Is the 60/40 portfolio still a viable option? How can we construct a 60/40 portfolio using ETFs? Marco Santanché, a former Credit Suisse quant strategist and the author of the monthly research series Quant Evolution, shares his thoughts on these questions below.
The Concept of the 60/40 Portfolio
The 60/40 portfolio is a widely recommended asset allocation strategy in which 60% of the portfolio is invested in equities and 40% is invested in fixed income. This allocation aims to achieve growth through equities while providing stability and protection against losses through fixed income investments.
Constructing a 60/40 Portfolio: Examples and Considerations
There are various ways to build a 60/40 portfolio, but the key lies in the proportion between equities and fixed income. Factors such as geographic, sector, and currency allocations can also impact the portfolio’s performance. Let’s explore a few examples.
One approach is to consider the BIGPX portfolio built by Blackrock, which currently focuses on US equities and US fixed income securities. While this creates a strong equity portfolio, it may not be optimal in terms of fixed income diversification. Adding international fixed income securities like the iShares Global Govt Bond UCITS ETF (IGLO) can enhance diversification.
When it comes to equities, the iShares MSCI ACWI UCITS ETF (SSAC) offers a global approach. It’s essential to consider both geographical and currency exposures to manage risk effectively. Additionally, assessing total costs is crucial when selecting ETFs.
Rebalancing and Performance
After selecting the appropriate ETFs, it’s important to determine how often to rebalance the portfolio to maintain the 60/40 allocation. Rebalancing can be based on fixed dates or event-driven triggers when the weights deviate significantly from the equilibrium. An event-driven approach can help minimize unnecessary transaction costs.
Performance Review: 2018-2020
Examining the performance of the international 60/40 portfolio during 2018-2020, it underperformed compared to the US-based portfolio. However, it still performed favorably. Adding international equities and rebalancing when weights deviate by 10% can reduce risk and minimize drawdowns.
A Comparison with Equities-Only Portfolio
Considering an equities-only approach using the SSAC ETF, the 60/40 portfolio has a comparable performance, albeit with a slightly better Sharpe Ratio in equities-only. However, it’s worth noting that the supposed benefit of negative correlation between bonds and equities during market downturns may not always hold true.
Conclusion on the 60/40 Portfolio
Based on recent performances, the 60/40 portfolio may not be as attractive as equities in terms of risk-adjusted returns. However, it still offers the advantage of volatility mitigation in the long term. The inclusion of international equities and fixed income securities can enhance risk management, although the returns may not be as rewarding.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Nasdaq, Inc.