US stocks: Wall Street investors with diversified bets are winning at last

It’s a backdrop Wall Street’s diversification-minded pros are ready to celebrate.

In the grip of the tariff war, epic rotations out of American equities have become a regular feature of markets. A Treasury index has climbed almost 3% this year, while gold and corporate debt are among other assets that sit atop of the leader-board. The reshaping of the trading landscape represents a long-awaited reversion to normalcy for purveyors of diversification strategies.

Coss-asset products premised on spreading out risks have been pitched by some of the industry’s brightest minds — only to see them crushed almost nonstop since the financial crisis by the spirited advance in US shares.

Now the S&P 500 remains stuck in a correction, ending another nervous week 0.5% higher. And all manner of long-dormant investment vehicles are shining again in the glare of Donald Trump’s trade war, from leveraged quant portfolios to options-hedged products. An exchange-traded fund (ticker RPAR) that spreads bets among asset classes, including commodities and bonds, has surged more than 5% to start the year, roughly 9 percentage points better than the S&P 500.

It’s much-anticipated break for the likes of Meb Faber and other advocates of time-honored advice harking back to King Solomon during Biblical times: Diversify, or get hurt when trouble strikes. “It feels a long time coming,” Faber, the founder of Cambria Funds, said in an interview. “Does three months make a trend? We’ll see. But these sort of secular trends don’t necessarily last just a quarter.”

Bloomberg

Before 2025, one of Faber’s models, a portfolio that spreads money across major assets, had trailed the US large-cap index in 14 out of 16 years, a stretch without precedent over the last century, and one he had labeled the “bear market in diversification.” Now, his global asset-allocation ETF (GAA) is up 3% this year, poised for the best return relative to the S&P 500 since its inception.

Whether this trend will stick is hard to tell. US stocks have trailed the global portfolio in Cambria’s model twice since the global financial crisis, in 2011 and 2022, only to rebound amid improving economic sentiment. Yet, years of stock gains have already pushed American households’ holdings in the asset class to a record high, relative to their overall financial exposures. That suggests Americans are generally all-in on stocks, lowering the bar for spreading their bets elsewhere. At the same time, the ETF revolution is offering alternative trades on the cheap, giving diversification proponents fresh avenues to sell products.

Bloomberg

Price action over the last few months has exemplified the dynamic, with once-forgotten assets rallying. After four years of losses, long-dated Treasuries are storming back on haven demand and signs of cooling US growth. The iShares 20+ Year Treasury Bond ETF (TLT) has crushed its equity counterpart for seven out of the past eight weeks, something that hasn’t happened since 2014.

Thanks to the buoyancy in fixed income, a trade that allocates 60% to stocks and 40% to bonds is providing protection of late. A Bloomberg model of so-called 60/40 strategy has outperformed the S&P 500 this year. Meanwhile, the most famous haven of them all — gold — reached a record, extending a stretch of advances that has lasted in all but one week this year, and just drove a commodity index to its largest weekly gain in two months.

More complex trades are also working, such as quant strategies that pick stocks based on characteristics like value or momentum. Alongside a swift correction in the S&P 500, the Bloomberg GSAM US Equity Multi Factor Index has climbed in three of the last four weeks, extending its year-to-date return to 2.5%. And those using options to generate income or provide protection are also faring better than a plain buy-and-hold trade in the S&P 500 this year.

“Diversification has delivered its promised benefit during this period of turmoil,” said Mayukh Poddar, senior portfolio manager at Altfest Personal Wealth Management.

Bloomberg

There are signs that big money is fleeing US equities in search of better returns elsewhere. Money managers slashed their allocation to American stocks at a record pace this month, while raising exposure to Europe and emerging markets, according to Bank of America Corp.’s latest survey.

Yet for small-fry investors, buying the stock dip — especially in technology — is proving a habit hard to break, according to Wall Street data.

“Many people, particularly in the last three or four years, buy it every time it goes down and immediately get gratification,” said John Flahive, head of fixed income at BNY Wealth. “You need to have a market environment or a landscape that you actually have equity prices that don’t bounce immediately back to change the psychology.”

With US equity valuations stretched, tech concentration persisting and the growth outlook turning murky, it’s prudent to consider a wide range of strategies, including those that make both bullish and bearish equity wagers, according to Pete Hecht, head of the North America portfolio solutions group at AQR Capital Management.

AQR is among a growing number of Wall Street firms that have been pushing for a leveraged investment approach called portable alpha to help investors diversify portfolios across assets. The strategy uses derivatives to track returns of long-only indexes and then invests the excess cash in trades championed by hedge funds, including trend following or market-neutral equity strategies.

Among six ETFs deploying the strategy, half have delivered positive returns this year.

“I would say investors need to lean on diversification even more than normal,” Hecht said. “I wish I had a crystal ball, because if I did, I wouldn’t hold a diversified portfolio. I would only hold the best performing market. But in reality it’s really hard to time markets.”