Trending
Jeremy Schwartz is the Global CIO at at WisdomTree. WisdomTree works to create a better way to invest, offering a leading product range that offers access to an unparalleled selection of unique and smart exposures.
Today, Jeremy joins Doug to talk about navigating today’s volatile market landscape. They discuss the impact of policy uncertainty, interest rates, and valuations on investor sentiment. While cautioning against reactive decisions, he reinforces the long-term case for equities despite short-term market swings.
Jeremy also discusses WisdomTree’s Equity Premium Income strategy (WTPI), which uses option selling to target a 2.5% monthly income. Designed for flat or choppy markets, WTPI offers a more defensive way to stay invested, with lower volatility than traditional 60/40 portfolios. As demand grows for income-generating strategies seeking downside protection, WTPI stands out as an option for cautious investors.
Resources: WisdomTree
Related: Trump, Powell & Rates: The Post-Liberation Day Edition
For standardized performance of WTPI, please visit here.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. For a prospectus or, if available, the summary prospectus containing this and other important information about the fund, call 866.909.9473 or visit WisdomTree.com/investments. Read the prospectus or, if available, the summary prospectus carefully before investing.
You cannot invest directly in an index.
For definition of terms used in this discussion, please see the WisdomTree Glossary.
WTPI Risk information: There are risks associated with investing, including possible loss of principal. The Fund will invest in derivatives, including put options on the SPDR S&P 500 ETF Trust (“SPY Puts”). Derivative investments can be volatile, and these investments may be less liquid than securities, and more sensitive to the effects of varied economic conditions. All SPY Puts are exchange-listed standardized options. The SPY Puts are selected to target a premium of 2.5%. THE SPY Puts sold by the Fund may have imperfect correlation to the returns of the Index. Although the Fund collects premiums on the SPY Puts it writes, the Fund’s risk of loss if the price of SPY falls below the strike price and the SPY Puts are exercised as of the Roll Date may outweigh the gains to the fund from the receipt of such option premiums. The sale of cash-secured SPY Puts serves to partially offset a decline in the price of SPY to the extent of the premiums received. The potential return to the Fund is limited to the amount of option premiums it receives; however, the Fund can potentially lose up to the entire strike price of each option it sells. By virtue of its put option sales strategy, Fund returns will be subject to an upside limitation on returns attributable to SPY, and the Fund will not participate in gains beyond such upside limitation. The Fund's investment strategy is subject to risks related to rolling. To the extent the Fund's portfolio managers are unable to roll the SPY Puts as described in the Fund's principal investment strategy, the Fund may be unable to achieve its investment objective. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
VIX: A key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It is the premier benchmark for U.S. stock market volatility.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S.
Jeremy Schwartz is a registered representative of Foreside Fund Services, LLC.
Transcript:
[00:00:02] Doug Heikkinen: This is Advisorpedia's Power Your Advice podcast, and I'm Doug Heikkinen.
Today we're very fortunate to have WisdomTree's Jeremy Schwartz with us. Jeremy has served as the Global Chief Investment Officer since 2021 and leads their investment strategy team in the construction of WisdomTree's equity indexes, quantitative active strategies, and multi-asset portfolios. . .
Jeremy, thank you so much for taking time and being with us today.
[00:00:29] Jeremy Schwartz: Oh, it's great to be with you. Thanks for having me.
[00:00:32] Doug Heikkinen: As we all know, market volatility is the major topic for investors. What factors do you think will continue to drive the volatility?
[00:00:41] Jeremy Schwartz: We came into this year and thought we might get a correction.
It came fast and swift. I think there was a few things that were on our mind. There was market valuations and how much earnings expectations were built in. And then we thought that interest rates could rise and pressure some of those valuations. You've had rates go down actually, from the beginning of the year towards where you're today, and but there's still some questions actually. We would still say, where will the 10 year go? It is possible that it creeps higher, and that's one of the things that could pressure the market. But you've got a new administration that is focused on a bunch of policies. Some of them are very pro markets, like lower tax rates. Lower corporate tax rates.
They're trying to extend the tax cuts from Trump's first administration. Those are very positive. People like that. But also at the same time, we've got this discussion on tariffs and, as we're recording, you don't know what the actual tariff policy will be.
And maybe there's gonna be some clarity over the coming weeks. But there's definitely an uncertain environment from some of these policies. And so the market doesn't like the tariffs. There's no question the market doesn't like tariffs. And so there'll be a question of where these settle down to. But there's, in a way there's a backdrop of geopolitics and uncertainty that is causing the market this indigestion as we're talking. So it's new administration policies combined with a backdrop of, the markets are not, even after a sell off, they're not cheap by historical measures. They're more reasonable than they were when they were higher, but they're still not cheap by any means.
So today the S&P is around 20 times earnings. It's a 5% earnings yield. You had 2% to 3% inflation. That's 7% to 8% is how we think about the long term opportunities from a 20 P/E. And so that's a little bit lower than history. Go back, the long term S&P used to average 15-16 P/E and used to get a 7% real after inflation return, from Professor Jeremy Siegel's long-term data on the market. So higher multiples brings higher risk to some degree.
[00:03:01] Doug Heikkinen: The outlook for S&P index returns has changed over the past several weeks, of course, with several major financial institutions revising their forecast downward due to the escalating trade tensions, and certainly economic uncertainties.
How do you see these challenges shaping market performance, and what should investors be thinking about in terms of portfolio adjustments?
[00:03:24] Jeremy Schwartz: We do caution people for making rash decisions and just wanting to exit the market. The worst time to sell is often right after a big drawdown where people think it's a lot more uncertain.
And we would say, if you took a 20 P/E, which is the S&P 500, and you eliminated all the earnings over the next two years, how much, in theory, should you go down from a discounted cash flows perspective? Well you should only go down 10% if you eliminate all the earnings. 5% this year, 5% next year.
20 P/E is 5% is one years of earnings. That's more or less. And you've already gone down more than that, so it's certainly not just reflecting to uncertainty over this year's earnings, it's the trust in the market and the market multiple, which is much harder to model. But the sentiment has shifted and things move way more than justified by the actual ongoing policy. So we would step back and make that as a long-term conclusion. We'd still very much believe in the thesis of stocks for the long run. That is definitely how we think about the market opportunities, but there's just more uncertainty, clouding the horizon from all this new, the policies that are being discussed right now.
[00:04:36] Doug Heikkinen: WisdomTree has highlighted its WisdomTree Premium Equity Income Fund Strategy, WTPI for short, as a tool for navigating flat to down markets. Can you walk us through how this strategy works and why it's particularly useful in periods heightened volatility?
[00:04:54] Jeremy Schwartz: The WisdomTree Equity Premium Income, WTPI, is using options to get exposure to the market.
It's not just owning equities in a traditional sense of buying all the large cap S&P 500 companies. It's actually selling options on that broad market index, and it is targeting 2.5% a month with that option selling. If you look at the distribution policy of how much we've been paying out of that 2.5% monthly income we're targeting, we've been paying out around 1% a month. And it's not just writing one option. I think in some of these standard call writing or option writing strategy, people have targeted sort of a monthly roll. We're trying to do things more often.
You've seen some people try to do as much as a daily roll, which is taking advantage of some of these new daily options. We're somewhere in between that. We're rolling options every two weeks, so that we have diversified strikes in terms of what options are we targeting. But again, the goal is to try to generate 2.5% income.
And elevated volatility gives you premium to sell against. Effectively, you're utilizing the volatility in the options market and selling some of those options and collecting the income. You get less upside because you're, really you're getting exposure to the market through the selling of the options.
So you do have downside risk, and your upside is constrained to the premium that you collect. But we're targeting that 2.5% every month. And that, we think is a useful way in the flat markets in particular, if the S&P were to be range bound, negative five, five to 10.
I think that 2.5% type monthly income is a pretty attractive place to be in those exact flat markets.
[00:06:42] Doug Heikkinen: Many investors worry about drawdowns, especially in uncertain markets. How does an option based strategy like WTPI help manage risk compared to simply holding a long equity position?
[00:06:56] Jeremy Schwartz: The long equities, the S&P 500 today doesn't have much income. There's a lot more growth oriented names, so they don't pay as much dividends as they used to. If you did a high dividend sort of the market today, a little bit under 4% income yields where the S&P is like 1.5% is the dividend yield on the S&P. They're doing more buybacks and that some way, a way to, to get some income also.
You're not getting the same income levels you used to on the broad market. Using options and selling options is definitely changing the return profile. Very different return profile. Again, there's not an unlimited upside. Your upside is limited to the income that you collect from writing these options.
But, it does cushion you in those flat to down markets where you don't have as much income off the traditional equity ownership. This is utilizing options to restructure the return profile, but is exactly that more uncertain period where you don't have big upside that we think it makes a lot of sense.
[00:08:00] Doug Heikkinen: Some investors turn to bonds, gold, or even inverse ETFs to hedge against market downturns. How does WTPI compare to these traditional hedging methods and what makes it a unique, diversifier?
[00:08:14] Jeremy Schwartz: You know, in some ways what you're doing with WTPI is, you could say you're getting a little bit lower beta way of owning the market, and I'd encourage people, if you've looked at like a 60/40 portfolio, that's one of the most standard combinations of a stock bond mix of 60/40 portfolio, is if you compare this, WTPI, versus something like a 60/40, I think you'll get, you'll find some interesting risk statistics and how much the volatility on WTPI is, has been actually lower than some of a standard 60/40 in some of the historical look backs I've done over the last three, four years. And, I think the returns have been competitive.
And so I think, if you look at that, one of the things you could do if you're nervous about the equity markets, you could get more bond risk. Now interestingly, bonds are very good hedges to stocks for much of the last few decades. But from 2022, you had a bear market in bonds and a bear market in stocks and, arguably the bear market in bonds was part of the cause of the bear market in stocks. Now at higher yields, when you got to four and a half yields and above, bonds started becoming a little bit better hedge, and during the downdraft bonds were going up. But I do think some of the environment where we are today, you could be worried that a big move in bond yields would be the cause of an equity selloff. And so I do think you have to look for other alternatives.
Again, other diversifiers. Gold is one of those diversifiers that could diversify portfolio risk. Gold has definitely been performing very very well over the last three or four years. I think this option strategies is just another way to capitalize on volatility. And I think compared with standard 60/40, people might find that return risk and return dynamic quite interesting when they look at WTPI's return and risk versus standard 60/40.
[00:10:11] Doug Heikkinen: With the VIX fluctuating and uncertainty around rates and inflation, some investors are looking at volatility itself as an asset class. Should investors and advisors think about incorporating volatility selling strategies into their portfolios?
[00:10:27] Jeremy Schwartz: To buy volatility as a hedge, it's often, it's hard to buy it directly.
People have tried to put futures on the VIX, and the futures have their own issues, in terms of the contango or backwardation at various times, factored into the futures market. It becomes a very difficult instrument to trade directly. When volatility is very low, say, Hey, now's a good time to go long volatility directly. But it's a very expensive thing to hold. It's not a very easy thing to do. People have done the opposite, which is sort of selling volatility. And you're trying to, if you have a very big volatility spike, you know that's been the cause of some ETFs to have real issues.
But options funds, again, we talked about it. You're, by selling options, you're taking advantage of the volatility in the market. We're collecting a certain income threshold. And again, with WTPI, we're targeting 2.5% a month. So that is reflecting the underlying volatility in the market. Now after big downdrafts, when volatility spikes, you could say, Hey, you're not gonna get as much of the the market rebound, right? So that there's no question after major drops sometimes you want the full upside participation. And again, we're gonna only get 2.5% a month is our maximum upside in that fund. So that has to be kept in mind that for after sharp drops, sometimes the markets rebound very, fast.
But so again, it is best in a flat market or a choppy market. And so, but if you expect a zoom higher, you don't wanna sell away all your upside. So it's really just those choppy markets, flat to down markets, that it's gonna perform the best. And you get, you know, these elevated volatility means in some ways you can take less risk to get that 2.5% threshold, because volatility has gone up. I think that'll be interesting to watch over time, as just, where does this year go? This might be a year in a choppy market that you really do prize that income level.
[00:12:40] Doug Heikkinen: Back to WTPI. How has it performed historically in different market environments, and what types of investors do you think would benefit most from adding this strategy to their portfolio?
[00:12:52] Jeremy Schwartz: I think it's the types of investors that would most find it attractive are those that have some caution. They don't know how much equities they want to take. And it's a way that you could get some equities exposure.
I mean, it's a similar, it's a derivative off of just raw equities. It's using options again. But it's a, you could say, a more defensive way to get some equity market risk. And also if you're worried about just bond yields rising, this is a way to get income in a very different structure.
You know, when you, when we collect the premium income, it's basically invested in very short term treasuries. So you're getting an income profile without the duration risk of the bond portfolio. And again, just, with some exposure to equity market risk, being that you're exposed to the downside of the markets and that 2.5% monthly income level.
So it's a, very nice combination, think performs well versus other standard asset allocation mixes. And I think it's appealing for those who are maybe defensive on either stocks or stocks and bonds combined in that 60/40 portfolio. It's a very nice, interesting alternative to that.
[00:14:05] Doug Heikkinen: While WTPI may have benefits, every strategy comes with risks. What should investors be aware of when implementing the put writing strategy, and how can they best position it in a broader portfolio?
[00:14:19] Jeremy Schwartz: Well volatility has certainly risen. We've already talked about, you, you mentioned the VIX has spiked a bit. And so you know that, that rising, a high level of volatility that can goes down is actually a very good time for the strategy. But also if you expect very very sharp upward movements in the markets, you know, if you thought the market was gonna go up 10% in the next few weeks, then that is not, this is not gonna go up to 10%.
It's going to go up generally the 2.5% a month. So I think that's the risk to know is that you got exposure on the downside. And your upside is capped at the 2.5% that you're writing the options for. So that's the, it's the pro and con of the different strategies is you're not gonna have a very sharp, upward moving return on this type of concept.
And so that's just the dynamic that you've gotta pay attention to. How much do you expect the market to go up? If you think it's go up a lot, that's not where this strategy really benefits.
[00:15:18] Doug Heikkinen: All right. Last one for you. Given the market conditions and the potential challenges for the S&P 500, how do you see the role of option based strategies evolving this year and beyond? Should investors be thinking differently about their equity exposure going forward?
[00:15:32] Jeremy Schwartz: Well this has certainly been one of the hottest areas of the ETF market.
There's about $80 billion in option income strategies this year alone. To start the year, you've seen over $7 billion come into the option income category. Certainly, advisors, investors are using option strategies and I think in some ways there's demographics behind it. Investors are aging as a whole and they want more income.
You've been a lot of strong gains over the last four to five years of people are saying, Hey, maybe it's time to just lower our overall risk levels, and this is one way, again, to maintain some equity participation, but with a very different risk profile. so I think it's that combination of attributes that have got people to use option strategies more.
I expect that to continue. And, this is just a novel way of doing it with our 2.5% monthly income target in WTPI. So yeah, I expect the category to continue to gain share. I think the market environment has set up with reminding people, as we have this year with the drawdown that you had in the S&P to start the year that volatility can come back. And so having strategies that help you manage volatility is very important, as we see.
[00:16:53] Doug Heikkinen: Jeremy, I know this is an incredibly busy time for you, so thank you so much for joining us.
[00:16:58] Jeremy Schwartz: Thanks for having me, Doug.
[00:16:59] Doug Heikkinen: To learn more about WisdomTree and all their strategies, please visit wisdomtree.com.
Please follow us for timely updates on X, LinkedIn, and Facebook, all @Advisorpedia. For everybody at Advisorpedia, our producer Tory Miller, and the Power Your Advice podcast team, this is Doug Heikkinen.
[00:17:20] Disclosure: Before investing, carefully consider a fund's investment objectives, risk, charges, and expenses contained in the prospectus available at wisdomtree.com/investments. Read it carefully. There are risks involved with investing, including the possible loss of principle.