THE 60/40 PORTFOLIO TUNE-UP

The notion that the traditional 60/40 portfolio is inadequate, especially in times of market stress, could stem from relying on risk diversification between equities and bonds.

In normal market conditions, and over the long term, the correlation between equities and bonds is near zero, or negative.¹

In times of heightened market stress, however, such as the financial crisis of 2008, the Covid-19 related volatility in early 2020, or the increase in inflation and interest rate hikes of 2022, the correlation has been positive (and much higher), reducing the expected risk diversification. This can leave balanced portfolios “off balance” and may bring the validity of the 60/40 portfolio into question.​²

Restoring balance could include re-aligning underlying exposures towards intended risk and return profiles using ETFs exposures such as minimum volatility style in lower risk and Megatrends in higher risk portfolios.

Both style factor and thematic Megatrend ETFs can provide more precise and comprehensive portfolio building blocks to manage multi-asset portfolios, model portfolios, target allocation and target date funds. Using these ETF exposures thoughtfully, strategically and/or tactically could extend and breathe life back to the 60/40 portfolio.​