none at all. interest rate risk.

Index return at worst/modified duration

Now let’s take a look at the current shape of the yield curve. Given current Fed policy, combined with the perception of a slowing economy, we have seen a distinct “flattening” of the yield curve— little difference between short-term and long-term rates. In fact, there was reversal at certain points on the curve.

Treasury yield curve

Finally, consider the trade-off between potential returns and duration, i.e. how much an investor is paid to take on duration risk. We see a very interesting situation right now: shorter-dated securities are currently offering yields in excess of their duration. In other words, investors receive more return per unit of duration risk at the short end of the curve than at the long end.

Yield and duration tradeoffs for short aggregates versus US aggregates

From a different perspective, in the current environment, an investor can generate, at the short end of the curve, more than 90% of the return of the broad Bloomberg US Aggregate Index, while taking only 42% duration risk.

Yield/duration for short aggregates and American aggregates

Meanwhile, credit spreads have widened, meaning investors are once again being paid to take on credit risk. There has been a noticeable retracement over the past few weeks, particularly in high yield spreads, but they remain higher than at any time since June 2020.

Why the WisdomTree Short Duration Fixed Income Model Makes Sense Right Now

All of this is intended to provide context as to why our model short-duration fixed income portfolio may make sense for many investors looking to generate quality income without taking on unwanted interest rate risk.

We intentionally made the model portfolio simple and inexpensive – we currently allocate to five strategies that provide diversification across sectors while maintaining a low duration profile.

WisdomTree Short Duration Fixed Income Model Portfolio

1. KISS is our Enhanced Yield US Short-Term Aggregate Bond Fund, which aims to provide high-quality income while tracking the performance of the Bloomberg US Short-Term Aggregate Bond Index.

2. HYZD is our interest rate hedged high yield bond fund, which seeks to provide high quality, high yield income while minimizing interest rate risk.

3. GFIG is our short-term US corporate bond fund, which seeks to generate high-quality income while tracking the Bloomberg US Short-Term Aggregate Bond Index.

4. MTGP is our Mortgage Plus Bond Fund, which attempts to generate high-quality income while controlling risk through the mortgage-backed debt and other securitized securities sectors.

5. USFR is our floating rate treasury fund, which pegs its coupon to the weekly auction of 2-year US Treasury bills. It essentially has minimal duration or credit risk and benefits from an environment of rising short-term rates, such as the one we are currently experiencing.

Unlike all other WisdomTree model wallets, this one is “closed architecture” and only contains WisdomTree strategies. We did this intentionally to (a) keep the number of line item allocations to a minimum, (b) provide diversified exposure across a variety of bond strategies and sectors, and (c) keep the cost low.

The Portfolio has not been immune to the market environment this year. Its year-to-date total return performance through July 31 is −4.27% at NAV (much better than the Bloomberg Aggregate Index performance of −9.12%).

But the main mandate of the Portfolio is to generate higher quality income in a short duration profile, and it succeeds in doing so. While maintaining a duration of less than half of the Bloomberg Aggregate Index (2.58 years versus around 6.5 years), the Portfolio generates a comparable level of return. Another way of saying this is that an investor receives a higher return per unit of duration risk in this portfolio than the broader Bloomberg bond index.


We believe that the current and expected future rate environment will be marked by rising rates, increased volatility and a much flatter yield curve regime. In this environment, investors should be careful when taking duration risk in search of higher yields.

Our short-term bond model can potentially be part of the solution. It can help reduce interest rate risk while generating levels of return close to broad market index levels. If the Fed continues its rate hike regimen and the economy continues to slow (strange mix of events, we recognize that, but that seems to be where we are), this portfolio should only gain more appeal for investors. Investors seeking risk-controlled return while maintaining the overall portfolio diversification benefits of a fixed income allocation.

You can find out more about our Model Adoption Center. We hope you’ll take a look.

Originally published by WisdomTree on August 11, 2022.

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