Key Takeaways
- The traditional 60/40 portfolio we are used to seeing appears to be a thing of the past as stocks and bonds have become highly correlated.
- ETFs provide a unique wrapper for different investments, ushering in an era where most portfolios are likely to only have ETFs going forward.
- Active management is gaining traction, quickly becoming the management choice for satellite investment allocations.
The traditional 60/40 portfolio—60% stocks, 40% bonds—has long been considered the gold standard for balanced investing. But in today’s fast-changing world marked by technological breakthroughs, alternative assets, and shifting market dynamics and investor preferences, is that still a good investment strategy? Data show that in recent years there has been a higher correlation between stocks and bonds. By the end of March 2025, they were positively correlated for more than 700 days!
For true portfolio diversification that helps investors cushion the blow during times of market volatility, the traditional mix, then, may not be sufficient.
Investors are pivoting into novel investing strategies to ensure that they remain able to effectively generate wealth in an increasingly complex financial ecosystem. The future of investing is likely to be affected by the explosive growth of exchange-traded funds (ETFs), the resurgence of active management, and novel strategies for navigating volatile market conditions, including alternative high-risk, high-reward investing options.
What Are the Options Available Beyond Traditional Stocks & Bonds?
Today’s investment landscape offers a broad spectrum of products, including but not limited to:
- Venture Capital and Private Equity: High risk, illiquid, but with significant growth potential.
- Real Estate and Private Credit: Moderate risk, often income-generating, and less correlated with public markets.
- Mutual Funds and Government Bonds: Accessible, liquid, and stable.
- ETFs: Flexible, low-cost exposure to sectors, themes, or entire markets.
- Crypto and Alternatives: Emerging opportunities, but with high volatility.
- Direct Indexing: Potential for high returns with tax benefits.
Diversifying across this spectrum can help investors capture upside while managing risk. Opportunities related to venture capital, private equity, and real estate often require high startup capital. While more accessible, mutual funds and bonds can be limiting for investors willing to take on more risk. Cryptocurrency as an individual bet can be tricky and prone to large swings due to public sentiment.
Direct indexing allows investors to replicate an index, for instance the S&P 500 index, to capitalize on the returns and open the doors to the benefit of tax-loss harvesting. The downside of this approach is that there are often investment minimums and higher management fees. As a result, the math only seems to add up for high net worth investors. Consider: if you can tax-optimize around 4% of your portfolio, a $1 million position in the S&P 500 could yield $40,000 in losses to harvest. That’s meaningful. But if your portfolio is $100,000, that same 4% amounts to $4,000, which may not be considered worth the added difficulty, complexity, and cost.
One way to increase exposure and diversification in a portfolio, while mitigating risk and being accessible to people of all income levels, is to invest in exchange-traded funds.
The Rise of Exchange-Traded Funds (ETFs)
ETFs grew from $1.4 trillion in assets under management (AUM) in 2010 to over $13 trillion globally by the end of 2024. According to State Street’s most recent ETF impact report, ETF inflows are projected to reach $2 trillion in 2025.
What has driven this explosive growth?
Key Drivers of ETF Expansion
- Fee Compression: The average ETF expense ratio was 0.36% in 2023, less than half of what it was back in 2003.
- Accessibility: ETFs have democratized access to previously hard-to-reach market segments. There are now over 250 ETF issuers with unique products on the market, improving access for investors and leading to a compound annual growth rate (CAGR) of 19.8% since 2008.
- Tax Efficiency: ETFs are taxed either when a shareholder sells shares of a fund, or on capital gains distributions if the fund is in a taxable account. In-kind transactions within the fund don’t trigger capital gains, thus reducing the tax burden of the fund.
- Increasing Variety: As of the end of 2024, there were over 9,000 ETFs globally, with 847 new ETFs launched worldwide in the first four months of 2025 alone. These ETF products are inclusive of a variety of options such as active ETFs, buffer ETFs, inverse and leveraged funds, stocks, bonds and crypto.
The Future of Investment Portfolios
Future retail portfolios will likely see ETFs dominating the core and satellite allocations:
- Index ETFs: To build your core position, think the S&P 500 index, or Nasdaq Index.
- Thematic ETFs: Can help expand satellite allocations, think specific sectors like HealthTech, AI, renewable energy, and biotechnology.
- Bond ETFs: Providing fixed income to hedge against market volatility.
- Leveraged and Inverse ETFs: For those with a higher risk tolerance, this is one way to increase returns.
Depending on where an investor is in their timeline to retirement, a portfolio can contain any and all of these options at varying combinations and concentrations. For instance, those who are more risk tolerant may prefer to diversify with newer ETF products like leveraged and inverse ETFs; those with a desire to focus on particular industries may find thematic ETFs to be the best fit.
Actively-Managed Funds
Active ETFs can be the investing approach of any ETF in a portfolio, and are currently gaining popularity, with over $1.3 trillion invested in active ETFs globally as of the end of April 2025. These funds offer a hybrid approach with the structural benefits of ETFs and the potential outperformance of active management.
Tomorrow’s retail portfolios will likely employ a barbell approach, with passive ETFs forming the core and active strategies deployed in alpha-rich sectors (i.e. those with a high probability of beating an index). This will also provide balance with regard to fund fees, as actively-managed funds tend to have higher expense ratios.
Final Thoughts
As ETFs continue their exponential growth and active management finds renewed relevance in specific niches, retail investors will have the necessary tools to build wealth effectively and the potential to construct more resilient, adaptable portfolios than ever before.
Sanjana Vig MD, MBA
Dr. Vig is a co-founder and Chief Marketing Officer of Langar Holdings. She is a board-certified anesthesiologist specializing in Perioperative Management. She is also the founder The Female Professional, a website geared toward empowering professional women in life and their careers.
Pablo Portillo Olivo
He is currently pursuing a B.A. in Economics and Neuroscience at Kenyon College. With past experience in financial due diligence, equity research, and strategic consulting, Pablo is passionate about the intersection of finance, technology, healthcare and the life sciences.
