For decades, the 60/40 portfolio (60% equities and 40% bonds) served as the foundation of investing. But in today’s market, that framework is increasingly being challenged.

“The 60/40 is designed to counterbalance during times of crisis and volatility,” said Christian Magoon, Founder and CEO of Amplify ETFs, in a recent interview on The ETF Show. But in 2022, he noted, “both went down”.

Investors and advisors have been forced to rethink not just the role of bonds, but the structure of portfolios more broadly. The question isn’t whether to move beyond the 60/40, but rather, what comes next.

For Magoon, it’s time to rethink the “40” in the equation. 

Instead of relying solely on traditional fixed income, he pointed to hybrid strategies that blend bonds with alternative income sources as a better option. One example he noted is combining Treasury exposure with options strategies to enhance yield. By layering option income on top of bond holdings, investors can potentially generate significantly higher income, creating a larger cushion against volatility.

That shift reflects a broader trend: alternatives are increasingly being used to fill the gaps left by traditional asset classes.

But not all alternatives are created equal.

Magoon noted that while the ETF wrapper offers clear advantages for alternative strategies due to its transparency, tax efficiency, and liquidity, investors need to be mindful of what sits underneath the hood.

“The issue is the liquidity of the underlying asset,” he said.

Magoon cautioned against less liquid exposures, particularly in areas like private credit. With ETFs offering daily liquidity, there can be a mismatch if the underlying assets are harder to trade, especially during periods of market stress.

At the same time, not all alternatives are about replacing bonds. Many are designed to take advantage of the current market environment.

Magoon highlighted that volatility can actually be an opportunity in certain strategies.

“Option-based strategies are one of the few areas that actually benefit from volatility,” he said, explaining that higher volatility can lead to increased income generation through options. That dynamic has led to a rise in “yield plus growth” approaches, where investors seek both income and capital appreciation, rather than maximizing yield at the expense of long-term returns.

That approach is also changing how investors think about newer asset classes like crypto.

Rather than treating crypto as a purely speculative allocation, Magoon said some investors are increasingly looking at ways to incorporate it more conservatively, like pairing crypto exposure with option income strategies to help reduce volatility and generate cash flow.

On the equity side, the shift beyond 60/40 is also driving a rethinking of traditional market exposure.

With concentration risk in the S&P 500 still a concern, Magoon emphasized the importance of diversifying beyond mega-cap tech, particularly within themes like artificial intelligence. One approach is equal-weighting exposures across the broader AI ecosystem, rather than just concentrating heavily in a handful of large-cap names.

More broadly, thematic investing continues to evolve, with investors balancing long-term structural trends such as AI, cybersecurity, and digital payments, against shorter-term, more tactical opportunities driven by market events.

The result is not a single replacement for 60/40, but a more dynamic, flexible approach to portfolio construction.

As Magoon put it, “you have to rethink what comprises the 60/40.”

Source: The ETF Show - Rethinking the 60/40 with Alternatives, Thematics