Portfolio Construction
Investment portfolio insights
Trends in portfolio construction
Stay up to date on the latest portfolio trends with our Portfolio Construction team’s insights, which are fueled by nearly 12,000 portfolio reviews annually.
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The resilient economy backed by the solid consumer backdrop continues to be strong, showing hints of stabilization and even reacceleration in some areas. Expectations of monetary easing have contributed to improving global financial conditions and manufacturing activity. With the Fed signaling that there are potential rate cuts to be seen in 2024, the market continues to enjoy favorable momentum. However, core US inflation pressures appear persistent, with recent inflation prints being higher than expected. Moreover, Q1 GDP came in at 1.6%, less than what was expected. The important drivers of inflation like shelter are trending down, which is good news, but investors are dialing back expectations for the magnitude and number of rate cuts for the year. The last mile of disinflation toward the Fed’s target may be difficult without greater economic slowing. As the markets reprice risk from the lower probability of near-term recession to a soft landing, it is important to maintain a well-diversified portfolio as upside surprises may be more difficult amid low market volatility and higher valuations.
A common composition of an advisor-created portfolio
Source: FI portfolio solutions (3,147 Portfolio Reviews and Portfolio Quick Checks conducted between 1/1/24 and 3/31/24) and Morningstar.
To monitor key trends in advisors’ strategic allocations and rebalances, we have reviewed over 3,000 professionally managed investment portfolios in Q1 of 2024 through our proprietary portfolio construction capabilities. Our analysis uncovers key themes playing out within each asset class that we believe will continue to be top of mind in 2024.
Average ETF usage in advisor portfolios
We are seeing the highest level of ETF usage in two years driven by advantages like better tax efficiency, cost, and intraday liquidity. In 2022, 52% of advisors had some ETF allocation and that has risen to 59% in Q1 of 2024. The average portfolio in 2024 has 13 positions of which 5 are ETFs (38%). This is an 11% increase from 2023 as interest continues to build in the wide variety of ETF products available. As ETF usage gains steam, the binary lines are blurred. While index funds continue to be the most popular product among advisors, there is increased interest in active ETFs. In 2022, 13% of advisors had some allocation to active ETFs and that proportion has increased to 25% in 2024. The average allocation to active ETFs among users is around 17%, showing increased adoption year over year.
We observed the average portfolio has:
All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), as of 3/31/24.
In conclusion
Inflation coming down is the main driver of market recovery. It makes the Fed more comfortable, which makes investors more comfortable. Contact Fidelity's portfolio construction guidance team to help you build strategic portfolios for this new market environment.
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With benefits spanning active management to tax efficiency, now's the time to take a fresh look at active ETFs and Fidelity's robust active ETF lineup.
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Find out more about alternatives and how allocating to these investments may help strengthen your clients' portfolios.
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Our tailored portfolio solutions—including model portfolios and separately managed accounts—can allow you to spend more time where it counts: building better client relationships.
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.