Why the 60/40 Portfolio Needs a New Playbook

• The 60/40 portfolio struggles when inflation is high and stocks and bonds fall at the same time.
• Managed futures can diversify a portfolio by performing well when both stocks and bonds decline.
• Options income ETFs can boost yield for clients who need cash flow, from retirees to younger investors.

That balance is now under strain. Persistent inflation, geopolitical shocks, and a growing need for income have exposed the limits of the traditional model in ways that don’t look temporary.

Two recent interviews shed light on what advisors can do about it. David Aspell and Gerald Prior of Mount Lucas Management make the case that most portfolios are diversifying with the wrong tools. Meanwhile, Mike Khouw, chief strategist at YieldMax ETFs, argues that the income side of the portfolio needs a fundamental rethink as well.

Their approaches differ, but they are working on the same core problem.

One of the central arguments from Mount Lucas is that many advisors are reaching for diversification and getting something else entirely.

David Aspell, chief investment officer of global macro and managing partner at Mount Lucas Management, said private equity and private credit are not the genuine diversifiers they’re often presented as. “It used to be that illiquidity was a bug and now it’s being repackaged as a feature.” Because these funds typically update their valuations only once a year, losses can build undetected until it’s too late to rebalance.

He went further, arguing that a portfolio built as 60% stocks, 20% private equity, and 20% bonds is really an 80/20 split. “That’s not super helpful,” Aspell said. “All that’s happening is that the 20 going from bonds into alternatives is going into private equity, and they’re giving you an expensive version of the 60 you’ve already got.”

The structural problem runs deeper than illiquidity, Aspell argued. “The 60/40 traditional portfolio relies on that negative correlation of stocks and bonds and it relies on a low inflation world to work.”

That relationship held for roughly four decades. It broke down in 2022, when stocks and bonds fell together, and the current environment of sticky inflation and geopolitical uncertainty is unlikely to restore it.

See more: Fed Rate Hike Fears: Rippling Through ETF Flows

Those vulnerabilities point to a gap that Gerald Prior, chief investment officer of managed futures and chief operating officer at Mount Lucas, said most portfolios aren’t filling. The liquidity trap inside private equity becomes most damaging precisely when advisors need to rebalance. “People get stuck selling what they can versus what they want to.”

In a downturn, that means selling public equities at the worst possible moment instead of buying into them.

Prior’s argument for managed futures rests on a genuinely different source of return. “Equity markets hate when correlations go to one. That’s their weakness and that’s our strength.”

When inflation or geopolitical shocks drive stocks and bonds lower together, managed futures can go long or short across commodity, currency, and bond futures markets, capturing price trends in either direction. Prior noted the strategy performed well in a deflationary 2008, when it was able to go short on commodities and long on bonds. It did well again in 2022, when those conditions reversed as inflation drove commodity prices higher while bond prices fell.

Mount Lucas packages that strategy for advisors through the KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM C). The fund carries a 0.90% expense ratio and holds about $330 million in assets, according to ETF Database. It has returned more than 15% year-to-date, with about $128 million in net inflows over the same period. Its underlying benchmark dates to 1988.

Aspell said that history matters. “What we’ve been doing for 40 years is running institutional strategies for large-scale pension funds. What’s kind of cool now is we’ve put it into an ETF wrapper. That institutional-grade diversifier is now available for everybody.”

The income side of the portfolio presents a different challenge. Mike Khouw, chief strategist at YieldMax ETFs, said a standard 3% dividend yield fails investors on both ends of the age spectrum. Retirees need cash to live on. Younger investors, meanwhile, see little appeal in a modest annual payout.

“You tell them we have a product handing out distributions of 12% a year or 25% a year,” Khouw said. “Now they’re saying, wait a minute, I am interested.”

YieldMax builds its income funds around an options strategy layered on top of existing equity holdings. Khouw described the mechanics as selling call spreads against those holdings to generate income above what dividends provide on their own.

That strategy takes shape in the YieldMax U.S. Stocks Target Double Distribution ETF (DDDD), which launched in March 2026 and targets approximately double the annualized distribution yield of the Schwab U.S. Dividend Equity ETF (SCHD B+), according to ETF Database. Khouw said the goal is around 75 basis points per quarter in net options income on top of the underlying dividends. Ideally, that brings total yield to roughly 6% to 7%.

For advisors building that income sleeve, Khouw pointed to the DDDD basket as a potential starting point. DDDD draws its holdings from the Dow Jones U.S. Dividend 100 Index, a group of energy companies, consumer staples, and legacy industrial names that many investors might overlook in favor of faster-moving stocks.

That index returned nearly 16% year-to-date through early May, compared to roughly 7.5% for the S&P 500 over the same period. It trades at about 14.6 times forward earnings, well below the S&P 500’s roughly 22 times, Khouw said.

“These are reasonably valued companies,” Khouw said. “They’re not going anywhere, they pay good dividends, and you’re getting a little supplemental options income boost.”

Originally published on Advisor Perspectives

For more news, information, and strategy, visit ETFdb.