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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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Q3 2025 investment landscape

Global equities rallied amid a constructive expansionary backdrop and strong corporate fundamentals. The Federal Reserve resumed its easing cycle with a rate cut amid signs of softer employment conditions, and the U.S. fiscal package provides an additional tailwind for corporate earnings growth. The near-term outlook appears favorable for continued economic expansion, but tariff uncertainty, inflation persistence, and elevated asset valuations warrant continued emphasis on portfolio diversification.

 

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

61% of incoming portfolios in Q3 have some allocation to ETFs. On average, 52% 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, where 61% of incoming portfolios have some allocation to them. In comparison, 74% of incoming portfolios use mutual funds. We see the lowest use of ETFs in the international where 45% of portfolios utilized ETFs and 77% of portfolios used mutual funds. Highest use of mutual funds is seen in the fixed income sleeve, where 80% of incoming portfolios have some allocation to that investment vehicle. ETF usage in that category is still significant, with 50% of incoming portfolios using them. One key point to note is that despite the varying adoption, the average allocation to each of the asset classes, despite the choice of investment vehicle, is comparable. This shows the conviction advisors have in ETFs. In Q3, we saw 36% of incoming portfolios with allocation to active ETFs—to put this in context, this number was 13% in 2022. The average allocation to active ETFs amongst users is around 23%. Highest adoption is in the fixed income asset class, with 28% of incoming portfolios utilizing them, followed by U.S. equity (25%).

We observed the average portfolio has:

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

Domestic Equity
Domestic Equity

In Q3, the average equity sleeve of a portfolio remained at 70%. 79% 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 30% exposure, and the remaining 42% was allocated to core. Fundamentals for U.S. equities continue to look favorable, buoyed by the AI theme. Relative valuations and accelerating momentum of small and mid caps make those categories an avenue for diversification. Fed rate cuts are also likely to help reduce the interest-rate expense of smaller companies.

Insights:

  • In the U.S., growth stocks extended their gains with strong returns in the info tech and communications sectors. Small cap stocks rebounded in Q3, with rate cuts fueling a rally that flipped year-to-date performance into positive territory.
  • The Federal Reserve resumed its easing cycle with a rate cut amid signs of softer employment conditions, and the U.S. fiscal package provides an additional tailwind for corporate earnings growth.
  • Corporate earnings revisions accelerated upward during Q3 across most sectors, including initial signs of momentum from smaller companies. Technology sector earnings growth continued to lead the way, supported by increased expectations for AI capex spending. The market remains optimistic that companies can achieve higher profit margins and double-digit earnings growth in both 2025 and 2026, and this outlook may at least partially hinge on companies’ ability to pass along higher costs to consumers.
Alternatives
Alternatives

In a higher inflation environment, the correlations of stocks and investment-grade bonds turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds led to 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 multistrategy and market neutral products.
International Equity
International Equity

21% of the equity sleeve is allocated to non-U.S. equities—which remained 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. 31% of portfolios had no international equities exposure in Q3. Tactically, we favor developed markets given the downside risks posed to more trade-oriented economies. They also have higher relative momentum acceleration, attractive valuation and lower volatility.

Insights:

  • International equities benefited from a weaker dollar. Emerging markets led regional performance, outperforming within both equity and fixed income markets.
  • The global economy remains in a solid expansion with countries in various phases of the business cycle amid a variety of fiscal, monetary, and trade policy crosscurrents. China and Europe experienced signs of improved cyclical momentum, and many regions continued to ease monetary conditions, but the global policy backdrop remained unsettled.
  • Countries have exhibited various policies to support domestic growth. European investor sentiment continued to improve off weak levels amid fiscal and monetary support, while Japanese corporate governance reforms have provided a multiyear tailwind for corporate profitability and equity markets. China has tilted some of its policy support in favor of consumption and its equity market, while financial conditions and industrial activity remain in decent shape
  • Currencies of both emerging and developed markets remain undervalued relative to the dollar. Historically, a weaker dollar is a tailwind for the relative returns of both developed markets and emerging markets.
Fixed Income
Fixed Income

Fixed income allocations consisted of 25% of the portfolio. This is still near the lows of fixed income allocations we have observed in the last 2 years. Advisors have been reallocating from fixed income to equities to take on risk and participate in the market as well as stayed in cash positions. Investment-grade allocation is at 80% of the fixed income sleeve, and 20% to high yield. This is comparable to the level of investment-grade and high-yield allocation seen in Q3 of 2024.

Insights:

  • Credit-sensitive emerging-market bonds led widespread gains among all major fixed income sectors, as U.S. yields ticked down.
  • Fixed income performance benefited from lower Treasury yields and tighter credit spreads across all major fixed income categories. The U.S. Aggregate Bond Index and high-yield spreads are now in the lowest decile of their historical range.
  • Several crosscurrents continued to influence yield movements, including softer labor-market data, Fed easing, sticky inflation, and medium-term fiscal challenges. Overall, fixed income yields ended Q3 around their 50th percentile, suggesting overall bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.
  • The market expects the Fed to continue easing monetary policy into 2026 and beyond. The yield curve has steepened significantly over the past year, and concerns over sticky inflation, elevated fiscal deficits, and political influence on Fed decision-making may keep long-term interest rates elevated and challenge the Fed’s ability to influence the economy.
  • 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.

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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