For many decades, the classic portfolio of 60% stocks and 40% bonds, referred to as the “60/40,” delivered an excellent blend of risk and return. The stock allocation drove strong returns during bull markets, while the bond allocation provided steady income and capital preservation during recessions.
The popularity of the 60/40 asset allocation led to the rise of numerous “balanced” funds, both mutual funds or exchange-traded funds, or ETFs, that utilized this strategy.
“A balanced fund is a diversified investment fund that provides a combination of growth and income by investing across a mix of stocks, bonds and other securities,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “It ‘balances’ the potential for higher returns and higher volatility associated with stocks with the relative stability and income potential of bonds.”
The main appeal of a balanced fund lies in its relative simplicity and accessibility for investors.
“Balanced funds offer the investment equivalent of a one-stop shop,” says Andrew Latham, director of content at financial comparison and education site Supermoney.com. “They’re typically well diversified, which can reduce risk, and they’re managed by professionals.”
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For investors looking to stay hands off, balanced funds are an ideal investment.
However, a unique combination of economic conditions that occurred in 2022 had many experts speculating that the 60/40 portfolio was “dead” amid one of the worst years in terms of performance for many balanced funds. As inflation and interest rates egged each other on to historical highs, stocks and bonds fell in tandem, leaving balanced funds with unexpectedly severe losses.
“While diversification between stocks and bonds can reduce risk, it doesn’t guarantee a profit or protect against loss,” Latham says. “Plus, the ‘one-size-fits-all’ nature of balanced funds means they may not be perfectly tailored to every investor’s individual needs or risk tolerance.”
That being said, 2022 was merely one bad year out of a long record of success for balanced funds. For instance, Vanguard found that in the 10 years through 2022, a globally diversified 60/40 portfolio still returned an annualized 6.1%, even after accounting for the recent losses.
For many investors with a moderate risk tolerance and time horizon, a balanced fund may still be the Goldilocks option when it comes to investment options. Here’s a look at seven of the best balanced mutual funds and ETFs on the market right now:
| Balanced Fund | Inception Date | Total annualized return since inception |
| Vanguard LifeStrategy Moderate Growth Fund (ticker: VSMGX) | 9/30/1994 | 7.2% |
| Vanguard Balanced Index Fund Admiral Shares (VBIAX) | 11/13/2000 | 6.3% |
| iShares Core Growth Allocation ETF (AOR) | 11/4/2008 | 7.1% |
| iShares Core Moderate Allocation ETF (AOM) | 11/4/2008 | 5.4% |
| Fidelity Freedom Index 2030 Fund Investor Class (FXIFX) | 10/2/2009 | 7.7% |
| WisdomTree U.S. Efficient Core Fund (NTSX) | 8/2/2018 | 8.9% |
| Invesco Balanced Multi-Asset Allocation ETF (PSMB) | 2/23/2017 | 6.3% |
Vanguard LifeStrategy Moderate Growth Fund (VSMGX)
“When choosing a balanced fund be sure to examine your goals, risk tolerance and time horizon, and choose one that is all encompassing, which includes international exposure,” says Lauren Wybar, senior wealth advisor at Vanguard. “Investors can hold hundreds of bonds and stocks in a single balanced fund, allowing you to have more diversification than if you purchased individual securities.”
To put this into play, investors can buy VSMGX, which is one of Vanguard’s LifeStrategy funds. The Vanguard LifeStrategy lineup features various fixed-asset allocation options, with VSMGX representing the 60/40 stock/bond pick. To keep expense ratios low at 0.13%, and portfolio turnover to a minimum, VSMGX only holds passive index-based underlying Vanguard funds for global stock and bond exposure. Its total average annual return, including dividends, since its inception on Sept. 30, 1994, is 7.2%.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
“VBIAX is another way to gain exposure to both stocks and bonds as it tracks two indexes that represent broad barometers for the U.S. equity and taxable-bond markets,” Wybar says. “This fund can be a good option for investors who have a long time horizon, can withstand some market fluctuations, and are looking for growth and some income potential in their portfolio.”
Unlike VSMGX, VBIAX has a U.S.-only focus, tracking the CRSP US Total Market Index and Bloomberg U.S. Aggregate Float Adjusted Index, respectively. The hallmarks of this fund are a long tenure and strong historical performance. Since its inception in November 2000, VBIAX has returned an annualized 6.3%. The fund also costs a low 0.07% expense ratio, or $7 annually for a $10,000 investment. It does require a $3,000 minimum investment.
iShares Core Growth Allocation ETF (AOR)
Investors who prefer the greater flexibility of ETFs compared to mutual funds can find some balanced picks as well. “The convenience of balanced ETFs lies in their ability to be bought and sold on stock exchanges throughout the trading day, which provides better liquidity and ease of access for investors,” says Sean August, CEO at The August Wealth Management Group.
A possible pick here is AOR, which holds numerous underlying iShares index ETFs to create a globally diversified 60/40 portfolio of stocks and bonds. The result is a professionally managed one-ticker portfolio that costs investors a 0.15% expense ratio to access. “Professional management ensures that the ETF’s portfolio is periodically rebalanced to maintain the desired asset allocation,” August says.
[READ: 10 ETFs to Build a Diversified Portfolio.]
iShares Core Moderate Allocation ETF (AOM)
“Balanced funds provide investors with a diversified investment strategy by incorporating a combination of stocks and bonds in varying allocations along a continuum, such as 40/60, 50/50, 60/40 or 70/30,” August says. “When selecting balanced funds and their desired allocation, investors typically consider factors like their risk tolerance, investment objectives and time horizon.”
Investors who find the 60/40 allocation of AOR too risky and equity heavy can opt for its more conservative counterpart, AOM. This ETF uses the same ETF-of-ETFs strategy as AOR, but in a more conservative 40% equity, 60% fixed-income allocation. Otherwise, AOM has the same features, such as global stock and bond diversification along with a 0.15% expense ratio.
Fidelity Freedom Index 2030 Fund Investor Class (FXIFX)
“Target-date balanced funds adjust their asset allocation based on a retirement date,” Schulman says. “They start with a long-term and higher-growth-oriented allocation to equities, and gradually reduce that exposure while increasing their debt and short-term allocation as the target date approaches, aiming for more stability as the investor nears their target date.”
A great example of a globally diversified target-date fund that currently holds a roughly 60/40 stocks-to-bonds allocation is FXIFX. The fund will gradually increase its bond allocation as 2030 draws closer to lower risk and increase income potential. Like many Fidelity funds, FXIFX charges a low expense ratio of 0.12% and features no transaction fees, 12b-1 fees or sales loads.
WisdomTree U.S. Efficient Core Fund (NTSX)
NTSX is a unique balanced fund that employs leverage to provide greater capital efficiency. For every $100 invested in this ETF, $90 is invested in a portfolio of large-cap U.S. stocks. The remaining $10 is held as collateral for futures contracts tracking intermediate-maturity U.S. Treasurys. These futures have embedded leverage that provides a notional exposure of 60% to Treasurys.
The result? A traditional 60/40 portfolio leveraged 1.5 times to 90/60. While investors can hold NTSX on its own as a high-risk, high-reward play, the ETF can be used to allocate to alternatives without sacrificing room. By holding NTSX at 67% in a portfolio, investors gain exposure to the risk and return of a 60/40 allocation while still having another 33% of space leftover to invest in alternatives.
Invesco Balanced Multi-Asset Allocation ETF (PSMB)
Not all balanced funds have to use an indexing approach. While passive indexing tends to lower fees and reduce turnover, it comes at the cost of being unable to outperform the market. For investors looking for a balanced fund that has the chance to outperform, PSMB could be a possible pick. This ETF targets a dynamic asset allocation strategy that can range from 45% to 75% equities and which is globally diversified.
PSMB’s underlying holdings consist of “smart-beta” ETFs that target specific factors that are empirically proven drivers of historical investment returns. This includes growth funds, low-volatility funds and “multifactor” funds that blend factors like quality, momentum, value and size. The ETF also holds Treasurys, variable-rate corporate bonds and municipal bonds. PSMB charges a 0.33% expense ratio.
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7 Best Balanced Funds to Pick Right Now originally appeared on usnews.com
Update 05/25/23: This story was previously published at an earlier date and has been updated with new information.
