ETF asset allocation quilt 2025

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• Reading duration: 3 minutes

ETF sub-asset classes ranked by performance

While it may look like a random pixel-popping puzzle game, our asset allocation quilt has something valuable to say about the fast-changing fortunes of the major asset classes. Every year is a riot of colour as the asset class blocks slide up and down the rankings - with only commodities and gold able to take the top spot for two years in succession. No asset epitomises how wild investing can be more than commodities. The asset class was crowned No.1 three times in the past ten years, only to prop up the table three times too. Gold, meanwhile, has had an amazing decade. It took first place four times, although a table-topping year was often followed by a so-so performance. And that’s the message the chart most vividly reveals in glorious technicolour. Buying into an investment because it had a stunning year is a recipe for disappointment. Because something else usually shines brighter over the next 12-months, while the previous winner falls back into the pack. That’s why savvy investors don’t chase performance. Diversification is the better antidote to fickle fortune.

Down on their luck

Bonds, cash (represented by the money markets), and real estate endured a very tough decade as you can see in the 10-year annualised return column on the right of the chart. Government bonds went nowhere, the money markets suffered seven straight years of negative returns, and real estate was hit hard by Covid in 2020 and the interest rate hikes of 2022. But don’t write off these diversifying asset classes too quickly. For example, government bonds typically fortify your portfolio when fears of economic contraction loom large. But that particular anxiety only gripped the stock market for a prolonged period during 2018 - as you can see from the negative returns scored by equities that year. Under those circumstances, government bonds were one of only two asset classes to register a positive return that year. And that’s their job: to provide a safe haven when economic demand is weak. However, surging inflation and interest rates are a toxic combination for bonds - hence their steep losses in 2022. Commodities and gold are more likely to ride to the rescue in that situation. Indeed, both asset classes came through in 2022, while commodities was a first responder in 2021. (Inflation indices took off from October 2021 but are a lagging indicator. Rising prices typically show up in raw materials earlier, and push commodities higher.) Gold itself is an asset class that tends to cope well during periods of uncertainty, and we’ve had plenty of that recently. What is exceptional is gold beating equities over ten years. That is a rare event. Indeed, the shiny metal suffered a 19-year bear market from 1980 to 1999, so it’s better thought of as a portfolio diversifier than your main growth engine.

Risk awareness

The task for any savvy investor is to devise a portfolio that covers you against different economic conditions. Mostly the global economy keeps on trucking (though fitfully and with many detours), thus equities are the mainstays of our portfolios. Then we look to:

• Government bonds for recessions
• Commodities for high inflation
• Gold for troubled times
• Money market for low volatility and liquidity

The asset allocation quilt shows that every asset worked as intended. While the ten-year returns speak more to the conditions that prevailed during the period.

• The global economy avoided a protracted recession despite enduring a pandemic.
• That was only possible due to unprecedented economic stimulus measures that vastly increased government debt.
• The upshot being that investors now demand much higher interest rates when holding bonds.

Thus equities delivered, bond prices fell, commodities had a moment as inflation soared, and gold assumed more importance in an era marked by turmoil, anxiety, and unpredictability. Nobody knows what the next ten years will bring and that’s why the message of the asset allocation quilt is so important. It tells us to focus less on outright performance and more on being ready for anything.