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Crafting a balanced portfolio is a common desire among investors. In this pursuit, 60/40 has proven to be one of the winning and time-tested strategies. It refers to a portfolio comprising 60% equities and 40% bonds. From the 1980s until recently, a portfolio of 60% stocks and 40% bonds has experienced solid returns.
While 2022 has yielded the worst returns in 100 years for this classic strategy, Goldman Sachs said, “we’re going back to the 60/40 portfolio in this ‘inverse Goldilocks’”, per a CNBC article.
Let’s find out what factors could support Goldman’s view.
What is a Goldilocks Economy?
A Goldilocks economy describes an ideal state for an economy where it avoids excessive expansion or contraction. This economy has steady economic growth, averting a recession, while simultaneously avoiding overly rapid growth that could lead to a surge in inflation.
A Goldilocks state is also ideal for investing because as companies grow and generate positive earnings growth, their stocks perform well. The term "Goldilocks" draws inspiration from the well-known children's story of the same title, representing situations that find a balance between two extremes and are deemed "just perfect.”
What Kind of Economy Are We in?
We are currently in an economy where consumers are resilient, inflation is hot (though falling steadily) and the manufacturing sector is weak. The economy is likely to record a soft landing despite consistent rate hikes since March 2022. However, the momentum and quantum of rate hikes have been lesser this year.
The Fed is likely to hike rates further to fight against inflation. All these indicate we are in anything but a “just right” economy. The U.S. economy is probably not in a Goldilocks situation. Investors should also note that while the market mood is volatile due to rising rates, risk-off trade sentiments are also not present fully in Wall Street as the AI boom and a strong consumer base will likely drive stocks.
Hence, both stocks and bonds should be in demand.
Against this backdrop, below we highlight 60/40 ETF strategies that could be considered for your portfolio.
Dividend: The First Bet – 20% of the Portfolio
Be it a bull or a bear market, investors mostly love dividend-paying stocks. After all, who doesn’t like a steady stream of current income along with capital appreciation?
Dividend-paying companies are usually good for value investing and are in demand when volatility flares up. Investors have two options in this field – one with steady dividend growth (or dividend aristocrats) and the other with high yield. Companies that raise dividends regularly appear steadier than those that offer higher yields. But high-yielding ones also make up for the capital losses to a large extent, if there is any.
So, investors can park 10% of their money into dividend aristocrat ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Dividend Aristocrats (NOBL - Free Report) and 10% in high-yield ETFs like First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) (yields 4.54% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY) (yields 4.45% annually).
Value Stocks – 15% Weight
Given the relatively lower valuation at the current level, a well-diversified portfolio should have value picks in it. Plus, value stocks perform better in a rising rate environment. The Zacks Rank #1 (Strong Buy) SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is a good pick here. It yields 1.97% annually. The fund has a P/E of 16.16X, less than 17.86X P/E of SPDR S&P 500 ETF Trust (SPY - Free Report) .
International Markets – 10% Weight
Even though the rising rate trend is palpable globally, some international economies are still practicing easy money policy or rates are relatively lower than the United States. iShares International Select Dividend ETF (IDV - Free Report) (yields 7.43% annually) and all-world ETF iShares MSCI ACWI ETF (ACWI - Free Report) are examples of two such ETFs.
Don’t Dump Tech – 10% Weight
The AI boom and the EV uptake are here to stay. Cybersecurity stocks are in high momentum. All these make the investing case stronger for iShares Cybersecurity And Tech ETF IHAK, Global X Artificial Intelligence & Technology ETF (AIQ) and Defiance Pure Electric Vehicle ETF EVXX.
Keep Defensive ETFs in Portfolio – 5% Weight
While it comes to defensive sector investing, consumer staples, healthcare and utilities grab investors’ attention. The Zacks Rank #2 (Buy) Consumer Staples Select Sector SPDR ETF (XLP - Free Report) , the Zacks Rank #1 (Strong Buy) Health Care Select Sector SPDR ETF (XLV - Free Report) and Zacks Rank #3 (Hold) Utilities Select Sector SPDR ETF (XLU) are great picks here.
Focus on Shorter Term Bonds – 20% Weight
Bond investing should not be ignored as short-term treasury yields are on the rise. Plus, investors can tap short-term bond ETFs that yield handsomely. Due to lower duration and maturity, these bonds offer lesser risks amid a rising rate environment, though these are high-yield in nature.
Some of the examples of such products are iShares iBonds 2023 Term High Yield and Income ETFIBHC (yield-to-maturity is 6.16%) and Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) has a 30-Day SEC yield of 9.74% on Aug 25, 2023.
Cash-Like ETFs – 10% Weight
Although cash holding is unattractive amid high inflation, retirees still need to have some cash cushion. Investors can bet on cash-like ETFs like First Trust Low Duration Strategic Focus ETFLDSF (yields 3.68% annually) and JPMorgan UltraShort Income ETF (JPST) (yields 3.71% annually).
High-Yield Bond ETFs – 10% Weight
First Trust Tactical High Yield ETF (HYLS), Principal Active High Yield ETF (YLD) , Xtrackers J.P. Morgan ESG USD High Yield Corporate Bond ETFESHY are some of the ETFs yield in the range of 6.24% to 6.94%. Each of these funds added about 0.6% last week. The fund HYLS has added 0.3% in the past month, while the other two lost 0.4% and 0.1%, respectively. Such high yield amid moderate performance make them good fits in the current environment.
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Time for 60/40 Portfolio? ETFs in Focus
Crafting a balanced portfolio is a common desire among investors. In this pursuit, 60/40 has proven to be one of the winning and time-tested strategies. It refers to a portfolio comprising 60% equities and 40% bonds. From the 1980s until recently, a portfolio of 60% stocks and 40% bonds has experienced solid returns.
While 2022 has yielded the worst returns in 100 years for this classic strategy, Goldman Sachs said, “we’re going back to the 60/40 portfolio in this ‘inverse Goldilocks’”, per a CNBC article.
Let’s find out what factors could support Goldman’s view.
What is a Goldilocks Economy?
A Goldilocks economy describes an ideal state for an economy where it avoids excessive expansion or contraction. This economy has steady economic growth, averting a recession, while simultaneously avoiding overly rapid growth that could lead to a surge in inflation.
A Goldilocks state is also ideal for investing because as companies grow and generate positive earnings growth, their stocks perform well. The term "Goldilocks" draws inspiration from the well-known children's story of the same title, representing situations that find a balance between two extremes and are deemed "just perfect.”
What Kind of Economy Are We in?
We are currently in an economy where consumers are resilient, inflation is hot (though falling steadily) and the manufacturing sector is weak. The economy is likely to record a soft landing despite consistent rate hikes since March 2022. However, the momentum and quantum of rate hikes have been lesser this year.
The Fed is likely to hike rates further to fight against inflation. All these indicate we are in anything but a “just right” economy. The U.S. economy is probably not in a Goldilocks situation. Investors should also note that while the market mood is volatile due to rising rates, risk-off trade sentiments are also not present fully in Wall Street as the AI boom and a strong consumer base will likely drive stocks.
Hence, both stocks and bonds should be in demand.
Against this backdrop, below we highlight 60/40 ETF strategies that could be considered for your portfolio.
Dividend: The First Bet – 20% of the Portfolio
Be it a bull or a bear market, investors mostly love dividend-paying stocks. After all, who doesn’t like a steady stream of current income along with capital appreciation?
Dividend-paying companies are usually good for value investing and are in demand when volatility flares up. Investors have two options in this field – one with steady dividend growth (or dividend aristocrats) and the other with high yield. Companies that raise dividends regularly appear steadier than those that offer higher yields. But high-yielding ones also make up for the capital losses to a large extent, if there is any.
So, investors can park 10% of their money into dividend aristocrat ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Dividend Aristocrats (NOBL - Free Report) and 10% in high-yield ETFs like First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) (yields 4.54% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY) (yields 4.45% annually).
Value Stocks – 15% Weight
Given the relatively lower valuation at the current level, a well-diversified portfolio should have value picks in it. Plus, value stocks perform better in a rising rate environment. The Zacks Rank #1 (Strong Buy) SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is a good pick here. It yields 1.97% annually. The fund has a P/E of 16.16X, less than 17.86X P/E of SPDR S&P 500 ETF Trust (SPY - Free Report) .
International Markets – 10% Weight
Even though the rising rate trend is palpable globally, some international economies are still practicing easy money policy or rates are relatively lower than the United States. iShares International Select Dividend ETF (IDV - Free Report) (yields 7.43% annually) and all-world ETF iShares MSCI ACWI ETF (ACWI - Free Report) are examples of two such ETFs.
Don’t Dump Tech – 10% Weight
The AI boom and the EV uptake are here to stay. Cybersecurity stocks are in high momentum. All these make the investing case stronger for iShares Cybersecurity And Tech ETF IHAK, Global X Artificial Intelligence & Technology ETF (AIQ) and Defiance Pure Electric Vehicle ETF EVXX.
Keep Defensive ETFs in Portfolio – 5% Weight
While it comes to defensive sector investing, consumer staples, healthcare and utilities grab investors’ attention. The Zacks Rank #2 (Buy) Consumer Staples Select Sector SPDR ETF (XLP - Free Report) , the Zacks Rank #1 (Strong Buy) Health Care Select Sector SPDR ETF (XLV - Free Report) and Zacks Rank #3 (Hold) Utilities Select Sector SPDR ETF (XLU) are great picks here.
Focus on Shorter Term Bonds – 20% Weight
Bond investing should not be ignored as short-term treasury yields are on the rise. Plus, investors can tap short-term bond ETFs that yield handsomely. Due to lower duration and maturity, these bonds offer lesser risks amid a rising rate environment, though these are high-yield in nature.
Some of the examples of such products are iShares iBonds 2023 Term High Yield and Income ETF IBHC (yield-to-maturity is 6.16%) and Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) has a 30-Day SEC yield of 9.74% on Aug 25, 2023.
Cash-Like ETFs – 10% Weight
Although cash holding is unattractive amid high inflation, retirees still need to have some cash cushion. Investors can bet on cash-like ETFs like First Trust Low Duration Strategic Focus ETF LDSF (yields 3.68% annually) and JPMorgan UltraShort Income ETF (JPST) (yields 3.71% annually).
High-Yield Bond ETFs – 10% Weight
First Trust Tactical High Yield ETF (HYLS), Principal Active High Yield ETF (YLD) , Xtrackers J.P. Morgan ESG USD High Yield Corporate Bond ETF ESHY are some of the ETFs yield in the range of 6.24% to 6.94%. Each of these funds added about 0.6% last week. The fund HYLS has added 0.3% in the past month, while the other two lost 0.4% and 0.1%, respectively. Such high yield amid moderate performance make them good fits in the current environment.