Does investor behavior change when markets get more volatile?
We analyzed over 450 client portfolios to gain insight into how investors behave and adjust their portfolios in challenging markets. We compared 2021 and 2022 portfolio allocations to their strategic benchmarks using our Portfolio Insights Analysis.
This analysis by the SPDR Americas Research Team evaluates the asset classes, security types, sectors, and duration of a portfolio — to reveal a portfolio’s exposures and any potential risks that may have been overlooked.
So, how did clients adjust allocations as volatility increased? Six clear trends emerged.
1. Exchange Traded Funds (ETFs) Remained the Top Choice
In 2021 and 2022, clients kept their largest allocation in ETFs. On average, ETFs comprised 72.83% of portfolios in 2021 and 62.28% in 2022.
Our Take
ETFs were the predominant investment vehicle for our clients’ portfolios in 2021 and 2022. This is likely because they offer increased diversification and transparency, lower costs, added liquidity, and greater trading flexibility.
In 2022, investors also increased allocations to stocks, REITs, and ADRs as well as to open-ended funds for active management, fixed income, and alternative allocations.
2. Fixed Income Allocations Declined
It’s no surprise that fixed income fell out of favor in 2022. The Federal Reserve raised the fed funds rate from a near-zero level to 4.375%. This tightening cycle had a negative effect on most fixed income investments, because of the inverse price-to-interest rate relationship.
In response, clients adjusted their allocations by:
- Deepening active fixed income by -3.42%.
- Increasing equity exposures to a -0.42% underweight (from -1.26%).
- Increasing average active weight in cash, cash equivalents, commodities, and alternatives to an overweight of 3.84%.
Our Take
In response to hawkish monetary policy, investors cut their fixed income allocations to limit the negative price impact (duration effect). At the same time, they searched for safe-havens like cash, T-bills, alternatives, and commodities (gold). Given the 2022 twin bear market, with both stocks and bonds underwater, investors turned their attention to alternative investments.
3. Equity Positioning Got Defensive
2022 was an equally unpleasant year for stocks, as increasing interest rates impacted the cost of capital and equity valuations.
Investors increased their investments in defensive sectors. Utilities saw the largest year-on-year increase, rising from a 0.64% underweight to a 1.05% overweight. Investors also increased their allocations to Industrials by 1.01% and Financials by 0.67%. Consumer Discretionary remained investors’ strongest allocation, with a 1.21% overweight in 2021 and 1.50% in 2022.
Investors were consistent with their underweights year-on-year, underweighting Energy by 1.88% and Telecoms by -1.43% in 2022. Tech went from a 0.29% overweight in 2021 to a 0.67% underweight in 2022.
Our Take
Investors made tactical allocations to capture market trends, guided by sectors’ cyclicality and dispersion of returns. With a wide array of factors moving markets, sector positioning in 2022 reflected multiple catalysts. Investors overweighted Utilities due to their defensive nature, as well as Industrials due to global supply chain easing. At the same time, intensifying geopolitical tensions increased the demand for Aerospace & Defense (Industrials subset).
We believe the Energy sector’s underweight was due to profit-taking after a long period of rising oil prices. Our view is that cyclicals’ underweight is a result of increasing cost of capital and decreasing growth prospects.
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Originally Posted June 22, 2023 – What Portfolio Analysis Reveals About Investor Behavior
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Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Diversification does not ensure a profit or guarantee against loss.
There can be no assurance that a liquid market will be maintained for ETF shares.
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ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
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