Considering all the talk about the importance of asset allocation in investing, there is surprisingly little agreement on the right mix of stocks and bonds.
There might have been a consensus that the default balanced portfolio was divided 60-40 between stocks and bonds, but it has broken down with bond stocks and bonds both tanking. A 70-30 mix seems more balanced in today’s market, but it could be a bit risky over the long term.
Talk about asset allocation is everywhere in investing. What you don’t see much is insight into what investors are actually doing. For some help on that, let’s consider how exchange-traded fund assets have been invested, according to data from National Bank Financial. Here’s a breakdown of ETF assets as of Sept. 30:
- Stocks: 62-per-cent market share
- Bonds: 30 per cent
- Multi-asset (holding both stocks, bonds and other assets): 5 per cent
- Other (including crypto and inverse or leverage funds): 3 per cent
Multi-asset ETFs tend to skew to stocks, which suggests that the 5 per cent in these products can be broken down in a way that gives us an overall weighting of 65-per-cent stocks, 32-per-cent bonds and 3 per cent for other assets. Overall, we can see more of a tilt to stocks than the old standard for balanced portfolios.
In the equity category, Canadian stocks have a 38-per-cent market share, U.S. equity funds have a 34-per-cent share, developed international markets have a 13-per-cent share and emerging markets get a small 3-per-cent share. The remaining 12 per cent is in global funds, which typically include all the aforementioned categories.
Canadian aggregate bond funds, which combine government and corporate bonds maturing in the short, medium and long term, have a 31-per-cent share of fixed income ETF assets. Another 10 and 15 per cent, respectively, are in funds focusing on government and corporate bonds. The other bond categories shake out like this: U.S. or North American bond ETFs at 9 per cent, foreign bond ETFs at 11 per cent, high yield bond ETFs at 4 per cent and preferred share/convertible bond ETFs at 8 per cent.
Rounding out fixed income is a hefty 12-per-cent market share for cash alternative ETFs, which are a way to park cash safely in an investment account and generate yields in the 3.6-per-cent range. With stocks and bonds tanking this year, it’s easy to see why these funds are so popular.
One more thought if you want some ideas on how to assemble a portfolio: Check out what asset allocation ETFs are doing. There’s a growing number of fully diversified portfolios that are packaged into a single fund. Use them for ideas on portfolio building, or just buy them directly.
Rob Carrick