Find out how your portfolios stack up

 How do your portfolios stack up against your peers'? Learn what’s trending in the semiannual report from Vanguard’s Portfolio Analytics and Consulting (PA&C) team. You can review the highlights of the year-end 2024 report here or download the full analysis.

Advisors continue to embrace U.S. equities over international, citing performance

Advisors increased their allocations toward U.S. equities in 2024. However, strong U.S. equity market returns also increased the U.S. weighting within global equity benchmarks. The result: Despite increasing their U.S. equity allocations, advisors hold lower levels of active risk relative to the global equity market when compared to portfolios observed in 2023.

After reviewing 1,747 unique equity sleeves in 2024, we found that advisors allocated roughly 78% of their portfolios to U.S. equities compared to the 64% U.S. equity allocation in the FTSE Global All Cap Index (see Figure 1).

In our conversations with advisors, the most-cited reason for underweighting or avoiding international equities came down to poor historical performance when compared to U.S. equity market performance.

Vanguard believes strongly in the power of diversification to deliver superior long-term risk-adjusted returns. A recent article from Vanguard Global Head of Portfolio Construction and Chief Economist for the Americas, Roger Aliaga-Díaz, Ph.D., highlights how investors can think of diversification  in a similar way to an insurance policy. Investors may pay away some future gains, as one would with an insurance premium; however, having insurance is a way of managing risk, just like with the benefits of asset class diversification.

Within the international equity allocation, advisor portfolios favored developed markets over emerging markets.

Overweighting developed-market equities was consistent with portfolios observed during 2023, though the magnitude of advisors’ relative overweight to developed markets more than doubled when compared to an international equity benchmark.

The increase in overweight to developed markets came despite emerging markets producing higher total returns during 2024.

Like the broader U.S. and international equity allocation decision, Vanguard cautions against forgoing the diversification benefit that comes from pairing emerging market equities with other non-correlated asset classes, such as developed market and U.S. equities.  

Duration positioning remains top bond portfolio concern

Bond market volatility was top of mind for advisors in 2024, evidenced by advisors sharing 1,767 unique fixed income sleeves with our team for analysis—a 55% increase in observed bond allocations year over year.

As the Federal Reserve transitioned from restrictive to more accommodative levels of policy rates, discussions with advisors were primarily centered around duration positioning within fixed income portfolios. From our data, rate risk held steady from 2023 to 2024, with the median duration coming in at roughly 5 years (see Figure 2).

Vanguard continues to encourage advisors to return to strategic duration targets as a way of preserving portfolio yields and diversification benefits for multi-asset class portfolios.

While advisors largely remain underweight duration, we’re encouraged by them exhibiting the lowest levels of active risk from a rates standpoint over the past several years. This development has been driven by advisors purposefully extending duration, as well as benchmark duration levels compressing due to higher coupon yields.

Interest grows to diversify away from U.S. monetary policy

As the Federal Reserve pivoted to cutting rates in 2024 and interest rate volatility is expected to continue into 2025, advisors have shown interest in diversifying away from U.S. monetary policy. From our conversations, common areas of interest have included structured products, private debt, and global bonds. 

On the global bond front, our data set has historically shown allocators having a strong preference for domestic bonds. This trend carried into 2024, with the median international bond allocation landing at just over 16% of the advisor fixed income sleeve.

Interestingly, when examining the international fixed income allocation further, we find that most advisors overweight emerging market debt while being underweight developed market bonds, relative to an international fixed income benchmark. This is a stark contrast to the regional preferences observed within the international equity allocation.

Said differently, advisors have tended to prefer accessing emerging markets through debt capital markets as opposed to equity, largely driven by attractive yields and a strong preference for outsourcing fixed income management—in 2024 the median allocation to active bond funds exceeded 70% of the fixed income sleeve.

Vanguard strongly believes in the merits of a long-term, strategic international bond allocation as exposure to ex-U.S. yield curves, monetary policy regimes, and economic environments has diversifying benefits and can contribute to long-term, superior risk-adjusted returns. For those concerned with volatility, we recommend dollar-hedging your international bond exposure for a U.S.-based investor, to limit the dispersion of returns driven by currency fluctuation.

Next steps to consider: Look for ways to optimize your approach

Whether you want another perspective on international allocations, additional insight on interest rate risk, or consultation on specific portfolio construction questions, our Portfolio Solutions team’s expertise and vast suite of analytical tools can help you fine-tune your approach. 

In addition, our self-service analytics tools allow you to evaluate your clients' portfolios from a variety of angles, confirming your current portfolio construction approach and/or identifying opportunities for improvement.

Notes:

• All investing is subject to risk, including possible loss of principal.
• Investments in bonds are subject to interest rate, credit, and inflation risk.
• Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
• Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
• Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
• Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
• CFA® is a registered trademark owned by CFA Institute.