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Tag: Portfolio Strategy

  • Can you build a 40/30/30 portfolio with ETFs? – MoneySense

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    From January to December 2022, the Vanguard Balanced ETF Portfolio (VBAL), which holds a 60/40 mix, lost 15.04%, nearly as much as the 16.88% decline posted by the 100%-stocks Vanguard All-Equity ETF Portfolio (VEQT). The problem wasn’t the stocks; investors should expect volatility with them. It was the bonds. 

    As interest rates spiked to combat inflation, the bond component of VBAL was hit hard. Its higher-than-average intermediate duration (a measure of rate sensitivity) meant that prices fell more sharply than shorter-term bond holdings might have. This caught many conservative investors off guard, particularly those who believed fixed income would provide ballast in a downturn.

    In response, many portfolio strategists began proposing a new model: the 40/30/30. That’s 40% equities, 30% bonds, and 30% alternatives. 

    While institutions and advisors have access to sophisticated private alternatives to make this work, the question is whether Canadian retail investors can replicate a similar structure using publicly listed ETFs. Here’s my take, and some suggested ETFs to obtain exposure to the alternative space.

    What is the 40/30/30 portfolio?

    The 40/30/30 portfolio is a conceptual framework that modifies the traditional balanced portfolio by carving out space for alternative assets. The idea is to introduce a third asset class that behaves differently from the other two. 

    In periods like 2022, when both stocks and bonds declined together due to rising inflation and interest rates, traditional diversification strategies failed. The extra alternatives sleeve is designed to preserve capital in times when the other two pillars of a portfolio move in tandem.

    It’s not a one-size-fits-all prescription. The 30% allocated to alternatives can vary widely depending on the portfolio manager’s preferences. In most institutional and advisor-led implementations, that portion could include:

    1. Hedge fund-like strategies such as long-short equity, managed futures, long volatility, and market-neutral approaches that rely on quantitative models and multi-asset exposure to generate absolute returns.
    2. Hard assets or digital stores of value like gold, commodities, or cryptocurrencies such as bitcoin, typically used as static allocations to offset traditional financial asset volatility.
    3. Private market investments such as private equity, private credit, and direct real estate holdings, which offer long-term return potential in exchange for liquidity risk and limited pricing transparency.

    MoneySense’s ETF Screener Tool

    Does the 40/30/30 portfolio work?

    It’s hard to draw firm conclusions because two factors limit the usefulness of most data used to support the 40/30/30 thesis. 

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    The first is survivorship bias. It’s easy to look backward and identify strategies that delivered low correlation and solid returns, but that’s hindsight. Investors didn’t necessarily have access to these funds or conviction in them when it mattered most. The danger is cherry-picking success stories that weren’t widely known or available at the time.

    Second, results are highly time-period dependent. The performance of any diversified strategy can vary meaningfully depending on the start and end dates. A few good or bad years in alternatives can drastically skew the overall return and risk profile of a portfolio.

    That said, there is a relatively robust benchmark with over two decades of data that helps assess the viability of the concept: the MLM Index. This benchmark tracks a systematic trend-following strategy across 11 commodities, six currencies, and five global bond futures markets. It weights each category based on historical volatility and equal-weights individual contracts within each basket. While not a perfect proxy for all alternatives, it offers rare long-term, transparent, and rule-based data in a space often lacking both.

    Using data from Nov. 12, 2001, through Aug. 19, 2025, a 40/30/30 portfolio built with the S&P 500, Bloomberg U.S. Aggregate Bond Index, and KFA MLM Index (rebalanced quarterly) underperformed a traditional 60/40 mix on total returns, with a 6.89% compound annual growth rate (CAGR) versus 7.46%. However, it significantly outperformed on a risk-adjusted basis, with a Sharpe ratio of 0.71 versus 0.56.

    Source: Testfolio.io

    More importantly, the diversification benefit showed up when it mattered. The 40/30/30 portfolio demonstrated better downside protection during key stress events like the bursting of the dot-com bubble, the 2008 financial crisis, the COVID-19 crash in 2020 and the bear market of 2022.

    Source: Testfolio.io

    Investors can access the KFA MLM Index through a U.S.-listed ETF: the KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM). It directly tracks the benchmark and provides exposure to trend-following futures strategies across commodities, currencies and fixed income. 

    The catch? Since KMLM is U.S.-listed, Canadians face a few hurdles: currency conversion, a high 0.90% management expense ratio, and a 15% foreign withholding tax on distributions unless it’s held in a registered retirement savings plan (RRSP).

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    Tony Dong, MSc, CETF

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  • Taking an active approach to ETF investing in Canada – MoneySense

    Taking an active approach to ETF investing in Canada – MoneySense

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    Although ETFs are often considered instruments for passive or index investing, actively managed ETFs are on the rise. If U.S. investment trends are a bellwether for what’s in store for Canada—and they often are—then active ETFs may have a bright future here.

    In the U.S., the share of ETF inflows that went to active ETFs in the first half of 2023 was about 30%, more than double the amount for all of 2022. A decade ago, active ETFs accounted for just 2.3% of fund inflows. How does the growth of active ETFs compare to that of passive ETFs? In the first half of 2023, passive ETFs grew at an organic rate of 3%, while active ETFs grew much quicker, at a rate of 14%. They’re gaining popularity in other global markets, as well. In Asia, active ETFs grew 78% in the first half of this year.

    Clearly, active ETFs are also attracting a lot of interest from investors. But how do active ETFs work, are they right for you, and how can you buy these ETFs in Canada for your registered retirement savings plan (RRSP)?

    The benefits of active ETFs

    In the investment world, there’s plenty of debate over which management style—active or passive—is better for investors, but both have their merits. If active ETFs fit your investment objective, time horizon and strategy, they could offer you the following benefits:

    1. Opportunity to invest in specific strategies: Active funds could offer investors a convenient way to invest in a certain sector or implement a particular investment strategy. While this can be achieved with passive ETFs too, the active ETF option could be used by investors who want to try to outperform the index in a particular sector.
    2. Possibility of outperforming the market: Although passive ETFs typically have lower fees than active ones, some investors are unsatisfied with simply getting market exposure; they want to outperform the market, which is primarily what active ETFs try to do.
    3. Easy to buy and sell: ETFs offer greater flexibility of trading intraday than mutual funds. You can buy and sell ETFs on a stock exchange anytime during trading hours. Also, unlike mutual funds, you’ll know the purchase or sale price of the ETF units when you place the order.
    4. Downside protection: Active ETF managers can prepare for or react to market events, including corrections and crashes. Unlike with an index fund, which mimics what the index itself does, the manager of an active ETF may increase their cash or fixed-income holdings in anticipation of a market downturn. In doing so, they attempt to limit their investments’ decline in value.

    Because of the above features, active ETFs could be the “core” portion of an investment portfolio (and, if held inside a registered account such as an RRSP, your investments can grow on a tax-deferred basis). Active ETFs could also form part of a “core and explore” portfolio in which passive ETFs could be the core. As the “explore” part of the strategy, active ETFs could be used to explore a particular sector or to attempt to outperform a market index.

    How to buy Fidelity Active ETFs

    If you decide that active ETFs are suited to your portfolio and investment style, there are two ways to access them.

    • A financial advisor: Financial advisors can access Fidelity’s ETFs and add them to their clients’ investment portfolios. A financial advisor can help you decide whether active ETFs are a good fit for your portfolio, which one(s) to buy and how much to invest.
    • An online brokerage: For self-directed investors who don’t work with an advisor, Fidelity’s ETFs are available through most online brokerages (also known as “discount”  brokerages). When logged in to your online brokerage account, search for the ticker symbol of the ETF you’re searching for—as you would search for a stock.

    In investing, one size doesn’t fit all. While some investors may prefer a passive-only portfolio of ETFs, others may want to implement specific strategies with the potential for higher returns. Also, many investors do both—hold passive ETFs as well as experiment with active options.

    Learn more about Fidelity Active ETFs.

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    Aditya Nain

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