It is an investment strategy as old and timeless as the hills.
However, rates are rising and bond prices falling, so one investor says that the old 60/40 rule just isn’t cutting it anymore.
Scott Ladner (CIO of Horizon Investments) advocates for an 80/20 split. He calls the traditional 40% in fixed-income potentially “dead money” and suggests that it be replaced with an 80/20 split.
Ladner stated that “equity is important, but there will be constraints on how much equity can be put into a portfolio.” He spoke to CNBC’s “ETF Edge,” Wednesday.
“I just want to reduce my allocation to that money dead money [in bonds and fixed income]”I agree, but I need to get the exact same kind of recurrent returns profile, the same type of risk characteristics, as a traditional 40/40,” he stated. “One way to accomplish that is to say, “Listen, we’re cutting our passive fixed income allocation in half and we’re replacing the equity allocation by some hedged equity types securities.”
Ladner outlines a few options for investors to achieve this. The first is through low-volatility ETFs, such as the First Trust Horizon Managed Velatility Domestic ETF [HUSV] and the iShares MSCI USA Minimum Vol Factor (USMV), which hold stocks that have smaller price swings relative the market.
He also mentions the use of derivatives through ETFs like the Global X S&P 500 covered call ETF (XYLD), that writes call options on S&P 500, and the Simplify Hedged equity ETF (HEQT), that invests in put-spread cols.
Ladner stated that there are many ways to manage risk and get out of the trap of investing 40% of our money into something we know will not be profitable for us or our clients over the next three to five year.
The four ETFs HUSV and USMV, XYLD, and HEQT all fell this month, but less than the nearly 8% decline of S&P 500.
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