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Defense Beyond Bonds: Defensive Strategy Indices How do defensive strategy indices compare to a traditional 60/40 mix on a risk/return basis?
BY Fei Mei Chan

EXECUTIVE SUMMARY


• The S&P 500® was up more than 20% in 2017 and entered the 10th year of a bull market cycle in 2018. Since bottoming in 2009 after the global financial crisis, the index has gained more than 300%. Risk mitigation might understandably be at the forefront of investors’ awareness, as worries of froth and volatility grow increasingly prominent.


• Bonds have been the conventionally-favored tool for portfolio risk reduction. But bonds have enjoyed a secular bull market since the 1980s and, with interest rates still near record lows, they may be a less appealing asset class now than they have been historically.


• We explore ways of utilizing defensive strategy indices in order to improve the risk/return profile of a traditional 60/40 equity/bond allocation mix.


• Defense need not be limited to long equity strategies. By combining long and short positions in certain factor indices, the result could look strikingly similar to a defensive strategy like low volatility—and offer the same benefits.

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