Investment portfolio insights
Trends in Portfolio Construction: Q3 2023
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 throughout the year.
The U.S. economy is proving to be more resilient than everyone expected, despite the uncertain global economic outlook. In Q2, continued global economic expansion amid generally disinflationary trends led recession odds to drop. However, in Q3, the resilient U.S. late cycle expansion has contributed to a stalling pattern in disinflationary trends. The job market continues to be very strong, but consumer activity is starting to fade along with a slight downturn in PMI—signs that the U.S. economy is cooling. Inflation remains in a downward trend despite a slight uptick in August. This late cycle environment is a mixed bag, with economic and corporate activity remaining solid but policy and inflation trends more uncertain. The question continues to be how much of this is priced in amidst these challenging dynamics.
To monitor key trends in advisors’ strategic allocations and rebalances as they react to a tough environment, we have reviewed over 2,100 professionally managed investment portfolios in the second quarter of 2023 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 2023 and potentially beyond.
We are seeing the highest level of ETF usage in two years. The average portfolio in Q3 includes 25% ETFs—a 5% and 8% increase from 2022 and 2021, respectively. As ETFs gain steam, the binary lines are blurred. While index funds are the most popular product in terms of usage, advisors are making larger allocations to strategic beta and active ETFs. The average allocation to active ETFs and strategic beta amongst users is 14% and 20% respectively, signaling a growing middle ground between active and passive as advisors explore a variety of wrappers for investment decisions.
We observed the average portfolio has:
All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), as of 9/30/23.
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Fidelity's Portfolio Construction team believes inflation coming down is the main driver of market recovery. It makes the Fed more comfortable, which makes investors more comfortable. Please reach out to our Portfolio Construction Guidance team and services 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.