The conventional 60/40 investment portfolio, once a staple for balancing risk and return, is undergoing a significant transformation, effectively shifting to an 80/15/5 model. This change reflects a reduced reliance on bonds, with their share in ETF assets plummeting from 23% in 2020 to just 16% currently, and only making up 10% of new ETF launches. Equities now constitute 80% of these portfolios, with the remaining 5% being allocated to alternative strategies such as buffers, covered calls, and digital assets like gold and Bitcoin.
This re-evaluation of portfolio construction stems from the diminished effectiveness of bonds as a hedge against stock market volatility. Historically, bond ETFs like AGG would rise on 90% of days when the S&P 500 fell, providing a crucial cushion. However, this protective correlation has significantly weakened, with AGG now only showing gains on 40% of S&P 500 down days. This erosion of their hedging capability, coupled with their failure to keep pace with inflation, has prompted investors to seek out different avenues for diversification and risk management.
The shift is particularly notable given the current market environment, where robust earnings and resilient growth are expected to help markets weather a measured tightening cycle by the Federal Reserve. Despite hawkish signals from Fed officials, some analysts, such as Ulrike Hoffmann-Burchardi at UBS Chief Investment Office, suggest that policy tightening might be less aggressive than market pricing indicates, with a December rate hike followed by a period of stability. Higher bond yields are also presenting opportunities for increased portfolio income, though investors are advised to prioritize quality in AI-related assets amid concerns over data center financing. The overall sentiment, buoyed by renewed optimism in AI and a retreat in oil prices, has led to the first inflow into US equity funds in five weeks, with investors purchasing a net $37.6 billion, the largest weekly net purchase since June 17. Funds focusing on large-cap technology companies, driven by a broader tech rally and strong consumer adoption of platforms like Meta's, have seen particularly strong demand.
