Stock pickers have long aimed to outshine the market, yet many still fall short. The performance of large U.S. mutual funds, taking fees into account, significantly lags behind market averages. The S&P 500, for instance, represents a substantial portion—between 80% and 90%—of all funds over a decade. However, there are alternative ways to consider generating so-called alpha, or outperforming a benchmark, through a broader portfolio strategy. This includes diversifying assets, ranging from cash to bonds and commodities. Asset managers like Pimco and State Street Investment Management recently engaged in discussions on CNBC’s “ETF Edge” about seeking returns beyond the U.S. large-cap market.
These financial leaders aren’t disregarding the possibility of continued strong performance in the U.S. stock market. But with current stock market volatility driven by geopolitical tensions, economic uncertainties, and varying interest rates from central banks worldwide, revisiting portfolio diversification and fine-tuning strategies might help achieve slightly better returns in 2026.
Matthew Bartolini from State Street pointed out that 2025 marked a unique year, where stocks, bonds, gold, and commodities all outperformed cash for the first time since 2019. “This notion of craftsmanship alpha and portfolio construction alpha comes into play, as opposed to merely trying to beat index alpha,” he noted.
Let’s Consider Cash
Investors might want to view their cash holdings from a different lens. With substantial assets in cash-equivalent accounts, “it’s advantageous to consider moving away from cash,” Bartolini explained. “Managing your cash is essential,” added Jerome Schneider from Pimco, emphasizing that enhanced cash accounts can yield returns of 1% to 2% higher than standard cash accounts.
Opt for Bonds Instead of Stocks
Schneider suggested that, rather than striving to outperform the S&P 500, investors could explore bonds for added returns. Pimco has introduced ETFs catering to this concept, such as the newly launched PIMCO U.S. Stocks PLUS Active Bond ETF (SPLS), which fuses passive S&P 500 exposure with an active bond approach.
Looking ahead, Schneider anticipates that economic growth will remain robust in 2026, although the U.S. economy exhibits uneven performance across various sectors. He emphasized the necessity of examining markets outside the U.S., pointing out divergent monetary policies in countries like Canada, Japan, Australia, and the UK as potential areas for value. “For the first time in what feels like a financial generation, we have a very divergent monetary policy,” he remarked.
Investors should explore broader fixed income opportunities, such as late-cycle corporate credit and securitized assets like agency mortgages. Schneider cautioned that negative benchmarks might restrict flexibility, especially amid heightened valuations and geopolitical issues. The long-term track record of active bond funds, he noted, often surpasses that of equity funds, though the performance of bond funds can be quite variable across categories.
Reassessing Your S&P 500 Exposure
Bartolini explained that refining traditional portfolio strategies doesn’t necessitate abandoning the U.S. market entirely. This topic has gained traction recently, particularly with discussions around “sell America” trade due to uncertainties regarding President Trump’s foreign policy. However, this might encourage the consideration of additional asset classes to mitigate risks linked to U.S. markets. State Street has facilitated this approach with the SPDR Bridgewater All-Weather ETF (ALLW), launched in collaboration with Bridgewater Associates; this fund invests across global stocks, bonds, inflation-linked bonds, and commodities.
For the last 15 years, investing in U.S. stocks has been a straightforward strategy, he remarked, but he doesn’t foresee a sudden mass sell-off of U.S. assets. “‘Sell’ is just a headline and doesn’t mean it’s an actionable point in portfolio construction,” Bartolini clarified. Still, concentrating 80% on a single country’s stock market runs counter to the principles of diversification.
The focus should be on rotation rather than drastic de-risking, Bartolini stated. Instead of maintaining an 80% allocation in large-cap U.S. stocks, perhaps that could shift to 75% or 70%. He further emphasized that interest in small-cap stocks is likely to resurge in the latter half of 2025, owing to expected monetary policy adjustments and fiscal support. Since mid-2025, small-cap stocks have consistently outperformed large-cap stocks and show promising earnings expectations for 2026. The Russell 2000 Index, while currently trading at record highs and up nearly 9% this year, has outperformed its large-cap counterpart for the past 14 market sessions—marking the longest streak of relative outperformance since May 1996—while large-cap benchmarks have seen a significant doubling in returns over the last six months.
