ETF Edge

Why an 80/20 portfolio strategy could be the new 60/40 in a rising rate environment

Why an 80/20 portfolio strategy could be the new 60/40
Why an 80/20 portfolio strategy could be the new 60/40

It's an investment strategy as old as the hills — allocate 60% of a portfolio to equities and the other 40% to fixed income.

But, with rates on the rise and bond prices falling, one investor says the old 60/40 adage just won't cut it anymore.

Scott Ladner, CIO of Horizon Investments, is advocating for an 80/20 split instead and calls the traditional 40% in fixed income potentially "dead money."

"You want to be in equities as much as you can, but there are going to be constraints sometimes on how much equity you can put into a portfolio," Ladner told CNBC's "ETF Edge" on Wednesday.

"I just want to minimize my allocation to that dead money [in bonds and fixed income], but I need to get the same kind of recurrent 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 some hedged equity types of securities.'"

Ladner highlights a few ways investors can do this. The first is through 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 smaller price swings relative to the market.

He also points to the use of derivatives through ETFs such as the Global X S&P 500 Covered Call ETF (XYLD), which writes 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 this risk-management cat and just get us out of this box of having to invest 40% of our money in something which we know is probably not going to do very well for us and for our clients for the next three to five years," said Ladner.

Those four ETFs — HUSV, USMV, XYLD and HEQT — have fallen this month but less sharply than the S&P 500's nearly 8% decline.

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