Rethinking your 60/40 portfolio: Where managed futures fit in

As the S&P 500 (^GSPC) is trading near record highs, Yahoo Finance Markets and Data Editor Jared Blikre, who also hosts Yahoo Finance's Stocks in Translation podcast, compares the historic performances of the index, the traditional 60/40 portfolio, and managed futures in the context of smoothing out your portfolio.

Check out Stocks in Translation's coverage of cyclical vs. defensive sectors.

Catch more Stocks in Translation here, with new episodes every Tuesday and Thursday.

To watch more expert insights and analysis on the latest market action, check out more Market Catalysts here.

Video Transcript

00:00:00 Speaker A

The S&P 500 is up over 300% this century, but it only turned positive in 2013 and there has been a lot of volatility. We've been looking at cyclicals versus defensive sectors the last two days. Today we're going to look at how to smooth out your portfolio with managed futures and bonds. And first, let's redo review the definition of managed futures. These are rules-based accounts or funds, including ETFs, that go long or short futures across stocks, bonds, commodities, and foreign exchange. They're different from a straight allocation to say gold or silver or a commodities index. And that's because they will trade in and out of different commodities, they try to time the market. So let's take a look at how stocks and bonds and managed futures have stacked up together over some periods of difficulty. And this period this table is prepared by Strategas ETF Todd Zone. We've had him on stocks in translation before. And you're looking at three different markets, the Spider S&P 500 ETF, so we got SPY there. And then we have an ETF AOR that covers the 60-40, that's 60% stocks, 40% bond allocation. And then we have the SGICTA managed futures index. So that's managed futures. And what you're going to see is that during the 2018 Fed tantrum, the S&P was down about 1/5th, over COVID, it was down about a third, over 2022 that inflation wave, it lost a quarter, and then again almost a fifth during the 2025 tariff tantrum. Now, if you take a look at what bonds did, they they lost a little bit less here, 10% versus 22, 21, 10% again, and then managed futures lost even less. But what really sticks out here is this one outlier, this green box where managed futures managed to rise 32.8% during that 2022 inflation wave, which tells me that they have done a better job at hedging risk than bonds did because bonds only added to the losses that stocks had during that 2022 drawdown. And also 2023 was a bad year for bonds as well. So here is a chart that takes the S&P 500 for stocks, in green, we have the Bloomberg Aggregate Bond Index, and then in managed futures, I'm using the SGCTA Index, which is a little bit different than the one I was just showing, but this time series goes all the way back to the beginning of the century. And what I said before, the S&P 500 only turned positive 20 in 2013. And that's because there was a double top created by the dot-com boom and also the global financial crisis high. But then it managed to gain 333% from those lows to this high right here. And then in the meantime, bonds had a more steady incline, and over that period, they've they've eked out about 172%, which is a nice return there. And managed futures, coincidentally, this is pure coincidence, they managed to also return about 170%. But the paths by which bonds got there and managed futures got there were a bit different. Bonds had a more steady incline into about the early pandemic, but then they had a huge decline in that 2022 year that I was talking about. Meanwhile, managed futures tended to go sideways. There's a little bit of an uptick here, but they tended to go sideways to down in the teens. And that's when we had those zero near zero interest rates combined with low growth. Arguably, we have transformed into a new market environment, but I'll get to that in a second because now I want to show you what the allocation looks like if you have just 100% stocks, and that's going to be the S&P 500 in white. So that's basically the same white line as a previous chart. But then in green, we have 60% stocks and 40% bonds, and then in blue, we have 60% stocks and 40% managed futures. And since the total return of both bonds and managed futures was the same amount, well guess what, the allocations for them, the 60-40 either way, is going to also be the same. Uh and if you were to do a 60-20-20 portfolio, it would kind of be in between these green and blue lines, but I didn't want to complicate the situation unnecessarily. We have to move on. I want to show you the a table of all the stats put together, but first, I need to define the Sharpe ratio for you. This is the excess return over the risk-free treasury rate divided by volatility. So this shows you how much reward you can earn per unit of risk. And this is kind of the standard when people talk about volatility adjusted risk. They want to take out that risk-free rate, and let's say the S&P 500 earned a return of 10% this year, and treasury bills are returning 4%. Well, you only give credit for the S&P 500 6%. That's beyond that 4% to reach that 10%. So that's the critical distinction there. Now to break down this chart, S&P 500 by itself got a return of 333%, bonds 172%, coincidentally managed futures right there with it at 173%. Average daily returns are going to be about the same for both managed futures and bonds, and then we look at risk, standard deviation of the of the daily returns. The higher this number, the more the risk, the more volatility you suffer. And so we had 1.23% risk in the S&P 500 or stocks compared with a much lower number for bonds, 0.27, and a lower number for managed futures as well, 0.53, although managed futures managed to be twice that risk of bonds. And now here's the key stat, Sharpe ratio, and I'm going to go over this. We have the S&P 500 with a Sharpe ratio of 0.33, and we want to see this number larger. A larger number is better. Bonds by themselves were 0.65, and managed futures 0.33. So for instance, if you were to compare the S&P 500 and managed futures, you have a much higher return, 333%, with about the same amount of risk. But why would you want to combine them? Because they will do differently. They will perform differently at different parts of the business cycle. And so you want something that's going to buffer those stock losses with hopefully gains. And that's part of what managed futures and bonds are supposed to do, but they don't always do that. Um so here we have instead of each of the markets by themselves, this is my final slide. Uh this is a blended portfolio. So in this column we have S&P 500 versus bonds, that's 60-40. Then we have S&P 500 versus managed futures, 60-40, and then we have S&P bonds and managed futures, that's a 60-20-20 portfolio. And you can see the returns are just about the same for all three of those. Again, that's just a coincidence. Uh the same for the average daily returns, but then when you get into the risk, you're going to see a higher risk, actually, the highest risk for that 60-20-20 portfolio. And if you're looking at the Sharpe ratio, going for the largest number, it happens to be bonds, S&P 500 and bond 60-40 portfolio. Although it's not that much higher than some of the other categories. Excuse me. A lot of talking here. Uh the bottom line is I do believe we're in a different market environment, and as I was saying, managed futures managed to perform admirably well during the downturn of 2022 when we had a lot of risk, but we also had things in commodities that were trending well. And that has to do with the higher inflation environment and also the fact that we have maintained higher growth as opposed to what we were seeing in the teens. So going forward, if we are in a new playbook, you might want to consider some of these alternative investments like managed futures for your portfolio. And tune in to Stocks in Translation, the podcast, for more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance's website or wherever you find your podcasts. Related Videos

04:32

Palantir stock: Why this analyst says it's an AI winner

Yahoo Finance Video • 33 minutes ago 06:14

Homebuilding sector playbook: 4 top stock picks

Yahoo Finance Video • 38 minutes ago 02:44

Why consumer stocks are falling out of favor on Wall Street

Yahoo Finance Video • 44 minutes ago 03:59

Procter & Gamble, Carvana, Boston Beer: Trending Tickers

Yahoo Finance Video • 1 hour ago

View Comments