Capital Efficient ETFs

Capital Efficiency ETFs

Today’s post looks at Capital Efficient ETFs.


Capital Efficient ETFs (henceforth CEEs) are ETFs with exposure to more underlying assets than the capital you put in.

  • In other words, it’s a fancy term for leverage.

But CEEs don’t operate like the daily-reset “turbo” funds that gave leveraged ETFs a bad name with many investors.

  • They usually hold a lot of physical assets (typically stocks) plus a futures overlay.

So they shouldn’t suffer from the potential volatility decay common in turbos.

  • They also tend to use less leverage than turbos.

I have been interested in CEEs for some time, but they are difficult to access from the UK.

  • A couple of brokers will let UK investors buy US ETFs, but only in taxable accounts.

The reason for finally getting around to writing about CEEs is that we now have one in the UK.

  • The WisdomTree US Efficient Core UCITS ETF (NTSX) – a copy of an existing US fund – launched in late 2023.

It holds 90% of US large-cap stocks and adds a 60% exposure to US Treasury bonds via a futures overlay.

  • So the total exposure is 150% or 50% additional leverage.
Risk parity Chronicles

My source for information on CEEs is Risk Parity Chronicles (RPC), where Justin has written six articles on the subject over the last year.

  • He will be referring to US ETFs, but the principles are the same.

And who knows, if the UK version of NTSX takes off, we might get some more over here.

The first article dates back to November 2022 and looks at three variations of a leveraged 60/40.

Leveraged 60/40

Justin says he was inspired by a Cliff Assess paper arguing for leveraged balance portfolios over 100% stocks.

  • I’ve been meaning to review that paper for years, so perhaps this will be the prod I need.

Asness recommends 55% leverage, turning a 60/40 into a 93/62.

  • Justin notes that (the US version of) NTSX is very close to this, and he labels it the “Asness in Action” portfolio.

He also points out that an alternative way to use NTSX would be to buy 66.7% of it and use the 33.3% of capital you have “saved” to buy uncorrelated assets.

  • For an RP approach, you might buy commodities or gold, or managed futures (the current favourite fund in this area is DBMF).

Justin labels the version with DBMF the Cory Hoffsten DIY Return Stacking portfolio.

Though when I reached out to him, he also gave credit to Jake (@EconomPic) and the real person at Unrelated Nonsense.

Resolve Asset Management is also involved in Return Stacking, and since Justin wrote this article, they have together launched a Return Stacking ETF (in the US).

The downside of using DBMF is that Justin’s backtests can’t go further than May 2019.

This is such a short time period that I’ll be reluctant to make anything of the results; on the other hand, this three year period has been pretty action-packed. You had the Corona crash of March 2020, followed by an incredible recovery, and then just mud and debris for the past twelve months or so.

For a third option, Justin proposes a “Carolina Reaper Return Stacking” portfolio (CRRS).

  • I now know that the Carolina Reaper is the world’s hottest chillie.
See also:  HFEA 2 - Long-Term Leveraged ETFs

To make up CRRS, Justin has to bring in turbos:

  • 20% UPRO, a 3X leveraged S&P 500 fund
  • 13.33% TYD, a 3X leveraged Intermediate-Term Treasuries fund
  • 66.67% DBMF

This is like a 60/40 with 66% of DBMF on top, so 1.67x leveraged.

  • In theory, this makes CRRS a version of return stacking with more DBMF.

Over the backtest period, the three asset classes involved have had varying fortunes:

This has been a particularly good stretch for managed futures, so take the results with a table shaker of salt. On the other hand, you’ve had two stock market bear markets in the three years, plus this has been a terrible year for bonds. Forbes says 2022 is the worst since 1977 and a good case can be made that you have to go back to 1931 to find another double-digit decline like this.

Leveraged 60-40

The good returns from managed futures (plus the use of leverage) mean that the leveraged portfolios show very good results.

  • But they really are impressive results across every measure, particularly drawdowns.

NTSX on its own boosts returns but is more volatile and has a worse drawdown (as you might expect).

Intro to CEEs

Inspired by these results, Justin began a series of three more articles digging deeper into CEEs.

  • They were all published in February 2023, and the first is called Intro to CEEs.

Justin notes that WisdomTree are the key CEE provider and they have five funds:

  1. NTSX – US stocks plus Treasuries
  2. NTSI – International stocks plus Treasuries
  3. NTSE – Emerging Markets Stocks plus Treasuries
  4. GDE – Gold plus US stocks
  5. GDMN – Gold plus Gold Miners

It’s not a thrilling range, but geographical diversification in stocks plus exposure to gold is a good start.

  • Whatever the split inside GDE, you could blend these five to end up with something like 89% stocks, 54% bonds, and 7.5% gold (which corresponds to 59/36/5 if you remove the leverage).

Article number three looks at two of the CEEs in particular – NTSX and GDE.

  • It turns out that GDE uses 80% leverage to get a 90/90 mix of stocks and gold.

Since the funds were launched in 2018 and 2022 respectively, Justin uses proxies for his backtests:

  • VTSAX for stocks (a US mutual fund)
  • VBMFX for bonds (another mutual fund) and
  • GLD for gold (a US ETF)


The baseline portfolio in the tests is a simplified Golden Butterfly RP allocation, with 40% stocks, 40% bonds and 20% gold.

  • Real-world GB portfolios tend to split the stock and bond sections into two funds each.

Up next is a capital-efficient version of the GB, with 57% stocks, 56% bonds and 28% gold.

  • This maintains the 2:2:1 proportions but adds 41% leverage.

60-40 plus gold

Portfolio number three is a “60/40 plus gold and stocks”.

  • It works out at 90% stocks, 40% bonds and 30% gold, for a total leverage of 60%.

In effect, it’s a 60/40 with the extra 60% split equally between stocks and gold.


The final portfolio is the basic 60/40.

  • Justin sees the first two and the last two as competing pairs of portfolios, one of each having added capital efficiency.
See also:  Leverage in SIPPs

CE results

Using data since December 2004, the two capital-efficient portfolios outperform by a decent amount in CAGR terms.

  • They have increased volatility (as expected) but their Sharpes are comparable or better.

The drawdowns are not great, with the “60/40 plus gold and stocks” having a 42% fall.

  • You wouldn’t want a huge allocation to this (I would suggest no more than 25%).

Justin also lists the PWR or perpetual withdrawal rate for each portfolio.

  • This is similar to what I call the Failsafe Withdrawal Rate, but Justin’s PWR is not adjusted for inflation.

The capital-efficient portfolios do very well on this measure.

Of the unleveraged portfolios, the simplified golden butterfly does better than the 60/40.

  • Looked at another way, all three RP-style portfolios do better than the non-RP portfolio.

Justin says:

You can use capital efficient funds at the +40% level or the +60% level to create  meaningfully better portfolios. The gains do not come at the expense of taking on out-sized risks: the +40% version has a volatility equivalent to about a 70/30 or maybe 75/25 portfolio, while the +60% version is just a hair beyond 100% Equities.


We’ll leave it there for today, and look at Justin’s remaining three posts in the next article.

  • CEEs look like a useful tool, and I wish they were easier to access from the UK.

The main downside is the fixed ratio of assets (particularly stocks and bonds).

  • In a year of rising interest rates, stocks and bonds will go down together, and leverage will make things worse.

So perhaps CEEs are best used within a TAA strategy, where the capital is moved to cash or short bonds when the CEE falls below (say) its 200-day moving average.

  • Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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Capital Efficient ETFs

by Mike Rawson time to read: 4 min