WisdomTree Launches US Floating Rate Treasury ETF

WisdomTree Launches US Floating Rate Treasury ETFUS Floating Rate Treasury ETF. Treasury bills that do not offer coupon payments and longer-maturity, fixed rate Treasury bonds.

Christopher Gannatti, WisdomTree Head of Research commented, “For investors who are looking for another government bond instrument to replace some of the low yield exposures present in many developed market treasuries, US Treasury FRNs could provide a yield enhancement, especially given the flatness of the US yield curve.”

Lidia Treiber, Fixed Income Research at WisdomTree, added, “US Treasury floating rate notes typically have a lower duration profile than floating rate corporate bonds (corporate FRNs) and can be used to help reduce corporate credit exposure within investor portfolios. Interest payments on corporate FRNs are exposed to corporate credit risk or risk that the borrower will default on its obligation.”

USFR: Under the Hood

Exposure: Invests in US Treasury Floating Rate Notes

Daily rate reset: The coupon rate is reset daily in reference to the highest accepted discount rate of the most recent 13-week Treasury Bill auction, plus or minus a fixed spread determined at the securities’ initial issuance.

Interest: Since auctions for new 13-week Treasury Bills occur once a week, the coupon rate effectively changes weekly. Interest is accrued daily and distributed quarterly.

Maturity: They are backed by the full faith and credit of the US government and have a 2-year final maturity.

Product information

TER: Total Expense Ratio

About WisdomTree UK Ltd.

WisdomTree Investments, Inc., through its subsidiaries in the US, Europe and Canada (collectively, ”WisdomTree”), is an exchange traded fund (”ETF”) and exchange traded product (”ETP”) sponsor. WisdomTree offers products covering equities, fixed income, currencies, commodities and alternative strategies. Through WisdomTree UK Limited, it sponsors WisdomTree UCITS ETFs and ETPs from ETF Securities and Boost, in a wide range of asset classes, including short and leverage ETPs. WisdomTree currently has approximately $58.3 billion (as of 13 March 2019) in assets under management globally. For more information, please visit www.wisdomtree.com.

WisdomTree® is the marketing name for WisdomTree Investments, Inc. and its subsidiaries worldwide.

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Communications issued in jurisdictions outside of the EEA: This document has been issued and approved by WisdomTree UK Limited, which is authorised and regulated by the United Kingdom Financial Conduct Authority.

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WisdomTree launches Artificial Intelligence ETF (WTAI)

Tracks a unique index designed in collaboration with AI & technology market experts, Nasdaq and the Consumer Technology Association Offers focused exposure to exponential AI megatrend

London, 5 December 2018: WisdomTree, the exchange traded fund (”ETF”) and exchange traded product (”ETP”) sponsor, has partnered with Nasdaq and the Consumer Technology Association (CTA) to launch an ETF providing unique exposure to the Artificial Intelligence (AI) sector. The WisdomTree Artificial Intelligence UCITS ETF listed on the London Stock Exchange today, with a total expense ratio (TER) of 0.40%.

The ETF will provide investors with liquid and cost-effective access to this exponential technology megatrend that is driving efficiencies and new business capabilities across all industries globally and redefining the way we live and work.

Christopher Gannatti, WisdomTree Head of Research in Europe says, “We are delighted to partner with Nasdaq and CTA, who are experts in AI and technology markets. We have worked together, leveraging our combined expertise, to re-define the AI investment landscape.”

“To capture the full economic value of AI we place companies in three categories; Engagers, Enablers and Enhancers*. When investors think of what this can bring to a portfolio, they should be thinking over a long time horizon and about how advances like autonomously driven cars, a digital workforce, mass facial recognition and other applications of intelligent machines could change the world,” Gannatti added.

Rafi Aviav, WisdomTree Head of Product Development in Europe comments, “AI is a revolutionary technology and the market for AI products and services is expected to more than triple over the next three years[1]. This fund offers a unique approach to capturing this expected growth, which is the result of a year-long collaboration between WisdomTree, Nasdaq and CTA.”

“The fund broadly represents the upstream[2] and midstream[3] parts of the AI value chain and so balances diversification with a focused exposure on those parts of the AI value chain that stand to gain the most from growth in the AI market,” Aviav added.

There is no commonly used classification system that allows one to automatically choose companies engaged in the emerging AI space, so the research for the selection of index portfolio companies is conducted by experts with deep familiarity of the AI value chain and the technology markets more broadly. This ensures the portfolio remains focused on AI opportunities rather than becoming just another broad tech fund.

We believe the fund’s unique approach offers the best of both the active and passive investment worlds in accessing the AI megatrend. The fund’s portfolio companies are already capitalising on the AI opportunity across industries and are well positioned for AI’s growth,” Aviav commented.

“AI is one of the key ‘ingredient technologies’ over the next decade – deployed everywhere from factory floors and retail stores to banks and insurance offices, creating new opportunities,” said Jack Cutts, senior director of business intelligence and research, CTA. “We’ll see this play out in January at CES® 2019 – the most influential tech event in the world – where AI will be a dominant theme, showcasing the massive potential AI has to change our lives for the better. We’re excited to partner with Nasdaq and WisdomTree to make AI investible.”

“Artificial Intelligence is at an inflection point to drive further economic growth and create new areas of opportunity,” said Dave Gedeon, Vice President and Head of Research and Development for Nasdaq Global Indexes. “The Nasdaq CTA Artificial Intelligence Index serves as an important benchmark for tracking the adoption of AI across a broad range of economic sectors as this influential technology hastens advancements in productivity and capacity.”

WisdomTree Artificial Intelligence UCITS ETF: Under the hood

The WisdomTree Artificial Intelligence UCITS ETF tracks the Nasdaq CTA Artificial Intelligence Index. This enables investors to gain diversified exposure which is focused on companies that stand to gain the most from growth in AI adoption and performance. The index can evolve as new AI trends and companies come on stream through a semi-annual update. The Index is currently comprised of 52 constituents globally with stringent eligibility criteria:

• Define Universe: Companies must be listed on a set of recognized global stock exchanges and satisfy minimum liquidity criteria and market capitalization criteria to be included in the index.

• Identify and Classify: Companies are identified as belonging to the AI value
chain and classified into the following categories: Enhancers, Enables and Engagers (see below for definitions.)

• Determine AI Exposure: The AI exposure for each individual stock is investigated and scored.

• Top Selection: Only companies with the top 15 scores in each category (Enhancers, Enablers and Engagers) are selected for inclusion, and their weight is allocated evenly in each category.

• Allocate Weight: In total Engagers comprise 50% of index exposure, Enablers comprise 40%, and Enhancers comprise 10% of index exposure.

*Engagers: Companies whose focus is providing AI-powered products & services.
Enablers: Companies who are key players in this space, with some of their core products and services enabling AI. They include component manufacturers (including relevant CPUs, GPUs etc.), and platform and algorithm providers that power the development and running of AI processes.

Enhancers: Companies who are a prominent force in AI but whose relevant product or service is not currently a core part of their revenue. They include chip manufacturers, and platform and algorithm providers that power the development and running of AI-powered products & services.

[TABLE=239]

[1] Source: New IDC Spending Guide, International Data Corporation (IDC), 19 September 2018.
2 Upstream AI constituents include component manufacturers, platform providers and algorithm providers
3 Midstream AI constituents consist primarily of AI powered solution providers

Notes to Editors

About WisdomTree Europe Ltd.

WisdomTree Investments, Inc., through its subsidiaries in the US, Europe and Japan (collectively, ”WisdomTree”), is an exchange traded fund (”ETF”) and exchange traded product (”ETP”) sponsor. WisdomTree offers products covering equities, fixed income, currencies, commodities and alternative strategies. Through WisdomTree UK Limited, it sponsors WisdomTree UCITS ETFs and ETPs from ETF Securities and Boost, in a wide range of asset classes, including short and leverage ETPs. WisdomTree currently has approximately $56.5 billion (as of 28 November 2018) in assets under management globally. For more information, please visit www.wisdomtree.com.

WisdomTree® is the marketing name for WisdomTree Investments, Inc. and its subsidiaries worldwide.

About Nasdaq

Nasdaq (Nasdaq: NDAQ) is a leading global provider of trading, clearing, exchange technology, listing, information and public company services. Through its diverse portfolio of solutions, Nasdaq enables customers to plan, optimize and execute their business vision with confidence, using proven technologies that provide transparency and insight for navigating today’s global capital markets. As the creator of the world’s first electronic stock market, its technology powers more than 100 marketplaces in 50 countries, and 1 in 10 of the world’s securities transactions. Nasdaq is home to over 4,000 total listings with a market value of approximately $15 trillion. To learn more, visit business.nasdaq.com.

About the Consumer Technology Association

Consumer Technology Association (CTA)TM is the trade association representing the $377 billion U.S. consumer technology industry, which supports more than 15 million U.S. jobs. More than 2,200 companies – 80 percent are small businesses and startups; others are among the world’s best-known brands – enjoy the benefits of CTA membership including policy advocacy, market research, technical education, industry promotion, standards development and the fostering of business and strategic relationships. CTA also owns and produces CES® – the world’s gathering place for all who thrive on the business of consumer technologies. Profits from CES are reinvested into CTA’s industry services.

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The content on this document is issued by WisdomTree UK Ltd (“WTUK”), which is authorised and regulated by the Financial Conduct Authority (“FCA”). Our Conflicts of Interest Policy and Inventory are available on request.

For professional clients only. Past performance is not a reliable indicator of future performance. Any historical performance included on this document may be based on back testing. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested performance is purely hypothetical and is provided on this document solely for informational purposes. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. The value of any investment may be affected by exchange rate movements. Any decision to invest should be based on the information contained in the appropriate prospectus and after seeking independent investment, tax and legal advice. These products may not be available in your market or suitable for you. The content of this document does not constitute investment advice nor an offer for sale nor a solicitation of an offer to buy any product or make any investment.

An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks.

The information contained on this document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares in the United States or any province or territory thereof, where none of the Issuers or their products are authorised or registered for distribution and where no prospectus of any of the Issuers has been filed with any securities commission or regulatory authority. No document or information on this document should be taken, transmitted or distributed (directly or indirectly) into the United States. None of the Issuers, nor any securities issued by them, have been or will be registered under the United States Securities Act of 1933 or the Investment Company Act of 1940 or qualified under any applicable state securities statutes.
The products discussed on this document are issued by one of WisdomTree Issuer PLC and Boost Issuer PLC (each of them separately, an “Issuer”).

This document may contain forward looking statements including statements regarding our belief or current expectations with regards to the performance of certain assets classes and/or sectors. Forward looking statements are subject to certain risks, uncertainties and assumptions. There can be no assurance that such statements will be accurate and actual results could differ materially from those anticipated in such statements. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements.

WisdomTree Issuer PLC

WisdomTree Issuer PLC is an umbrella investment company with variable capital having segregated liability between its funds organised under the laws of Ireland as a public limited company and authorised by the Central Bank of Ireland (“CBI”). WT Issuer is organised as an Undertaking for Collective Investment in Transferable Securities (“UCITS”) under the laws of Ireland and shall issue a separate class of shares (”Shares”) representing each fund. Investors should read the prospectus of WT Issuer (“WT Prospectus”) before investing and should refer to the section of the WT Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in the Shares.

Nasdaq®and the Nasdaq CTA Artificial intelligence Index are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by WisdomTree Management Limited. The WisdomTree Artificial Intelligence UCITS ETF (the “Fund”) has not been passed on by the Corporations as to its legality or suitability. Shares in the Fund are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE FUND.

Dividends as alternative sources of income

Today, there are more investment choices than ever before. Yet, when looking for income, a lot of investors tend face two options:

• Take More Risk: Usually, this ends up being “credit” risk, which deals with the chance of an entity being able to meet specific obligations. Common strategies may focus on “High Yield” or “Floating Rate” debt, or dealing with European Banks, AT1 Coco Bonds. Why is there more income? To compensate investors for taking greater risk that payments won’t be made.
• Accept Lower Income: People are aging, so “lower income” may not necessarily be an option for everyone. If safety of principal is the primary objective, then there is little safer than government debt of some of the world’s most creditworthy countries, such as the United States, Germany or Japan. We cite these three countries because they also have exhibited “safe haven” characteristics, meaning that when investors are nervous, the value of these assets has historically tended to rise.

The ugly nature of inflation

Inflation is important to consider because it may be one of the most significant challenges facing investors in the future. Central Banks printed an awful lot of money in response to the Global Financial Crisis of 2008-2009. History has indicated that typically the consequence of this response is higher inflation. Consider that, at 3% inflation, prices double every 24 years and at 5%, they double every 15 years. Inflation truly erodes real returns, as the purchasing power of future units of currency—be it British pounds, US Dollars or Euros—can buy less and less and less over time.

To give investors a sense of the current environment :

• The US 10-Year Treasury is yielding slightly more than 3.20%.
• The United Kingdom 10-Year Gilt is yielding almost 1.60%.
• The German 10-Year Bund is yielding less than 0.50%.
• The Italian 10-Year BTP (not currently in the headlines for its lack of risk—quite the opposite) is yielding nearly 3.40%.

An alternative may be dividend-paying stocks, as these are one investment option that could not only potentially provide income, but also have a higher potential for price appreciation—providing the opportunity to keep up with inflation. Consider that dividend equities:

• Offer the potential to grow your income stream through dividend growth, in fact, outpacing the rate of inflation over the entire history of the S&P 500 from 1957 to today .
• Provide potential growth of principal through price appreciation
• May offer more downside protection than their non-dividend paying counterparts

Dividends are everywhere

First, it is worth noting that dividends are quite prolific. Small, medium and large companies all over the world offer dividends, with nearly 35% from the United States, more than 18% from emerging markets and almost half coming from Europe and other developed international countries.

Figure 1: The world broken down by dividend stream weighted exposure

Sources: WisdomTree, Factset, Standard & Poor’s, with data measured as of the 30 September 2018 WisdomTree Global Dividend Index Screening. Historical performance is not an indication of future performance and any investments may go down in value. You cannot invest directly within an Index.

New paradigm for asset allocation?

While it is always difficult to make such a bold statement, we think that it is always important and valuable to look across different, logical alternatives. For decades, people have looked at equity markets and thought in terms of weighting stocks by their market capitalization (share price x number of shares outstanding). Doing this, roughly speaking, leads to approximately 50% weight to the US, 40% weight to the developed world ex-US, and 10% weight to emerging markets . Figure 1 substitutes “dividend per share” for “share price” in the aforementioned equation, and we saw the results in the regional allocations. Now might be an interesting time to be thinking in these ways, as the US equity market has tended toward strong outperformance for the better part of the past 10 years.

By Christopher Gannatti

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Beyond the US Midterm Elections

The big surprise from one of the most expensive and engaged midterm elections in US history was that for the first time since Brexit and Trump’s triumph in 2016 US elections, the polling survey and consensus actually got it right! This begs the question, if most of the information was priced in, why did the US equity markets rally after obtaining the official midterm results? We believe the reasons are three-fold.

Source: Centre for Responsible Politics, WisdomTree, data available as of close 14 November 2018.

Markets breathe a sigh of relief

1) Firstly, while history can’t be used as a precursor for anticipating the future, it’s worth noting that in the 12-months following each US midterm election since 1946, the US equity markets have posted a positive performance.

2) We also believe a wave of uncertainty was removed after the official results were declared which also lent buoyancy to the US equity market rally. Evident from these two reasons, sentiment started to improve.

3) Finally, the details of the results highlighted that it wasn’t a clear sweep of blue for the Democrats. While the Democrats took control of the House of Representatives, the Republican party increased their majority in the Senate.

Implications of gridlock

Two things we can draw from this election result:

1) We are unlikely to see the unwinding of the first round of tax cuts
2) We are unlikely to see the re-regulation of the US economy.

As additional fiscal expansion is less likely to be on the cards, the probability of Tax reform 2.0 is lowered. The gridlock in Washington also narrows the risks that labour costs and bond yields rise rapidly from here. This is likely to benefit global markets as the Fed’s rate trajectory will be more gradual as the fiscal boost from last year’s tax cuts fade in 2019.

Interestingly if we strip out the tax effect from the latest Q3 US earnings results, average earnings growth expectations in the US would decline from 26.7% to 18% and when compared to the rest of the world at 10%, still places the US on a strong footing.

We do expect to see more congressional oversight on what Trump does next. And despite the rise of investigative committees, Trump is likely to avoid getting impeached as the Democrats would be extremely unlikely to get the 67 Senate votes necessary to remove him from office. While there is a strong likelihood on bipartisan support for an infrastructure plan, we expect the split congress could have more disagreements over its implementation and funding.

Debt ceiling risk is underappreciated

The funding for the US federal government is due to expire on 7 December 2018, presenting the likelihood of a government shutdown that could last until year end. President Trump’s proposed wall on the border with Mexico and special counsel Robert Mueller’s investigation are likely to extend the deadlock.

We also believe markets are under-pricing the upcoming debt ceiling which should come to the fore in March 2019. While September/October 2019 will be a more critical time for a hard-ceiling. Democrats are likely to use the impending debt ceiling as negotiating leverage to address the need to raise corporate taxes, increase personal income tax rates for the highest bracket and lay a greater emphasis on green initiatives (renewable energy and electric mobility) in the infrastructure spending plan.

Polarized congress could slow trade policy

We are already starting to see reverberations of the new political landscape being felt in trade policy. Just 7 days after the midterm results, comments by a key democratic representative Bill Pascrell, who is positioned to chair the Ways and Means Trade subcommittee suggest the ratification of the recently struck United States-Mexico-Canada deal, known as USMCA, that was supposed to take place at the end of November, will have to wait well into 2019.

Consideration of the USMCA will provide signals of issues of concern to Democrats that could have implications on other agreements. The US Trade Representative (USTR) notified Congress on October 16 of its intention to begin negotiations for trade agreements with Japan, the European Union (EU), and the UK. The uncertainty around US trade policy remains the biggest hurdle for the global economy. Some of the world’s biggest exporters such as Japan, Europe and Emerging markets are starting to see the spill over effects.

While we expect to see greater oversight from the Democrats in regard to trade policy, the USTR aims to provide a quick turnaround on less controversial issues. In the case of EU, enlarged quota for high-quality beef and sales of US soybeans will dominate negotiations, while market access for autos and agriculture will be the main focus with Japan. US farmers are facing their worst economic year in a long time and this could push the members of congress to adopt a more moderate stance. China trade policy is most likely to be an important element of both parties’ presidential election campaigns for 2020, so an important emphasis will be laid on the administration’s approach to China.

by Christopher Gannatti

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Tackling the income challenge

Income is a universal challenge these days. People are living longer than ever before, retirements are lasting longer, and costs of living are increasing. And in every part of the world, investors are looking for ways to generate more income.

With interest rates in many parts of the world still quite low from a historical perspective, investors may be wise to look beyond traditional fixed income — or at least beyond the traditional ways to gain exposure to fixed income market. Consider that in the last decade the universe of fixed income products was extended not only by the newer ways to weight traditional fixed income securities or select them based on their exposure to a certain factor, but also by newer fixed income securities to choose from.

Smarter Bond Weighting

For example, most traditional fixed income indices are market cap weighted. What this means is that they give more weight to companies, governments and entities issuing more debt — this seems counterintuitive to us. At WisdomTree, we believe it is more logical to weight securities by fundamentals.

In the fixed income space, we believe we can enhance yield by weighting the index constituents based on their yield, rather than by debt issuance. The entities paying higher yields would get higher weights, subject to important constraints that ensure diversification. Using this thinking as a pivot in our index construction process, we can take a broadly followed benchmark, like the Bloomberg Barclays Euro Treasury Bond Index and reweight it in a way that would provide higher exposure to entities paying higher income rather than entities just issuing more debt. It is a valid concern here that higher income can compromise the risk profile vs the benchmark and we address it by optimizing the trade-off between the common bond risk factors and delivering as high a yield as possible within that universe of securities.

The new kid on the block

Additionally, there are new types of fixed income like Contingent Convertible bonds. Known as CoCos, these bonds became popular a few years back in Europe, as Basel III framework encouraged their issuance with the aim of securing the financial health of systemically important banks and avoiding potential system-wide shocks. CoCos were meant to enable banks meet new capital requirements imposed by Basel III and let them absorb potential losses without passing the burden onto the taxpayers. For example, AT1 CoCos, a widely issued type of CoCo in Europe, can be qualified as Additional Tier 1 Capital.

Serving the purpose of their creation, CoCos, as their name suggests, either can convert from bond to equity or can lose part of their principal conditional upon a certain trigger. If a bank’s capital ratio, such as Common Equity Tier 1 (CET1), falls below a pre-determined level, it is referred to as the mechanical trigger. In other cases, when bank’s solvency is in question, a regulator’s discretion can trigger the conversion to equity or write-down event to support bank’s capital adequacy. Most CoCos, being perpetual bonds, i.e. those that don’t have a maturity date, if not triggered, will start paying a floating coupon after their indicated call date, typically about five years after initial issuance.

Figure 1. AT1 CoCo features: illustrative example.

Source: illustrative example by WisdomTree

Allure of higher yield

One of the biggest appeals offered by CoCos is their relatively higher yield in comparison to other conventional fixed income securities. Currently the index that tracks liquid AT1 CoCos from developed European countries yields slightly above 6.5% , while the figure for some indices which hold European high yield debt stands above 4% .

The higher yield for CoCos, unlike for conventional high yield bonds, stems from the principle of seniority in the capital structure and not from its issuer’s credit risk. Coupons of CoCos can be cancelled, their principal can be written-down and they can be converted into equity. For investors to justify their exposure to these potential risks, while holding CoCos, requires a certain reward, translated here into higher yield.

by Christopher Gannatti

Disclaimer

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.