What advisors are talking about: Bonds and the 60/40

Michael Lane Apr 19, 2023


  • Three things top of mind for advisors that I learned at the recent ETF Exchange:
  • Yields are back with significant implications for advisors and their clients
  • Advisors are rethinking their clients’ “60/40” by increasing allocations to bonds.
  • The ETF ecosystem is strong, helping advisors serve their clients better.

Over the course of my career, I’ve attended countless conferences and industry events. They are usually a great opportunity to catch up with old friends, make new ones, learn about trends in the industry, and often share my view of where the industry is headed. Most importantly, I like to ask questions, listen, and take the pulse of how people are feeling. Case in point: ETF Exchange, which I attended in February. 

This year’s ETF Exchange conference was an improvement on those of the past and had a much more balanced universe of people involved in the ETF world, including thought leaders, Industry solution providers and financial advisors. This diverse audience enabled a comprehensive exchange of views that was important for those of us in financial business trying to help our clients build better portfolios.

The headline takeaways are not that surprising; after years of accommodative Federal Reserve policy, we are now in an era of rising interest rates and tighter monetary policy against a backdrop of sustained high inflation. Volatility still reigns in the equity markets, and geopolitical risks are concerning. 

With all that in mind, here are three key things I learned from my conversations with financial advisors, thought leaders, and others at ETF Exchange. 

Bonds are back. First and foremost, advisors are focused on the opportunity in bonds. Indeed, this is the first time in more than a decade that one could even make a compelling case for the attractiveness of bond yields. Last year was a miserable year for bond performance with the Bloomberg U.S. Aggregate Bond Index falling over 13% .1 Although that created some opportunities for tax loss harvesting last year, it has also led to an opportunity to earn higher yields across fixed income sectors and maturities. From 2013 to 2021, only emerging market and high yield debt provided yields over 4%; now, over 70% of fixed income sectors are yielding 4% or greater. 2 That could have significant implications for advisors to increase allocations to bonds, potentially adding income while reducing risk in their clients’ portfolios. As I like to say, income has become a lot cheaper these days. Good news for retirees, except inflation has been accelerating faster than the yields, but hopefully that will continue to calm in the coming months.

Rethinking the 60/40. A recent BlackRock survey of more than 5,400 moderate model portfolios managed by advisors showed that the average 60/40 portfolio was underweight fixed income by 9%. 3 Given the new yield environment, advisors have an extraordinary opportunity to reallocate client assets to fixed income. In so doing, they can trim over-weights to equities, move up in credit quality, diversifying portfolios as well as potentially reducing aggregate portfolio risk.

But they also have an opportunity to rethink their clients’ “40.” In the past, many advisors would give up liquidity or pick one or two active managers, but if those strategies were highly correlated with equities – by overweighting, say, high yield to generate income -- it could lead to underperformance during risk-off periods.

Now advisors can instead combine elements of active and index for their clients’ fixed income portfolios in a so-called “barbell approach.” This approach combines allocating to low-cost ETFs for a diversified, liquid fixed income core exposure, while adding a reasonable allocation to active managers or alternatives to pursue excess return.

Barbell your bonds in 2023

Barbell your bonds

For illustrative purposes only

The ETF ecosystem is strong. My final observation from the conference is that the ETF world is strong. I had meetings with a range of asset managers and financial advisors, as well as every index provider. By the end of the conference – and yes, I attended a number of very compelling sessions as well – I was struck by how the ETF industry has matured and grown. The ETF ecosystem has developed into a robust system dedicated to delivering results for clients to help them build better portfolios and pursue their investing goals. What was once known as a purely index industry, is also becoming more diversified with index, systematic, and active alternatives. The structure continues to grow as a building block “go-to” for financial advisors.

At the heart of the conference was what matters most to me: the client. I believe the end investor, the consumer and beneficiary of all things at this conference, can feel confident that we are continuing to turn hope of a comfortable retirement into a reality.

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Michael Lane

Michael Lane

Head of iShares U.S. Wealth Advisory at BlackRock

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