The 80/20 portfolio strategy could be new 60/40 in this rate environment


It’s an age-old investment strategy — allocating 60% of a portfolio to equities and the remaining 40% to fixed income securities.

But, with rates rising and bond prices falling, one investor says the old adage 60/40 is no longer good enough.

Scott Ladner, CIO of Horizon Investments, favors an 80/20 split instead and calls the traditional 40% fixed income potentially “dead money”.

“You want to be in stocks as much as you can, but sometimes there will be constraints on how much stock you can put in a portfolio,” Ladner told CNBC’s “ETF Edge” on Wednesday.

“I just want to minimize my allocation to this dead money [in bonds and fixed income], but I need to get the same kind of recurring return profile, the same kind of risk characteristics as a traditional 60/40,” he said. “One way to do that is to say “Listen, we’re going to cut our passive fixed income allocation in half, and we’re going to replace the equity allocation with certain types of hedged securities.”

Ladner highlights a few ways investors can do this. The first consists of low-volatility ETFs such as the First Trust Horizon Managed Volatility Domestic ETF (HUSV) and the iShares MSCI USA Min Vol Factor ETF (USMV), both of which hold stocks with lower price fluctuations compared to at the market.

He also highlights the use of derivatives through ETFs such as the Global X S&P 500 Covered Call ETF (XYLD), which sells call options on the S&P 500, or the Simplify Hedged Equity ETF (HEQT), which invests in put-spread collars. .

“These are different ways to skin that cat of risk management and get us out of this box where we have to invest 40% of our money in something that we know is probably not going to work very well for us and for our customers for the next three to five years,” said Ladner.

These four ETFs – HUSV, USMV, XYLD and HEQT – fell this month, but not as sharply as the nearly 8% drop in the S&P 500.

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Don F. Davis