Portfolio perspectives

The choices shaping advisor portfolios today

In this edition:

• Many advisors are still positioned for a low-yield world, even as today’s bond market offers some of the most attractive yields in years.
• Advisors are embracing active ETFs, but at a rate that favors stocks over bonds twice as much. That means fixed income remains one of the areas least changed by today's higher-yield environment, both in how many advisors allocate assets and how they implement active strategies.
• The next AI winners may be the adopters, not the mega-cap builders, yet many portfolios remain underweight international and value stocks, where a second wave of investment success could occur.

The most interesting insights from advisor portfolios are sometimes found not in what advisors are buying, but what they are avoiding.

Our review of more than 1,000 advisor portfolios found a pattern that appeared across several asset classes. Advisors have embraced many of the defining trends of this market cycle, such as active ETFs and artificial intelligence. Yet in some notable instances, portfolios appear slow to reflect how dramatically the investment landscape has changed.

Fixed income provides the clearest example. Many advisors remain cautious on duration despite bond yields that are among the most attractive in years. At the same time, adoption of active ETFs in fixed income significantly trails other asset classes, even as the category expands rapidly. In equities, enthusiasm for artificial intelligence is increasingly concentrated in a narrow group of companies, while many portfolios remain underweight areas that could benefit from broader AI adoption.

Together, these trends suggest that some of today's most compelling opportunities may lie not in identifying the next investment theme, but in reassessing how portfolios are positioned for the ones already underway.

Higher yields have changed the fixed income equation

Advisor portfolios reveal a fixed-income paradox: Many are avoiding duration risk while simultaneously increasing credit risk in pursuit of income. That approach may have made sense when yields were historically low, but today's market calls for a different playbook.

Our review found that 66% of fixed income portfolios maintained duration positions more than half a year shorter than the Bloomberg U.S. Aggregate Index. At the same time, advisors allocated 15% of fixed income assets to high-yield bonds and maintained a 7% overweight to corporate credit relative to the benchmark. In other words, many advisors are seeking protection from interest-rate risk while accepting greater credit risk to replace lost income.

The yield environment that shaped many of those decisions no longer exists. For much of the past decade, investors often needed to move down in credit quality to generate attractive income. But today, the Bloomberg U.S. Aggregate Index yields 5.01%, placing it in the 86th percentile historically and well above its long-term average of 3.38%. High-quality bonds are once again offering yields that many investors have not seen in years.

Figure 1: Higher yields may reduce the need for credit risk

Bloomberg U.S. Aggregate Index yield versus historical average (2005–2026).

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: FactSet, as of August 31, 2026.

Notes: The chart displays daily yield to worst figures over time on the Bloomberg U.S. Aggregate Index. The green dotted line denotes the average yield over the stated period. The gold dotted line indicates one standard deviation above the mean and the blue dotted line is one standard deviation below.

Active ETFs: The overlooked opportunity in bonds

Fixed income appears to be evolving more slowly than other parts of the portfolio as well—not just in asset allocation decisions, but also in implementation choices. While advisors have rapidly embraced active ETFs, adoption has been far stronger in equities than in bonds. As a result, one of today's most significant market shifts, the return of meaningful bond yields, may also be fully reflected least in how portfolios are constructed and implemented.

Since the SEC simplified and standardized the ETF launch process in 2019, active ETF assets have grown to nearly $2 trillion. Of the more than 1,000 advisor portfolios our team has reviewed, active ETF usage has increased ninefold since 2020—a 43% annual growth rate—reflecting growing acceptance of active ETFs as a portfolio construction element.

But rate of adoption has not been uniform across asset classes. Advisors are more than twice as likely to put money into active equity ETFs over active fixed-income ETFs. Active equity ETF flows have grown at a 97.8% compound annual growth rate since 2019, while active fixed income ETF adoption has grown at a 44% rate.

The slower adoption of active fixed income ETFs is notable because it reflects a broader pattern in advisor portfolios. Fixed income remains one of the areas least changed by today's higher-yield environment, both in how many advisors allocate assets and how they implement active strategies.

Many advisors may be accessing active fixed income through higher-cost solutions even as lower-cost ETF alternatives are increasingly available. On an asset-weighted basis, active fixed income ETFs carry expense ratios that are 15 basis points lower than comparable active fixed income mutual funds,¹ creating a potential opportunity to reduce implementation costs. In other words, advisors may be embracing active management but not always implementing it in the most cost-efficient manner.

As demand for active fixed income continues to grow, this may represent an opportunity to improve portfolio efficiency while maintaining exposure to skilled active managers. The next chapter of the active ETF story will not be about whether advisors use active ETFs, but rather about how efficiently they implement them.

Putting active fixed income to work

For advisors evaluating active fixed income solutions, the following Vanguard ETFs may provide opportunities to combine active management with cost-conscious implementation.

The next AI winners may not be today’s leaders

Artificial intelligence is one of today’s defining investment themes. Much of the attention has focused on the first wave of companies building AI infrastructure and technologies—a relatively small group that is helping to drive extraordinary gains and creating significant concentration in a handful of mega-cap stocks.

History suggests, however, that the companies that build transformative technologies are not always the ones that create the greatest value for investors over time. Many of the biggest beneficiaries emerge later among the firms that successfully adopt and apply those technologies. International and value stocks may provide exposure to a different side of the AI story; these are not the companies building the technology, but those using it to improve productivity, profitability, and earnings growth.

Instead of simply chasing today's AI leaders, advisors should consider two key questions:

• How much future success is already reflected in today's prices?
• And which companies are positioned to benefit from the next wave of AI-driven adoption?

Technology's weight within the S&P 500 has increased by roughly 14 percentage points since the launch of the first generative AI model in November 2022; technology now represents nearly 40% of the index.² For advisors, broad U.S. equity exposure may already represent a substantial allocation to AI-related expectations.

Current valuations suggest investors are paying historically high premiums for exposure to the companies most closely associated with the AI trade. U.S. large-cap stocks are trading near the 95th percentile of their historical relative valuation range, indicating markets are already pricing in substantial future growth.

Figure 3: Today's AI leaders already carry the weight of enormous expectations

Relative valuations of U.S. large-cap stocks versus the broader U.S. equity market (1995–2026).

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Vanguard calculations, based on data from Robert Shiller’s website at https://shillerdata.com/, U.S. Bureau of Labor Statistics, the Federal Reserve Board, and Refinitiv, as of June 30, 2026.

Notes: The U.S. equity valuation measure is the current cyclically adjusted price/earnings ratio (CAPE) percentile relative to our fair-value CAPE estimate for the MSCI US Broad Market Index. Factor valuations are relative to U.S. equities as the base at the 50th percentile. Value, growth, large-cap, and small-cap valuation measures are relative to our fair value estimate.

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Valuations from VCMM are derived using 10,000 simulations for each modeled asset class from March 31, 2026, and June 30, 2026. Results from the model may vary with each use and over time.

This does not mean AI's potential is overstated. It may simply mean that a significant portion of the opportunity is already reflected in today's market leaders.

Yet many advisor portfolios remain underexposed to areas that could benefit from broader AI adoption: international and value stocks. Our review found that 82% of portfolios are underweight international equities relative to the FTSE Global All Cap Benchmark, while nearly 44% are underweight value stocks.

Looking beyond today's AI leaders

For advisors seeking to broaden exposure beyond today's dominant technology companies, the following ETFs may provide access to international and value-oriented areas of the market that could benefit from the next phase of AI adoption.

More Vanguard analysis

For additional expert insights, check out:

• Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
• Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.

1 Morningstar, Inc., as of August 31, 2026.

2 Morningstar, Inc., as of June 30, 2026.

Notes:

• For more information about Vanguard funds or Vanguard ETFs, view detailed product information or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
• Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
• Past performance is no guarantee of future results.
• All investing is subject to risk, including possible loss of principal. 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.
• Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.                                                                
• Vanguard is not responsible for determining what's in the best interest of any underlying client on whose behalf you use this information. As an investment advisor, it remains your responsibility to make a best-interest determination for your clients, so you should review carefully the information presented and the fund's prospectus for more complete information regarding any fees, expenses, investment objectives, and risks, and make your own determination as to its appropriateness before you rely on it.
• The Factor Funds are subject to investment style risk, which is the chance that returns from the types of stocks in which a Factor Fund invests will trail returns from U.S. stock markets. The Factor Funds are also subject to manager risk, which is the chance that poor security selection will cause a Factor Fund to underperform its relevant benchmark or other funds with a similar investment objective, and sector risk, which is the chance that significant problems will affect a particular sector in which a Factor Fund invests, or that returns from that sector will trail returns from the overall stock market.
• Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
• Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.