Record Stocks and 24-Year Yield Highs Push Money Into Bonds, Rewriting 60/40 Portfolio

Bond ETFs have drawn a record $525 billion this year, according to NovaDius Wealth Management president Nate Geraci. Yet many bond categories are posting losses, which strains the 40% bond slice of the 60/40 portfolio.

The 60/40 portfolio holds 60% stocks and 40% bonds. Geraci says record stock prices helped the stock side, but rates at multi-decade highs weighed on the bond side.

Why Are Investors Buying Bonds That Are Losing Money?

NovaDius is a registered investment advisor. Geraci told CNBC‘s ETF Edge program that more than $75 billion entered fixed income ETFs over the past month.

Geraci said money moved across the yield curve, which plots yields by maturity. Some investors parked cash in short maturities for yields above 4%, while others reached for higher payouts in longer bonds.

However, many bond ETFs remain in the red this year, Geraci said, particularly those with long duration. Duration measures how sharply a bond’s price reacts to rate changes.

Meanwhile, State Street Investment Management counted $469 billion of US-listed bond ETF inflows through September, also a record. Geraci did not say which tracker or cutoff date he used.

The S&P 500 set an all-time high on October 6. In the same week, the 10-year Treasury yield touched its highest level since 2002.

Is Managed Futures the Next Fix for the 60/40 Portfolio?

Geraci said some investors now want strategies that move less in step with stocks and bonds.

Managed futures ETFs can fit, he said, because they trade futures contracts. They can short bonds or go long the dollar and oil.

He called them a diversifier when other parts of a portfolio are not working. However, he cited no performance figures.

Andrew Beer, founder of managed futures specialist Dynamic Beta Investments, was set to join Geraci for a follow-up segment.

Alternative ETFs gathered $31 billion through September, State Street says, helped in part by weaker bond protection in stock selloffs.

Bond ETFs and alternatives are both gathering billions, which suggests ETFs now serve the yield trade and the hedge alike.