WisdomTree partners with ValMark to launch ‘Target Range’ ETF

Oct 21st, 2021 | By | Category: Alternatives / Multi-Asset

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WisdomTree has launched an ETF in the US that blends features of a defined-outcome solution with a traditional asset allocation strategy.

WisdomTree partners with ValMark to launch 'Target Range' ETF

Jeremy Schwartz, Global Head of Research, WisdomTree (left); Michael McClary, Chief Investment Officer of ValMark Advisers.

Listed on Nasdaq, the WisdomTree Target Range Fund (GTR US) seeks to provide capital appreciation with a secondary objective of hedging risk.

The fund is actively managed but follows the methodology of the TOPS Global Equity Target Range Index, a strategy created by ValMark Advisers, an Ohio-based investment adviser.

“Investors face a complex market environment with elevated stock valuations and historically low interest rates. Fears of inflation and rising rates have pushed some investors out on the risk curve, pushing up a traditional 60% equity/40% fixed income mix towards 75/25,” said Jeremy Schwartz, Global Head of Research at WisdomTree.

“WisdomTree’s Target Range Fund may help investors increase their equity exposure and upside participation in markets, but in a risk controlled manner.”

The fund utilizes a rolling 12-month call spread option strategy that involves purchasing, at the start of the year, 15% in-the-money one-year call options on a portfolio of four underlying ETFs that track the performance of large- and mid-capitalization companies in the United States, developed market countries and emerging market countries, and the sale of one-year call options on the same portfolio of ETFs that are 15% out-of-the-money, while the remainder of the fund is allocated to a collateral account invested in fixed income instruments.

The underlying ETFs the options are referenced to are the SPDR S&P 500 ETF (SPY US), the iShares MSCI EAFE ETF (EFA US), the iShares Russell 2000 ETF (IWM US), and the iShares MSCI Emerging Markets ETF (EEM US). Their target allocations are 50%, 20%, 20% and 10% respectively.

If markets decline, the potential target (annual) loss would be the amount of capital invested in the long call options, minus any proceeds received from selling options to offset the cost. Conversely, if on the last business day of the month the price of the underlying ETF has appreciated and is above the strike price of the existing short call option, the fund will enter into new options contracts to ratchet up the upside and the corresponding loss range.

Restrikes reset the Target Range when an underlying component ETF’s value ends a qualifying month above the strike level of the short call option. The new Target Range locks in a higher strike level for the coming January on both the long call and short call which make up the underlying call spread.

The strategy serves to manage downside risk for investors on an annual basis while providing an opportunity to lock in investment returns during the year through the potential monthly restrikes.

Michael McClary, Chief Investment Officer of ValMark Advisers, said: “TOPS Target Range is an innovative solution designed to solve the concerns we hear from investors when putting together thousands of financial plans each year. Investors often express concerns about the risk of market crashes and struggle to stomach the day-to-day volatility of markets.

“Historically, the TOPS Target Range indexes have reduced day-to-day volatility, compared to a similar long-only exposure, and the strategy is designed to provide protections over annual periods against major market crashes.”

The ETF will likely see deployment as a buy-and-hold position for longer-term, risk-conscious investors and as a short-term, risk-reducing investment for investors temporarily uneasy about the outlook for market sentiment.

It comes with an expense ratio of 0.70%.

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