For many years, stock pickers have aimed to surpass market performance, but most often, they fall short. Over a decade, between 80%-90% of U.S. large-cap mutual funds underperform against the S&P 500, after accounting for fees. However, generating 'alpha'—exceeding a benchmark index—can be achieved at a broader portfolio level using a variety of strategies involving assets ranging from cash to bonds and commodities. This is a focal point for asset management firms such as Pimco and State Street Investment Management, who recently joined CNBC's 'ETF Edge' to discuss avenues for achieving differentiated returns beyond the U.S. large-cap stock market.
These managers aren't predicting poor performance for the U.S. stock market, but recognize the potential for significant market volatility due to geopolitical tensions, macroeconomic uncertainties, and divergent global central bank policies. Classic diversification advice and strategic adjustments can potentially enhance 2026 returns.
Matthew Bartolini, State Street Investment Management's global head of research strategists, highlighted that 2025 marked the first year since 2019 where stocks, bonds, gold, and commodities all outpaced cash. 'This is where the concept of craftsmanship alpha or portfolio construction alpha originates, not merely beating an index,' he remarked.
Start with Cash Management
Investors should initially evaluate their cash management. With substantial funds in cash-equivalent accounts, even minor deviations from cash are considered alpha, according to Bartolini.
'Effectively managing cash is the fundamental step,' stated Jerome Schneider, Pimco's head of short-term portfolio management. He emphasized that enhanced cash accounts could yield 1%-2% more than traditional cash accounts.
Prioritize Bonds Over Stocks
Investors should contemplate seeking additional returns through bonds without attempting to outpace the S&P 500, as per Schneider. Pimco's recently launched PIMCO US Stocks PLUS Active Bond ETF (SPLS) exemplifies this strategy, combining passive exposure to the S&P 500 with active fixed-income strategies.
Despite signs of uneven economic performance across U.S. households and sectors, Pimco anticipates robust economic growth in 2026. Schneider stressed the significance of exploring opportunities beyond U.S. markets, noting diverging monetary policies in countries like Canada, Japan, Australia, and the U.K. '[We] are witnessing divergent monetary policies for the first time in nearly a financial generation,' Schneider stated.
Investors should adopt a broad perspective on fixed-income exposure, considering securitized assets like agency mortgages, not just corporate credit nearing the cycle's end. Schneider urged caution against passive benchmarks that could restrict flexibility amidst high valuation and geopolitical concerns. While active fixed-income funds have shown better long-term performance compared to equity funds, the S&P Global SPIVA scorecard reports a varied track record for bond funds.
Refine S&P 500 Exposure and Risk
Bartolini suggested that enhancing traditional portfolio design doesn't necessitate abandoning the U.S. market. This was a hot topic this week amid concerns over a 'sell America' trade due to uncertainties linked with President Trump's foreign policy.
Instead, Bartolini recommended considering additional asset classes to mitigate U.S. market risks. In line with this, State Street offers the SPDR Bridgewater All Weather ETF (ALLW), launched last year in collaboration with Bridgewater Associates. The ETF embodies this diversified strategy, investing across global equities, bonds, inflation-linked bonds, and commodities.