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60-40 Asset Allocation: Time to Change Up Template

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This article was originally published on ETFTrends.com.

The tried-and-tested 60-40 asset allocation, 60% in stocks coupled with 40% bonds, has served investors well for years. However, today’s market landscape may require strategies that go beyond the 60-40 template, according to J.P. Morgan Asset Management.

“Over the past decade that 60/40 [asset allocation] has done a tremendous job. It delivered over eight percent. Going forward, however, we believe that the same 60/40 benchmark is going to deliver closer to five percent,” says Phil Camporeale, Investment Specialist in Multi-Asset Solutions at J.P. Morgan Asset Management.

The 40% allocation into bonds has proven to be a challenge given that Treasury note yields have gone to basement-low levels. With more investors adding bonds to their portfolios, it’s skyrocketed bond prices and driven yields down to a point where negative rates are entering fixed income vernacular.

“The real thing that has caught our attention is just how quickly interest rates have moved lower,” he says. “In August, 10-year Treasuries have dropped by about 40 basis points. That is the most 10-year Treasuries have dropped since 2015. So it is not the level of rates that is concerning us, it is more the speed that they got down this far.”

Investors can get more strategic by also taking a closer look at smart beta exchange-traded funds (ETFs). While a simple passive index strategy may work in certain cases, smart beta will give investors a different look and flux with the changing market dynamics.

One ETF option is the Deep Value ETF (DVP) , which seeks to track the price and total return performance of the Deep Value Index. The index is composed of the common stock of typically 20 companies included in the S&P 500 that have been selected through a proprietary ranking system developed by the fund’s index provider, that evaluates the earnings and cash flows of each company to create a final universe of companies that are deeply undervalued as compared to the S&P 500 overall.

Another option is the Vanguard Value Index Fund ETF Shares (VTV) . VTV seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks.

The fund employs an indexing investment approach designed to track the performance of the CRSP US Large Cap Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

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