Perhaps the most important thing in all of investing comes down to asset allocation. A portfolio’s mixture of stocks, bonds and other assets can make or break returns, increase or decrease risk and, ultimately, determine success rates. And when it comes to asset allocation, no mix is more famous than the classic 60/40 stock/bond mix – also known as a balanced fund.
The 60/40 model has been relevant in recent years as bond yields were low, only to be followed by the current period of rising interest rates.
But with the Federal Reserve appearing to pause interest rate hikes, the 60/40 model may have a new life, and the latest active ETF from Capital Group may just be able to capitalize on the 60/40 resurgence and come out a winner.
Why 60/40 In the First Place?
Arguably, the classic 60/40 is one of the easiest asset allocation models to understand and implemen:. Invest 60% of your portfolio in stocks and another 40% in bonds, hold for the long term, and generate low risk and strong returns. The idea is that the income from bonds coupled with a steady long-term return from stocks should help reduce volatility, while still producing great returns.
The idea was first popularized in the 1950s during the early days of Modern Portfolio Theory. Vanguard founder John Bogle took the idea and ran with it, ultimately making it popular with investors. Since then, there have been plenty of academic studies on the allocation method, and the data all points to being an optimal allocation for many investors.
Since the 1980s, a 60/40 split would have returned about 7.5% per year – besting both the stock and bond market returns over that time. That is … until recently.
With interest rates low and stocks surging since the Great Recession, the bond side has significantly dragged down returns for the asset allocation model. Then the bottom dropped out last year. With the Fed’s recent moves to raise interest rates to combat inflation, bonds haven’t lived up to their low-volatility name. The loss on bonds allowed the classic 60/40 to return a negative 15% in 2022 – the worst in real terms since the Great Depression.
60/40 Bounces Back
But like all things in the market, a new year brings new opportunities. For the classic 60/40, it could mean a return to normalcy.
Thanks to the dip in bonds during 2022 and for most of 2023, fixed income assets are holding up their end of the bargain in terms of yield these days. Getting 4%+ in cash return goes a long way in smoothing out a portfolio’s ride and generating a positive return. At the same time, higher valuations and high interest rates are poised to reduce the return of stocks.
With these two factors in tow, the classic 60/40 blend is poised to deliver returns between 6% to 7% per year for the next decade as rates remain at more normalized levels.
Capital Group’s New Active ETF
On the back of this potential comes a new ETF launch from Capital Group. The asset manager has quickly pivoted to ETFs over the last few years and its latest launch tackles 60/40 head-on.
The Capital Group Core Balanced ETF (CGBL) will hold a mix of U.S. stocks and bonds at a 60/40 base mix. The key for the ETF is that it will actively manage on several fronts, including individual stock and bond selection rather than buying indexes for exposure. Secondly, CGBL is allowed to drift in terms of allocation. This means it can have as little as 50% in equities or as much as 75%. The idea is that the ETF should be able to circumvent any issues with 60/40, such as low equity returns or rising rates. Currently, the fund is set at the classic 60/40 equity/bond blend.
Ultimately, the new ETF could serve as a core portfolio holding for portfolios. This is particularly true given the ETFs low expenses ratio of just 0.33% or $33 per $10,000 invested.
Capital Group ETFs
These ETFs were selected based on their assets under management and represent the largest active ETFs from Capital Group. They are sorted by their YTD total returns, which range from 14% to 42%. They have expenses between 0.33% and 0.54% and assets under management between $1.1B and $3.9B. They are currently yielding between 0.40% and 1.56%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| CGGR | Capital Group Growth ETF | $2.7B | 42% | 0.40% | 0.39% | ETF | Yes |
| CGDV | Capital Group Dividend Value ETF | $3.84B | 28% | 1.56% | 0.33% | ETF | Yes |
| CGUS | Capital Group Core Equity ETF | $1.17 | 27.1% | 1.19% | 0.33% | ETF | Yes |
| CGGO | Capital Group Global Growth Equity ETF | $1.9B | 22.9% | 0.90% | 0.47% | ETF | Yes |
| CGXU | Capital Group International Focus Equity ETF | $1.51B | 14.8% | 1.2% | 0.54% | ETF | Yes |
The Bottom Line
The classic 60/40 portfolio has been a long-term winner for portfolios and could be getting its mojo back. A new Capital Group active ETF launch allows investors to play right into the thick of its potential.
