What’s the Best Stock-Bond Allocation in Today’s Market?

Even before the coronavirus pandemic rained heavy volatility on stocks and bonds, the 60-40 allocation was already in question as a viable strategy at the height of the bull market. Now, that 60-40 allocation has been rendered even more arcane, which puts strategies like smart beta into the limelight.

“In a world where multiasset returns will be lower, and diversification between asset classes harder to come by, investors would benefit from a new approach to asset allocation,” a Barron’s article noted. “Rather than dividing up investments by asset class, a better approach would be to classify investments by the role they play in the portfolio: this comes down to a flexible array of beta, idiosyncratic alpha, and defensive instruments.”

“Beta can be thought of as any available source of return in both public and private markets,” the article added. “The most obvious form of this is cheap exposure to the equity market through passive ETFs, but the growth of so-called smart beta funds in recent years demonstrates that there are other “betas” as well, such as traditional style factors like value or growth. The term is asset class agnostic and applies equally to long and short returns and to non-listed assets.”

Given that, ETF investors looking to get into smart beta strategies via factor investing can look at a pair of funds that use a comprehensive factor approach that will provide them with broad exposure:

  1. Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS): seeks investment results that correspond generally to the performance of the Russell 1000 Comprehensive Factor Index. The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance of the underlying index, which is designed to track the equity market performance of companies in the United States selected on the investment style criteria of value, momentum, quality, low volatility, and size. It will invest at least 80% of its total assets (but typically far more) in component securities of the underlying index.
  2. Xtrackers FTSE Developed ex US Comprehensive Factor ETF (DEEF): seeks investment results that correspond generally to the performance of the FTSE Developed ex US Comprehensive Factor Index. The fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of issuers from developed markets countries other than the United States. The index is designed to track the equity market performance of companies in developed countries selected on the investment style criteria of value, momentum, quality, low volatility, and size.

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