What Portfolio Analysis Reveals About Investor Behavior

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.

4. Home Bias Ruled Across Asset Classes

Investors increased their average overweight in US equities by 3.84% to 9.27% in 2022. At the same time, they intensified their emerging market and developed market underweights from 2021.

Active fixed income allocations also show a home bias. Investors allocated to tax-exempt sectors, increasing their active weights by 8.83% and decreasing average weights in sovereign debt by 2.05%.

Our Take

Overall, clients increased their active allocation versus the strategic benchmark in 2022 — and showed a strengthening home bias toward domestic equities. Investors likely sought to take advantage of the strengthening US dollar market. However, we believe they may have missed out on potential value in non-US equities.

5. Investors Favored Ultra-Short-Term Bonds

Within fixed income, investors took active allocations to the extreme from 2021 to 2022. To avoid negative duration effects amid rising interest rates, investors increased their allocation to ultra-short duration investments from 7.70% to 20.00%. The largest underweight was in the middle of the curve, 5-7 years of duration. Overall, investors underweighted all duration buckets over one year.

Our Take

The short end of the yield curve is the most sensitive to monetary policy actions. As a result, in 2022 investors optimized their portfolio allocations to increased yield with limited interest rate risk.

6. Investors Added Credit Risk

Investors allocated an additional 4.04% and 2.11% to corporate high yield and term loans, respectively. They also decreased US Treasurys by 4.45% and pass-throughs by 5.58%.

Investors focused on the top of the high yield spectrum, such as BB and B, from a credit rating perspective. They increased their underweights to US Treasury and agency securities by around 15%.

Our Take

Increased allocations to high yield indicate risk-on behavior, despite the upward interest rate trajectory. Hawkish monetary policy and recession fears caused credit risks to steadily increase. This likely led investors to invest in a part of the market that had been previously neglected.

How to Tackle the Challenges Ahead

After years of near-zero interest rates, investors were thrust into a new era of tightening monetary policy. Suddenly, portfolio construction became more complicated. That’s where we believe portfolio analysis can help.

The SPDR Americas Research Team's Portfolio Insights Analysis can help guide smart allocation decisions and reduce the risk of making unintended investments, even in a difficult market.

To learn more about Portfolio Insights Analysis, please reach out to your SPDR representative. Or visit Market Trends for our latest insights, ETF flows data, Chart Pack, and more.