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Trends in portfolio construction

Stay up-to-date on the latest portfolio trends with our Portfolio Construction team’s insights, fueled by nearly 12,000 portfolio reviews annually.

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Q2 2025 investment landscape

The markets endured a major early quarter sell-off followed by a dramatic recovery, primarily due to U.S. tariff policies. The global economy remained in solid shape and markets were underpinned by sturdy expectations for corporate earnings. The Fed may be leaning toward additional rate cuts, so the near-term outlook appears favorable for continued economic expansion. However, policy uncertainty remains high and much of the impact due to tariff hikes are still ahead, with inflation risks potentially under appreciated.

 

A common composition of an advisor-created portfolio

Source: FI Portfolio solutions (3,198 Portfolio Reviews and Portfolio Quick Checks conducted between 4/1/25 and 6/30/25) and Morningstar.

ETF Usage

Driven by advantages like better tax efficiency, cost, and intraday liquidity, we are seeing increase in ETF usage. Sixty-four percent of incoming portfolios have some allocation to ETFs. On average, almost 50% of an advisor’s portfolio is allocated to ETFs, which shows the popularity of the investment vehicle. We see the highest use of ETFs within the U.S. equity sleeve. In Q2, 72% of incoming portfolios utilized ETFs for their U.S. equity exposure—which is almost equal to the 77% of portfolios that used mutual funds. However, in the international sleeve, 42% of portfolios utilized ETFs and 78% of portfolios used mutual funds. When it comes to fixed income, 51% of incoming portfolios having some allocation to ETFs and 84% of them utilize mutual funds. In 2022, 13% of advisors had some allocation to active ETFs but in 2024, that proportion increased to 36%. In Q2, we saw 40% of incoming portfolios with allocation to active ETFs. The average allocation to active ETFs amongst users is around 22%. This is largely seen in the Fixed Income asset class, followed by U.S. equity.

We observed the average portfolio has:

13
holdings
6
different asset managers
49
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q2, the average equity sleeve of a portfolio remained at 70%. Seventy-nine percent of the equity sleeve is allocated to U.S. equities versus 21% in international. U.S. allocation continues to remain high, compared to 73% in 2021. Within U.S. equity, the average portfolio has 65% allocation to large caps, 22% to mid caps and 13% to small caps. Growth exposure remained consistent with last quarter at 28%, which caps off four consecutive quarters of decline. Value had a 29% exposure and the remaining 43% was allocated to core. We continue to favor the large growth category given that it is the highest quality within domestic equity, with exposure to the tech sector. Mid caps also look attractive from a valuation standpoint, offering an avenue for diversification.

Insights:

  • Large cap U.S. growth stocks, particularly in the info tech and communications sectors, bounced back sharply and spearheaded a broad-based Q2 global rally.
  • The trend in business investment remained positive, spurred by outlays for AI by large companies in the technology and communications sectors. However, policy uncertainty, particularly around tariff rates, continued to weigh on companies in other sectors and small businesses.
  • After weakening during Q1, consensus estimates for 2025 corporate earnings growth stabilized. Profit margin expectations remained robust, with hopes that sales growth will continue to outpace input-cost inflation. The largest companies have been the biggest contributors to earnings growth in recent years, and the market expects them to maintain elevated margins and strong relative earnings power in 2025 and beyond.
Alternatives
Alternatives

In a higher inflation environment, the correlations of stock and investment-grade bond turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds led advisors looking at alternatives as an option. Given the uncertainty going forward, alternatives can provide a good opportunity.

Insights:

  • In this quarter, 11% of incoming portfolios had allocation to Liquid Alternatives. The average allocation was around 7%. The most popular categories are hedged equity and market neutral products.
International Equity
International Equity

Twenty-one percent of the equity sleeve is allocated to non-U.S. equities—while it is a slight increase, it remains consistent to what we saw last quarter. This level is still a far way off from the 27% exposure to international we saw in 2021. Advisors have 84% of their international sleeve in developed markets and 16% in emerging markets—which continues the trend of quarter-over-quarter increases to developed. Twenty-six percent of portfolios had no international equities exposure in Q2 2025 versus 31% in Q1. This shows the growing appetite for international equities amongst advisors as they seek diversification away from the domestic market. Tactically, we favor developed markets given the downside risks posed to more trade-oriented economies.

Insights:

  • Non-U.S. equities posted double-digit gains, including both developed and emerging markets, and extended their year-to-date leadership.
  • The global business cycle remains in expansion, with a broad shift toward monetary easing outside the U.S. Continued dollar weakening from still elevated valuation levels increases the attractiveness of diversification in non-U.S. assets.
  • Earnings growth remained positive across regions in Q2. Emerging markets posted especially strong momentum, while non-U.S. developed markets saw a more modest increase.
  • A renewed commitment in the eurozone to fiscal expansion through defense spending may spark an upturn in business sentiment. China is seeing signs of improvement through a pick-up in industrial activity and regulatory policy easing. However, the tariff hikes may provoke meaningful headwinds for countries with large trade relationships with the U.S.
  • Given the attraction valuation of non–U.S. equities, diversification to this asset class could be key for advisor portfolios in the coming months.
Fixed Income
Fixed Income

Fixed income allocations comprised of 25% of the portfolio. This is still near the lows of fixed income allocations we have observed in the last two years. Advisors have been reallocating from fixed income to equities to take on risk and participate in the market as well as staying in cash positions. Investment-grade allocation is at 79% of the fixed income sleeve, and 21% is allocated to high yield. This is a 1% decrease to high yield compared to last quarter.

Insights:

  • Riskier credit sectors, such as high-yield corporate bonds, led the positive returns across most fixed income categories. Yields remained modestly lower than where they began 2025, with real yields still at the high end of their range over the past decade.
  • After widening during Q1 and immediately after the early Q2 tariff hike announcements, credit spreads abruptly reversed course and tightened significantly across most fixed income categories. Overall, fixed income yields ended Q2 around their 50th percentile, suggesting bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.
  • The Fed kept its policy rate steady for the second quarter in a row. At the end of Q2, the market expected 50 bps–75 bps of additional easing in 2025, despite the Fed’s forecast of 3% inflation. Higher long-term Treasury yields may be a sign of the market’s concern about large and growing public debt levels and bond issuance in the U.S. and other advanced economies.
  • The elevated U.S. policy uncertainty underscores the importance of diversification in fixed income to hedge growth risks and provide reasonable yields.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), from 4/1/25 to 6/30/25.

In conclusion

It is important to maintain a well-diversified portfolio and employ discipline to reach investment objectives and embrace volatility to create portfolio opportunities. Reach out to our portfolio construction guidance team to help you build portfolios for this new market environment.

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Diversification does not ensure a profit or guarantee against a loss.

Past performance is no guarantee of future results.

ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.

Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments.

Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.

Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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