As you’re planning your investment strategy for 2023, you may want to increase your allocation of ETFs in your portfolio. For investors who adhere to a 60/40 portfolio strategy, money experts say there are specific ETF strategies that can work for you.
Here’s more about how ETFs can intersect with the 60/40 portfolio strategy.
D.J. Tierney, senior portfolio strategist at Charles Schwab, tells FOX Business that the 60/40 portfolio strategy is a portfolio holding 60% stocks and 40% bonds.
“It is supposed to hedge against both assets dropping simultaneously. But that didn’t happen in 2022. Inflation and rising interest rates negatively hit both asset classes,” Tierney explains.
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ETFs generally offer low-cost, diversified, transparent exposure to asset classes, he says.
“They also offer ease of implementation from the price transparency and visible liquidity on exchanges,” Tierney says.
The 60/40 strategy is a classic approach to asset allocation that is easy to understand and implement, Tierney says.
“The wide variety of ETFs available today allow for a more nuanced and flexible approach to constructing a portfolio,” he adds.
For example, he states that Schwab Asset Management’s philosophy on portfolio construction is based on beliefs in transparency, cost-efficiency, global diversification, and having a long-term view with discipline and measurable objectives.
“ETFs allow for our portfolio construction approach to be implemented with ETF allocations among domestic equity, international equity, real assets, fixed income, along with cash,” Tierney says. “Our framework also allows for different allocation settings across a spectrum of risk/reward outcomes ranging from more conservative to more aggressive.”
Bear markets and asset price volatility are elements of investment markets, says Tierney.
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Portfolios with allocations across asset classes, including fixed income, real assets, cash, in addition to equities, can generally weather market volatility better, but it is important to remember that investing inherently does involve risks, says Tierney.
“Maintaining a long-term strategy can help maintain time in markets and contribute to better long-term outcomes,” Tierney tells says.
Christopher Huemmer, a senior investment strategist at FlexShares ETFs, says ETFs provide investors easy access to many different segments of investable markets, can provide tax efficiency, daily transparency of the holdings within the ETF, and the ability for investors to choose their entry and exit point throughout the day.
One strategy, says Huemmer, is a low volatility approach to equity investing, like the FlexShares Quality Low Volatility ETFs, which can also be attractive in the current environment.
“We have seen volatility increase in both equity and fixed income markets over recent years, altering the predicted risk associated with a 60/40 portfolio,” he says. “Adjusting that equity allocation to incorporate a low volatility strategy can help bring down the overall portfolio volatility from the elevated levels we are experiencing today.”
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Furthermore, Moneta CIO Aoifinn Devitt says the prevailing market volatility in 2022 was a challenging environment for active managers, who, she says, displayed a poor ability to add value and generate positive performance relative to their benchmark.
“This will help lead to an increased interest in ETFs with their lower fees, and both active and passive ETFs exist,” Devitt says. “We have seen a rise in custom indexing and direct indexing across our industry in response to the desire to offer better tax loss harvesting solutions that are customized to individual client needs. Of course, an index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly.”
As always, she cautions, remember to consult with an appropriately credentialed professional before making any financial, investment, tax or legal decisions.
