Find out how your portfolios stack up

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

Advisors continue to underweight large-cap growth

Advisors’ allocations towards growth equities remain steady while their benchmark-relative active risk continues to increase. Benchmark composition changes are largely responsible, given mega cap growth’s outperformance year-over-year and higher concentration.

After reviewing 932 advisor equity sleeves in the first half of 2024, the underweight to large cap growth has widened from just under 1.5% to roughly 4%, relative to a global equity benchmark (see Figure 1).

From the conversations we are having with advisors, many are questioning the merits of market-cap-weighted index products given higher levels of concentration. That has sparked advisor interest (and higher usage) of nontraditional, options-based, equal-weighted, and active equity products—especially within the ETF wrapper. As one example, we’ve seen an 8x jump in usage of active equity ETFs just since 2019—many of which meaningfully underweight the top 50 names in broad indexes.

While concentration may feel like a new phenomenon, it’s more common than you think, as the top ten holdings in the S&P 500 Index have ranged from 20% to 30% over most years since 1990 (source: Vanguard Investment Advisory Research Center research: “Historical perspective on equity concentration”).

There are trade-offs associated with incorporating any non-market-cap-weighted index products into a portfolio. Take equal-weighted S&P 500 Index products as an example: Roughly 60% of these strategies will screen as mid-cap (see Figure 2). That shouldn’t be a surprise in and of itself, but it can increase the likelihood of unintended outcomes when paired with equity portfolios that already lean smaller in size, which happens to be the most consistent equity trend we see. More than half of all equity sleeves we reviewed in 2024 had at least an 8% overweight to mid- and small-caps.

Consider getting back to strategic duration targets for your clients’ portfolios

Given increased demand in our perspective on fixed income positioning, advisors have sent 930 unique fixed income sleeves our way for analysis—representing a 63% increase in observed bond allocations, year-over-year.

Duration positioning remains one of the more popular topics being discussed. Vanguard is encouraging advisors to position more towards 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 have observed an encouraging directional trend in advisors’ extending duration.

In the first half of 2024, advisors’ bond portfolios exhibited lower levels of benchmark-relative active risk. Year-over-year, in aggregate, advisors’ underweight to duration has shrunk by 0.5 years—driven by both advisors slightly extending duration along with benchmark duration composition edging lower (see Figure 3).

Fixed income portfolio construction

Based on our advisor conversations, many are seeking our perspective on ways to simplify bond portfolios given higher bond yields. Advisors are questioning the need to maintain overly complex fixed income strategies to achieve acceptable returns for client portfolios—often with overlapping risk and return profiles.

Given today’s bond market environment, simplifying your bond strategy is possible while still maintaining diversified exposures. One method is to use a low-cost, true-to-label core fund or ETF as the foundation of your fixed income allocation (see Figure 4). This can create a more scalable and efficient base to layer in your favorite credit- or duration-tilted funds for specific client or model needs. This approach also frees up a meaningful portion of your fee budget to redeploy to often higher-cost and highly active satellite funds.

Next steps to consider: Seek out a second opinion

If you’re concerned with equity market concentration, curious about the fixed income landscape, or simply want a fresh perspective on portfolio construction, leverage our Portfolio Solutions team’s expertise and vast suite of analytical tools to help you determine the way forward. 

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.
• 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.
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• Certified Financial Planner Board of Standards Inc. owns the certification mark, CFP®, in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.