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Andrew Okrongly, Director of Modern Portfolios at WisdomTree, examines how capital efficiency can help advisors solve one of the harder diversification questions: not whether to diversify, but what has to be sold to make room for it. Rather than treating alternatives, gold, commodities, or managed futures as trade-offs against core equity and fixed income exposure, Okrongly frames capital-efficient ETFs as a way to preserve the exposures clients already need while layering in complementary return streams.
That framework extends from efficient core strategies like NTSX to equity-plus-diversifier and inflation-sensitive approaches, with each structure pairing a funded sleeve with a futures overlay. Okrongly also addresses the practical considerations advisors need to understand, including collateral, tax treatment, funding costs, and why the point is not leverage for speculation, but a more flexible approach to modern portfolio construction.
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WisdomTree Emerging Markets Efficient Core Fund (NTSX) risk information: While the Fund is actively managed, the Fund’s investment process is heavily dependent on quantitative models and the models may not perform as intended. The Fund invests in derivatives to gain exposure to U.S. Treasuries. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage and derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. Interest rate risk is the risk that fixed income securities, and financial instruments related to fixed income securities, will decline in value because of an increase in interest rates and changes to other factors, such as perception of an issuer’s creditworthiness.
WisdomTree International Efficient Core Fund (NTSI) risk information: Investments in non-U.S. securities involve political, regulatory, and economic risks that may not be present in U.S. securities. For example, foreign securities may be subject to risk of loss due to foreign currency fluctuations, political or economic instability, or geographic events that adversely impact issuers of foreign securities. While the Fund is actively managed, the Fund’s investment process is heavily dependent on quantitative models and the models may not perform as intended. The Fund invests in derivatives to gain exposure to U.S. Treasuries. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage and derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. Interest rate risk is the risk that fixed income securities, and financial instruments related to fixed income securities, will decline in value because of an increase in interest rates and changes to other factors, such as perception of an issuer’s creditworthiness.
WisdomTree U.S. Efficient Core Fund (NTSE) risk information: Investments in non-U.S. securities involve political, regulatory, and economic risks that may not be present in U.S. securities. For example, foreign securities may be subject to risk of loss due to foreign currency fluctuations, political or economic instability, or geographic events that adversely impact issuers of foreign securities. Investments in securities and instruments traded in developing or emerging markets, or that provide exposure to such securities or markets, can involve additional risks relating to political, economic, or regulatory conditions not associated with investments in U.S. securities and instruments or investments in more developed international markets. While the Fund is actively managed, the Fund’s investment process is heavily dependent on quantitative models and the models may not perform as intended. The Fund invests in derivatives to gain exposure to U.S. Treasuries. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage. Derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. Interest rate risk is the risk that fixed income securities, and financial instruments related to fixed income securities, will decline in value because of an increase in interest rates and changes to other factors, such as perception of an issuer’s creditworthiness.
WisdomTree Efficient U.S. Plus International Equity Fund (NTSD) risk information: The Fund invests in equity securities of U.S. large-capitalization companies and in index futures contracts that provide exposure to international equity securities, and which are used to enhance the capital efficiency of the Fund. The Fund invests in a basket of equity securities of large capitalization U.S. companies generally weighted by market capitalization. The Fund expects to invest most of its assets in the securities of U.S. companies and is therefore, more likely to be impacted by events or conditions affecting the United States.
The Fund invests in derivatives to gain exposure to U.S. equity securities. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage. Derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. The Fund’s investments strategy is subject to risks related to rolling. The price of futures contracts further from expiration may be higher or lower, which can impact the Fund’s return.
Investments in non-U.S. securities, including depositary receipts, involve political, regulatory, and economic risks that may not be present in investments in U.S. Securities. While the Fund is actively managed, the Fund's investment process is heavily dependent on quantitative models, and the models may not perform as intended.
WisdomTree Inflation Plus Fund (WTIP) risk information: Inflation-protected U.S. Treasury Bonds (“TIPS”), can provide a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Fixed income securities are subject to interest rate, credit, inflation, and reinvestment risks. Generally, as interest rates rise, the value of fixed-income securities falls.
The value of commodities and commodity-linked derivative instruments typically is based upon the price movements in other asset classes. An active trading market may not exist for certain commodities. The Fund is subject to risks related to rolling futures contracts. The price of futures contracts further from expiration may be higher (“contango”) or lower (“backwardation”), which can impact the Fund’s returns. Because of the frequency with which the Fund expects to roll futures contracts, the impact of such contango or backwardation may be greater than the impact would be if the Fund experienced less portfolio turnover.
In addition, bitcoin exchange-traded products (ETPs) and bitcoin futures are relatively new and the markets may be less developed. They are subject to unique and substantial risks, and historically, have been subject to significant price volatility. As a result, the markets for bitcoin futures and bitcoin ETPs may be less developed, and at times, potentially less liquid and more volatile, than more established commodity futures and ETP markets. While the bitcoin futures market has grown substantially since bitcoin futures commenced trading, there can be no assurance that this growth will continue.
The Fund may invest in the WisdomTree Bitcoin Fund, a bitcoin exchange traded product, sponsored by an affiliate of the Fund’s adviser. The Fund will not invest in bitcoin directly.
WisdomTree Efficient Long/Short U.S. Equity Fund (WTLS) risk information: The Fund invests in a basket of equity securities of large capitalization U.S. companies generally weighted by market capitalization. The Fund expects to invest most of its assets in the securities of U.S. companies and is therefore, more likely to be impacted by events or conditions affecting the United States. The Fund invests in derivatives to gain exposure to U.S. equity securities. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage. Derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. While the Fund is actively managed, the Fund's investment process is heavily dependent on quantitative models and the models may not perform as intended.
WisdomTree Efficient TIPS Plus Gold Fund (GDT) risk information: The Fund invests in a basket of equity securities of large capitalization U.S. companies generally weighted by market capitalization. The Fund expects to invest most of its assets in the securities of U.S. companies and is therefore, more likely to be impacted by events or conditions affecting the United States. The Fund invests in derivatives to gain exposure to U.S. equity securities. The return on a derivative instrument may not correlate with the return of its underlying reference asset. The Fund’s use of derivatives will give rise to leverage. Derivatives can be volatile and may be less liquid than other securities. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. While the Fund is actively managed, the Fund's investment process is heavily dependent on quantitative models and the models may not perform as intended.
WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE) risk information: The Fund invests in a portfolio composed of Inflation-protected U.S. Treasury Bonds (“TIPS”) and U.S. listed gold futures contracts. The interest and principal payments of TIPS are adjusted for inflation and typically have lower yields than conventional fixed-rate bonds. The Fund’s income from TIPS may decline due to deflation or changes in inflation expectations. The value of gold and commodity-linked derivative instruments such as gold futures contracts typically is based upon the price movements of the physical commodity or an economic variable linked to such price movement. Price movements in gold and gold futures contracts may fluctuate quickly and dramatically, have a historically low correlation with the returns of the stock and bond markets. Derivatives are used by the Fund to gain exposure to inflation swaps and U.S. listed gold future contracts. Derivative investments can be volatile and may be less liquid than other investments. As a result, the value of an investment in the Fund may change quickly and without warning you may lose money. While the Fund is actively managed, the Fund's investment process is heavily dependent on quantitative models and the models may not perform as intended.
WisdomTree Funds are distributed by Foreside Fund Services, LLC.
Andrew Okrongly is a registered representative of Foreside Fund Services, LLC
Transcript:
[00:00:03] Doug Heikkinen: This is the Power Your Advice podcast, and I'm Doug Heikkinen. Today, we welcome Andrew Okrongly, the Director of Modern Portfolios at WisdomTree to the podcast. It's a great time to have Andrew on as he's responsible for the design and ongoing management of modern portfolios and custom solutions for portfolio managers and advisors.
Andrew, welcome to the podcast.
[00:00:28] Andrew Okrongly: Thank you so much, Doug. . .
[00:00:31] Doug Heikkinen: Let's get right to it. Most advisors already believe in diversification. The harder question is often, what do you have to sell to fund it? How can capital efficiency help answer that funding decision?
[00:00:44] Andrew Okrongly: That's spot on. I think most advisors today are certainly comfortable, familiar, and supportive of the idea of diversification and what that brings to a portfolio, right? The bigger challenge, and we call this the portfolio paradox, that all investors, whether you're individuals, advisors, institutions, face when it comes to diversification is, I can make a more efficient portfolio by selling stocks, selling fixed income, investing in something like gold or hedge funds or trend following, managed futures type strategies.
That can diversify my portfolio, but what I've created is probably an asset allocation that's going to have a lower expected return if I've sold equities. If I've sold fixed income, I probably have a portfolio that is not generating as much income or might not have as much volatility offset or downside protection as it once did.
You put it perfectly. Advisors are familiar with diversification, but I think what capital efficiency enables advisors to do is change that question from, what do I have to sell to achieve a more efficient portfolio, to what do I already own that I can implement?
What exposure's already in my portfolio today that I can implement or achieve in a more efficient way so that I have room to Invest in alternatives or invest in diversifiers and make a better, more diversified portfolio. And so I think this is especially powerful for model portfolios. As you mentioned, my day job is managing all of our model portfolio strategies here at WisdomTree.
And, this is where, from an investor standpoint, every piece of a portfolio, every 1%, 5%, 10% allocation of a client portfolio, there's an opportunity cost to that, right? If I've reduced my equity exposure by 5% to invest in alternatives, I've probably sacrificed my upside participation versus a benchmark in a market environment where equities rip higher.
If I sold 5% of my fixed income, there's an opportunity cost for that as well. And so this is, as we'll talk about, what I think capital efficiency is all about, is making the trade-off less about giving something up and more about how can I add complementary exposures on top of my existing asset allocation.
[00:03:26] Doug Heikkinen: When you talk about capital efficiency, are we simply talking about leverage?
[00:03:31] Andrew Okrongly: Yeah, no, that's a great question, right? Because ultimately, leverage is a tool that we're utilizing when we're talking about building more capital efficient portfolios. I think what's really important is to focus on, what's the objective of utilizing the leverage.
In this case it's the prudent use of leverage to build a better, more diversified portfolio. It's not utilizing leverage to load up and double down on a single concentrated bet that we might have high conviction on because we're trying to generate higher returns, full stop, right?
I think that's where leverage on its own has gotten people into a lot of trouble historically, is when you're utilizing leverage for speculation at the end of the day. I think the way that I would describe capital efficiency in just plain English is you're utilizing a portfolio or an ETF in this case, that for every dollar you invest in that ETF You're going to get over more than $1 of exposure to underlying asset classes, underlying drivers of returns.
But I think really the question is not, does that mean there's leverage, right? Because, I think leverage is implicit in being able to build a more capital efficient portfolio. The question is, why are we doing that? What exposures are we adding? What exposures are we preserving? And ultimately, I think, as long as you're utilizing leverage in a prudent way and you're doing it to build a more diversified portfolio, and we'll talk about ways that we do that with Treasuries or gold or commodities. I don't think that's something to immediately shut down, right?
Because leverage certainly has a negative connotation to it. I think it's all about, what's the, objective of utilizing that leverage. And we'll talk more about exactly what that is and how we can utilize capital efficiency to get to that.
[00:05:40] Doug Heikkinen: Okay, let's talk about how capital efficiencies changes the traditional asset allocation conversation advisors are used to having with clients. How does that work?
[00:05:50] Andrew Okrongly: Yeah, so I think historically, the asset allocation discussion has really been, how do I divvy up my portfolio between investing or setting aside X percent into stocks, X percent into bonds, X percent into cash, et cetera? And it's this kind of very capital budget mindset to building client portfolios.
And I think what capital efficiency can do is allow you to really reframe conversations in an outcome-oriented or risk budget type mindset. And so what I mean by that is if you're an advisor working with a client, you don't necessarily need to start with, is a 60/40 or a 70/30 the right portfolio for you?
Where you can start is, what are your long-term goals? What types of nominal returns does your investment portfolio need to generate in terms of being able to achieve those goals? Or what type of income, annual income, does your portfolio need to be throwing off to achieve your lifestyle objective in retirement?
And then at the same time, you can try to understand, what's the willingness and capacity of my client to take on risk? And you can look at that through the lens of volatility or drawdowns. But once you've established those two things, then it's, okay, can I build the right portfolio of exposures that can set my client up for success given those kind of objectives and constraints?
And I think what capital efficiency, how I view the capital efficient suite of ETFs, is really it's a tool in the advisor's toolkit to try to be able to solve that risk and return puzzle. Because I think oftentimes, if the only thing you have in your toolkit is equities and bonds, you're probably either going to be making portfolios that are overly conservative or overly risky, based off of kind of focusing in on just a return bogey or a risk bogey.
And I think importantly, just because a portfolio might have exposures that exceed 100%, nominal exposures that exceed 100%, i.e., you're utilizing capital efficiency to get more return streams into that portfolio, that doesn't necessarily mean that you've built a more risky portfolio, right?
We manage model portfolios that utilize capital efficiency and that certainly have had lower volatility than a traditional asset allocation that had that same return expectation would've had. Likewise, I think, if you've built a portfolio that is within someone's risk tolerance, but it's setting them up where they're at high risk or very low degree of probability of achieving their long-term return goals or keeping up with purchasing power and protecting against inflation, you've introduced a new type of risk, right?
So risk isn't just volatility, it's also, what's the risk that my client doesn't achieve their long-term goals? And so I think capital efficiency is really a underutilized tool in an advisor's toolkit to try to build portfolios that can solve for these sometimes conflicting goals that clients have.
[00:09:22] Doug Heikkinen: Capital efficiency may sound like a new ETF innovation, but the underlying idea has roots in institutional portfolio construction. What is genuinely new here, and what is simply becoming more accessible to advisors?
[00:09:38] Andrew Okrongly: Exactly right. The concepts, the math behind all of this isn't new, right?
Institutional investors like pension plans, endowments, foundations, insurance companies, institutional investors have been utilizing futures or swap overlays to achieve exactly what we're talking about for decades, right? there's ways to achieve your interest rate exposure, your bond exposure, your equity portfolio that are very, very capital efficient and very low cost, meaning the underlying funding cost that's embedded in a Treasury futures contract is basically three-month T-bills.
So there's ways to bring in capital efficiency to portfolios. And institutions have had different words for this over the years, right? Whether it's completion portfolios or portable alpha or synthetic beta. There's lots of different ways that this has been described by institutional allocators.
But ultimately, it comes down to can we start thinking in more efficient, holistic terms about what risks are in a portfolio instead of just where does the capital sit and what's our capital allocation pie chart look like? So I think this shift into thinking in a more holistic risk way, total portfolio risk mindset, might be new to some advisors, but it's certainly not new to the investment community.
What is new is that it's not just limited to institutions with the scale and the ISDA agreements and the infrastructure to manage an overlay portfolio. It's now available to all advisors, via the ETF wrapper, through the Capital Efficient suite offered by WisdomTree.
[00:11:31] Doug Heikkinen: So what's actually happening inside this capital efficient ETF, and what does the fund own?
What do the futures play, and how is collateral managed?
[00:11:40] Andrew Okrongly: Yeah, so we'll go over the full suite of offerings that we have. But, regardless of the specific fund, the best way to think about this is there's kind of two components to any capital efficient ETF. There's a funded sleeve and an overlay sleeve.
The funded sleeve is typically going to be a portfolio of traditional basic core portfolio holdings, right? S&P 500 type US stock portfolio, or a portfolio of inflation-protected Treasury securities, TIPS. Something that is very liquid, vanilla, straightforward, that we can own, in the ETF wrapper and get obviously all the tax benefits that come with the creation redemption mechanism of the ETF.
So that's the funded sleeve. What the funded sleeve also will own is typically a 10% allocation to cash. And when I say cash, I basically mean short-term Treasury T bills or cash equivalents. But that's important because what that cash piece can do is serve as the support, basically the collateral to this overlay sleeve. Which is generally speaking, going to be a portfolio of futures contracts that could be fixed income Treasury futures, it could be gold futures. We have a lot of different strategies where you can basically build an overlay on top of that funded sleeve. But that's really what's going on. And under the hood, what the day-to-day management of that portfolio is like, is basically just making sure that whatever the desired, the target notional exposures are being achieved.
So NTSX, that's the first capital-efficient ETF that we launched back in 2018. That's meant to give you a 90% exposure to the S&P 500 and a 60% exposure to a laddered Treasury futures portfolio. So basically, for every $100 I invest, I get $90 of large cap US stocks, $60 of US Treasuries.
So the day-to-day management of that fund is really just about ensuring that we're achieving those desired exposures. And what's involved in that? It's basically rolling the Treasury futures contracts. It's rebalancing if we fall outside of certain predefined exposure tolerances, and managing the collateral, that's the cash collateral, that's supporting that Treasury futures portfolio.
So basically keeping things in line with objectives and minimizing the frictional costs to the extent that's possible. That's really what's happening inside the ETF.
[00:14:26] Doug Heikkinen: Great. The variety of strategies offered by WisdomTree has expanded significantly. What is available in the market today, and how should advisors distinguish among these use cases?
[00:14:38] Andrew Okrongly: Yeah. So I would break down our capital-efficient offering into three buckets. The first is our efficient core series, and these are the first funds that we launched. We're going to be celebrating our eight-year anniversary of managing these strategies this summer. But basically what this is is a global equity portfolio plus Treasury futures, right?
So NTSX, what I mentioned before, that's US equities, Treasury futures. NTSI is going to be international developed, or EAFE equities, plus a Treasury futures overlay. And then NTSE is that same concept, but with emerging market equities and Treasury futures. So depending on what your regional allocation is, you can use a combination of those three funds to basically get efficient exposure to your core asset allocation of stocks and bonds and free up capital elsewhere in the portfolio.
As an example, say I take fifteen percent of my portfolio today, and let's just say I have a sixty/forty for simplicity's sake. I put ten percent into those efficient core funds, and I've basically, with that ten percent, have replicated the full fifteen percent that I sold. Now I can take an additional five percent and buy commodities, or buy a managed futures fund, or a hedge fund strategy, or private markets.
It's really whatever you want to do with that capital to add value onto your portfolio. What the efficient core funds allow you to do is to, in a more capital efficient manner, replicate what you sold so that you free up room in the portfolio for additional exposures that you can layer on top of your core.
And then in addition to that efficient core series, we've launched what you can call equity plus diversifiers. So our most popular strategy in this category is GDE. That's US equities plus gold futures. So very similar concept to efficient core, where you have the funded portfolio and the overlay portfolio.
In this case, though, your overlay portfolio, instead of being Treasury futures, are just plain vanilla US-listed gold futures contracts. So you're getting large cap US stocks, plus gold, all in one wrapper. The idea being here, a lot of advisors and clients love gold, but selling stocks to buy gold can create portfolios that, as we talked about in the beginning, won't keep up in a equity bull market.
And so this allows you to kind of have your gold exposure without sacrificing your core US equity exposure. And then we've also launched similar type of strategies in this category that combine US equities with other diversifiers, like international equities, that would be NTSD, or US equities with a long/short alternative equity strategy on top. That would be WTLS.
And then the last category is our inflation sensitive efficient core funds. So this would be, TIPS plus gold. So in this case, TIPS is your funded portfolio, and then gold futures on top, that's GDT. And then WTIP, which is the same type of strategy with TIPS as your funded portfolio, but where you have a more diversified basket of kind of commodities with some trend following, long/short in there, as well as a flexible allocation to Bitcoin on top.
So that's WTIP. That's our inflation plus fund. So whether it's freeing up capital for alts, whether it's bringing in diversifiers on top of US equities, or whether it's bringing in a more inflation-sensitive, inflation-hedging type portfolio, we kind of offer three different varieties in our capital efficient suite.
[00:18:33] Doug Heikkinen: That's great information for advisors. Do you think capital efficient building blocks will eventually become a standard part of advisor model portfolios the way alternatives and factor ETFs became mainstream over time, or is this more of a specialist tool?
[00:18:50] Andrew Okrongly: Yeah, I think from my perspective as a model manager, these are incredibly useful tools. And I think they solve real-world challenges that are, I don't want to say completely universal, but certainly, I think, present for a lot of client portfolios, challenges, that people are trying to build.
Some of our best performing long-term strategies that we've been running have been utilizing these strategies, because at the end of the day, I think if you're a advisor or any sort of asset allocator, the hurdle that you have to achieve for a capital efficient strategy to pay off is basically just, I'm freeing up capital in my portfolio, and I'm going to go out and invest that in x.
As long as that investment that you select can outperform the funding cost inherent in your capital efficient ETF, which is essentially just three-month T-bills. If you can outperform cash, you can add value to client portfolios and deliver above benchmark experience. And I think that clearing that hurdle, especially for advisors and model managers, I think it's a lot more straightforward and being able to do that consistently, than trying to pick what active manager's going to outperform the benchmark next or what factor's going to beat the market next.
So I think that this is the future of how advisors are going to be building portfolios, certainly how I think model managers are going to be building portfolios. And I think it's going to lead to more consistent, desirable outcomes at the end of the day.
[00:20:39] Doug Heikkinen: Crazy world, challenging markets. Where do you think capital efficiency has the highest value application in today's market environment?
[00:20:48] Andrew Okrongly: If I had to distill it to one thing, I would say, what we still hear from a lot of advisors and partners that we work with is inflation risk is still relevant. And I think the 2022-like market environment scarred a lot of clients, it scarred a lot of advisors where you had both your stocks and your bonds going down at the same time.
And I think it's led the conversation to, how can I ensure that next time we get an environment like that, I have something in my portfolio that's going to be a ballast to, whether you want to call it stagflation, or just an environment where equities and fixed income, due to most likely inflation being the catalyst or inflation expectations, leading to significant declines in both of those asset classes.
And so what are things that did well in that environment? Managed futures and trend following strategies is the top of mind thing that tends to really do well in a positive stock bond correlation type market. But gold and commodities, those are other things as well that I think advisors are increasingly looking to add as diversifiers to their portfolio.
So whatever you're really looking to add at the end of the day, I think the most practical application of these tools right now is how can I incorporate things into my portfolio, that I know could really be useful for me in a tricky market environment, that I don't want to have to sacrifice my ability to participate in the upside scenario to add them.
[00:22:35] Doug Heikkinen: The pitch can almost sound too good, keep core exposure and add something else on top. We know there's no free lunch in markets, as everyone says. So what's the catch? How can this approach impact tax efficiency?
[00:22:47] Andrew Okrongly: Yeah. Taxes are certainly one element of it, right? I would say that, bigger picture, what are the risks?
What are the potential, the downside to this? There's no free lunch, right? So there is a cost of getting capital efficient exposure into the portfolio, and that cost, as I mentioned before, is basically the funding cost that's embedded in your futures contract. As long as you can achieve a return through whatever exposure you're adding that's going to exceed your funding cost, you will enhance the portfolio returns at the end of the day.
If you're not able to do that or if there's an environment where, if it's stocks and treasuries or stocks and gold, if those two assets decline at the same time, then you're going to underperform what would've just been a standard beta exposure with that capital.
What I think's important to keep in mind though is that, when you're looking at judging, or qualifying, or looking at the relative success of these strategies, it's important to do it in the full portfolio context. So not just did NTSX do better than IVV.
It's did NTSX allow me to incorporate gold or incorporate managed futures or some other liquid alternative? How did that holistically do relative to if I had kept just a traditional portfolio asset allocation? And so I think that's an important thing to how you evaluate success, but it's not guaranteed that these different exposures that you're incorporating into one fund are going to necessarily always do better than the beta position that is kind of your opportunity cost.
From a tax perspective, I think obviously the ETF structure that we're utilizing to implement these is still going to be highly tax efficient. Derivatives, like futures, can create taxable distributions that are essentially unavoidable. Some of those futures contracts receive the mark-to-market treatment that's basically going to be taxed at 60% long term, 40% short term capital gains. And that can be, in some cases, attractive.
But I wouldn't say that overall tax alpha is the reason to pursue a capital efficient strategy, right? It's really about, you're trying to achieve a total portfolio outcome, and finding a partner to work with that's going to help you understand what the potential tax implications of doing that are with whatever funds or strategies that you're using.
[00:25:38] Doug Heikkinen: All right, last one for you. If an advisor takes away just one idea from this conversation, what should it be when thinking about capital efficiency and modern portfolio construction?
[00:25:49] Andrew Okrongly: I would say the one thing to take away is, it's the question that we hear all the time when we're talking about alternatives.
It's, "That sounds great, but what do I need to sell to put this into my portfolio?" And that's ultimately what capital efficiency is trying to solve. It's allowing a client to preserve their core asset allocation, preserve their core exposures, and adding diversifiers on top of that that's going to improve the overall outcome, right?
That's the takeaway. That's the key message. And WisdomTree has been doing this, as I mentioned, for coming up on eight years. We've invested a lot into kind of the education that goes along with moving to this type of framework and have plenty of tools that are there to help advisors with some of the initial learning and hurdles that come with moving to this type of a framework.
But it's something that we're really excited about and would be thrilled to partner with different advisors on learning more about.
[00:26:46] Doug Heikkinen: These are great tools to consider, fantastic explanations, and you have a great brand behind you. Thank you, Andrew. We appreciate you joining us.
[00:26:56] Andrew Okrongly: Thank you very much.
[00:26:57] Doug Heikkinen: To learn more about WisdomTree, please visit wisdomtree.com. For our producer Tory Miller, I'm Doug Heikkinen. Thank you so much for listening.