From January 2022 to 1222, the Vanguard Balanced ETF Portfolio (VBAL) has a 60/40 mixture, losing 15.04%, which is almost down 16.88% compared to the 100% Vanguard All-Equity Al-Equity ETF ETF Portfolio (VEQT). The problem is not stocks; investors should expect them to follow. That’s the bond.
As interest rates soar to combat inflation, VBAL’s bond component was severely hit. Its intermediate duration is higher than average (measured interest rate sensitivity), which means that the holding rate of the shorter term bond is more obvious. This caught many conservative investors off guard, especially those who think that fixed income will provide ballasts during economic downturns.
In response, many portfolio strategists began to propose a new model: 40/30/30. That’s 40% stock, 30% bonds and 30% alternatives.
While institutions and consultants can use complex private alternatives to do this work, the question is whether Canadian retail investors can replicate similar structures using publicly listed ETFs. This is my opinion, some suggested ETFs have gained exposure to alternative spaces.
What is a 40/30/30 portfolio?
The 40/30/30 portfolio is a conceptual framework that modifys traditional balanced portfolios by engraving spaces for alternative assets. The idea is to introduce a third asset class that is different from the other two.
During the 2022 period, traditional diversification strategies failed due to inflation and rising interest rates, and stocks and bonds fell together. The additional alternative sleeve is designed to maintain capital while connecting the other two pillars of the portfolio to move in series.
This is not all prescriptions for a certain size. 30% of the allocated to alternatives may vary greatly depending on the portfolio manager’s preferences. In implementations by most agencies and consultant leaders, this section may include:
- Hedge Fund Strategy For example, long-term equity, custodial futures, long volatility and market neutral methods that rely on quantitative models and multi-asset exposure to produce absolute returns.
- Digital storage of hard assets or value Like gold, cryptocurrencies like commodities or Bitcoin, are often used as static allocations to offset traditional financial asset fluctuations.
- Private market investment For example, private equity, private credit and direct real estate holdings provide long-term return potential in exchange for liquidity risks and limited pricing transparency.
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Is the 40/30/30 portfolio effective?
It is difficult to conclude because two factors limit the usefulness of most data used to support the 40/30/30 paper.
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First is survival bias. It’s easy to look back and identify strategies that provide low correlation and stable returns, but it’s after the fact. When it matters most, investors may not necessarily master these funds or beliefs. Danger is a success story of choosing cherries, which was not widely known or available at the time.
Second, the results are highly dependent on the time period. The performance of any diversification strategy can be meaningfully varied based on the starting point and end date. Several years or bad years of alternatives can be a huge bias towards the overall return and risk profile of the portfolio.
That is, there is a relatively strong benchmark and twenty years of data that helps evaluate the feasibility of the concept: MLM indexing. The benchmark tracks strategies for systemic trend ranges in 11 commodities, 6 currencies and 5 global bond futures markets. It weights each category based on historical volatility and equalizes a single contract within each basket. Although not the perfect proxy for all alternatives, it provides rare long-term, transparent and rule-based data in a space that often lacks both.
Using data from November 12, 2001 to August 19, 2025, the 40/30/30 portfolio established by the S&P 500, Bloomberg, the U.S. Total Bond Index and the KFA MLM Index (Rebalanced Quarter) was not mixed with a traditional 60/40 on total return and was 7.46% at a CAGR of 6.89%. However, it significantly outperforms performance on the basis of risk adjustment, with a sharp ratio of 0.71 to 0.56.
More importantly, there are diversified benefits when it is important. The 40/30/30 portfolio shows better downside protection amid key stressful events such as the bursting of the Internet bubble, the 2008 financial crisis, the 2020 Covid-19 collapse and the 2022 bear market.
Investors can access the KFA MLM index through US listed ETFs: Kraneshares Mount Lucas Custody Futures Index Strategy ETF (KMLM). It tracks benchmarks directly and provides risks to forward-looking strategies across trends across commodities, currencies and fixed income.
capture? As KMLM is listed, Canadians face some obstacles: currency conversion, a high 0.90% administrative expense ratio and a 15% foreign withholding tax unless held in a registered retirement savings plan (RRSP).
