ALLW Brings Bridgewater’s All Weather Wisdom to ETF Investors
Learn how ALLW applies Bridgewater’s All Weather approach with the goal of compounding capital through various types of economic weather.
Since the beginning of time, weather has served as a metaphor for the unpredictability of life. And, yet, our desire to know what’s coming is insatiable. Billions are spent each year forecasting sunny skies and storms — all so we can be comfortable.
But what if you never had to worry about the weather? Rain for your backyard wedding? No problem, you have a tent and umbrellas. Record high temperatures? Take a dip in your new pool.
Preparing for a wide range of environments — that’s the goal of Bridgewater Associates’ storied All Weather asset allocation strategy and the new SPDR® Bridgewater® All Weather® ETF (ALLW).
Diversify Differently With All Weather
Of course, investors spend more time than anyone stubbornly trying to forecast the future. Thus the well-known investing maxim: “Time in the market, not timing the market, gives investors the best chance of meeting their goals.”
Investors have traditionally pursued their goals by allocating to strategic 60/40 portfolios split between stocks and bonds — hoping that when one zigs, the other zags.
But surprise.
Stock-bond correlations have varied significantly over time (Figure 1), and the 60/40 portfolio may be less diversified than most investors think. In fact, the vast majority — more than 90% — of the 60/40 portfolio’s risk is driven by equities.1 As a result, many portfolios that investors view as diversified are, in fact, highly concentrated — essentially predicting that equities will always be the top-performing asset class across all economic environments.
Bridgewater’s All Weather approach provides a different, time-tested way to build a diversified portfolio, one that you can be comfortable holding for the long haul. That’s because it seeks to diversify across macroeconomic environments and asset classes — helping to create a more balanced ride while you keep your eyes on the horizon.
Introducing the SPDR® Bridgewater® All Weather® ETF (ALLW)
The partnership between State Street Global Advisors, the creator of the first US-listed ETF, and renowned asset manager Bridgewater Associates now provides all investors access to Bridgewater’s flagship All Weather investment approach. The actively managed SPDR® Bridgewater® All Weather® ETF — based on Bridgewater’s All Weather model portfolio and managed by SSGA Funds Management Inc. — is designed to compound capital through various types of economic weather.
Created by Bridgewater in 1996, the All Weather approach has been available to institutional investors since 2003. Today, All Weather leverages 50 years of the firm’s preeminent macroeconomic research and portfolio engineering expertise to balance the portfolio to the most important macro drivers of asset prices — growth and inflation — rather than relying on unstable measurements like correlations for diversification.
Here’s the twist — Bridgewater’s All Weather approach does not predict what economic environment comes next. Instead, using proprietary asset allocation techniques, Bridgewater allocates risk equally to assets that do well in different growth and inflation environments. That way, whatever is ahead, you’re better prepared.
And now, in a single trade, ALLW seeks to deliver this All Weather diversification to a wider investor base, beyond large institutions and ultra-high-net-worth investors.
It’s About Time: The Foundation of the All Weather Approach
The All Weather approach is based on three simple investing concepts: assets go up over time, no single asset stays on top forever, and no one knows what the future has in store:
- Assets go up over time.
Figure 2: Major Asset Classes’ Cumulative Returns Above Cash (1970 to Present)
- No asset class stays on top forever.
Figure 3: Major Asset Classes’ 10-year Rolling Returns Above Cash (1970 to Present)
- The future — and the path to it — is uncertain.
Figure 4: Major Asset Classes’ Rolling 10-year Sharpe Ratio (1970 to Present)
Diversified Based on Reliable Cause-and-effect Relationships
Rather than choose assets based on their performance or correlations over arbitrary time periods, whether it’s one year or 30, Bridgewater allocates assets based on their cause-and-effect relationships to economic environments.
How do asset classes react to changes in growth and inflation? Well, falling growth historically reduces revenue and corporate earnings. Equities don’t generally behave well here, but bonds can benefit. On the other hand, rising inflation can hurt consumer spending and lead to higher interest rates — and so nominal bonds can react poorly in high inflationary periods, as can stocks if high rates restrict growth. Commodities and gold, however, will typically do well during such times.
In short, the different reactions of different assets offers the key to constructing a more reliable portfolio. And by combining assets with opposing relationships to growth and inflation, investors can potentially mitigate portfolio volatility while seeking to capture the risk premiums of assets over the long term.
The bottom line? Relying on asset class sensitivities to different economic environments may provide investors with more reliable tools to construct a truly diversified portfolio.
Figure 5: Rely on Cause-effect Drivers of Assets (1970 to Present)
Balancing Risk to Key Economic Environments
More specifically, ALLW allocates equal risk to four “sub-portfolios” designed to outperform in rising growth, falling growth, rising inflation, and falling inflation environments (Figure 6). Again, the goal is to balance assets with offsetting sensitivities to key economic environments, not to predict which environment is ahead.
Assets are also risk-adjusted and put on a more “level playing field” — using futures or swaps to achieve an asset exposure greater than the cash outlay. By risk-adjusting asset classes, investors can achieve better diversification and more consistent performance without sacrificing return.
All Weather Balances Across Growth and Inflation Environments
Figure 6: ALLW Allocates Equal Risk to Four “Sub-portfolios”
Diversification Matters Even More Today
US equities recently had their best 15-year period since 1970.2 But many of the drivers that have contributed to these outsized gains may not persist. In fact, today’s high valuations, deglobalization, and the end of zero-interest-rate era could create hurdles for the continued outperformance of US equities going forward.
A reliably diversified portfolio can help investors pursue more resilient returns in the wide range of economic environments that could play out in the years ahead.
To that end, ALLW may invest across a range of global asset classes, such as domestic and international equities, nominal and inflation-linked bonds, and commodity exposures.
How to Add ALLW to Your Portfolio
As a strategic allocation, ALLW’s investment characteristics mean it can be used flexibly in portfolios as a source of reliable returns and/or as a diversifier to traditional approaches. And ALLW’s capital efficiency makes a wide variety of assets available in a single ETF, including asset classes that are currently underrepresented in most portfolios.
Funding ALLW from lower-risk asset classes like bonds may potentially enhance portfolio returns. And funding ALLW from higher-risk asset classes like equities may help reduce risk without sacrificing returns.
Either way, ALLW puts time to work for you. Rather than view time as a force to outwit as you try to forecast what comes next, ALLW makes time your companion. Of course, there will be periods of time (typically short-lived) when “cash is king” and asset portfolios, including ALLW, will underperform. But at least you can relax knowing that your growth and inflation biases are covered. That way it’s easier to ignore short-term noise and stay focused on the long term.
As the economic growth and inflation winds change, take comfort in the fact that ALLW is built to be as steady as possible no matter how quick or severe the shifts. By allocating risk equally to different growth and inflation environments, ALLW is designed to smooth out volatility driven by growth or inflation surprises and let time do what it does best — reward the patience and discipline of a long-term investor with reliable returns.
ALLW
Let Us Do the Work for You
Let Us Do the Work for You
Get All Weather diversification in a single trade with SPDR® Bridgewater® All Weather® ETF (ALLW).