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Redefining Portfolio Resilience Beyond the 60/40 Allocation
The 60/40 stock-bond allocation has long been the foundation of diversified investing but recent years have made it clear that relying on bonds to provide consistent protection may no longer be prudent.
Read MoreThe 60/40 stock-bond allocation has long been the foundation of diversified investing but recent years have made it clear that relying on bonds to provide consistent protection may no longer be prudent. Bond returns are taxed at the highest rates, lack upside and can suffer during both inflationary and disinflationary shocks. Moreover, bond-heavy portfolios leave little room to maneuver when risks rise and they offer limited flexibility in aligning with investor-specific needs.
In response, progressive advisors are turning to more adaptive solutions that combine options-based strategies, data-driven market signals and behavioral finance principles. These modern approaches aim to deliver more consistent outcomes across full market cycles while addressing the shortcomings of conventional fixed income allocations.
Let’s examine how financial professionals can modernize portfolio construction through:
- Options-based strategies for targeted risk and return
- Dynamic exposure management using real-time market signals
- Structurally tax-efficient tools that put more after-tax dollars in investor hands
- Behavioral resilience frameworks to help clients stay committed during volatility
Part 1: Options-Based Strategies – Better Tools, Better Outcomes
Dynamic Risk Management Through Options
Traditional portfolios lean on bonds to manage risk, but bonds come with structural limitations: limited upside, poor tax treatment and unreliable protection in volatile environments. Options-based strategies offer a more precise and flexible toolkit for today’s investor. Some examples include:
Protective Puts and Collars
Buying put options to protect equity exposure allows advisors to set clear downside limits while preserving the opportunity for growth. This may enable an increased equity allocation without exposing portfolios to uncontrolled risk. Collars, which pair put protection with covered calls, create an even more defined range of outcomes. These structures shape both the upside and downside, offering a level of risk control and payouts that bonds cannot replicate.
Income Generation and Enhanced Returns
Options are not just about defense, they can also offer a repeatable source of premium generation. Strategies like covered call writing and cash-secured put selling generate premium income that can cushion drawdowns and may serve as an alternative to bond yield. These strategies have demonstrated the ability to deliver equity-like returns with lower volatility, especially during flat or declining markets. Advanced designs can adapt in real time by adjusting strike levels and expirations based on prevailing volatility.
Integrated Multi-Strategy Solutions
More comprehensive approaches combine multiple elements into unified portfolio solutions. These might include pairing long call options for equity participation with limited downside within your core fixed income to augment the return, while pairing in long puts to increase the downside protection of the bond allocation. Some implementations further enhance diversification by incorporating alternative risk premia such as trend-following strategies or minimum-volatility equity exposure. This results in portfolios designed to produce smoother return patterns through carefully combined, uncorrelated components.
Part 2: Market Signals for Smarter Exposure Management
Volatility as a Strategic Guide
Real-time market signals can be powerful tools for adjusting portfolio risk. The Cboe Volatility Index (The VIX Index), offers insight into investor sentiment and expected volatility. Elevated VIX levels typically signal increased market stress and may warrant greater hedging activity or reduced equity exposure. Conversely, when volatility retreats to more normal levels, portfolios can systematically increase risk exposure.
One application of this thinking is a strategy we refer to as Dynamic PutWriting. This approach evaluates the next-month return potential of the Cboe S&P 500 PutWrite Index (PUT) based on whether the VIX Index at month-end is below 20 ortrending lower versus when it is above 20 and rising. This simple filter has historically improved the consistency of results, suggesting that even basic volatility cues can enhance outcomes.
More sophisticated implementations may further analyze the VIX futures term structure, where conditions like contango or backwardation can provide additional insights about potential tail risks.
Trend Following for Adaptive Defense
Rules-based trend systems offer another powerful tool for dynamic portfolio management. By using objective indicators like moving average crossovers or momentum measures, these systems automatically reduce exposure during deteriorating market conditions and systematically re-engage when trends improve. This approach provides dual benefits: it helps protect capital during downturns while also serving as a risk release valve that may help prevent emotional decision-making.
Importantly, these systems are reactive rather than predictive, adjusting to observable market conditions without requiring forecasts.
Part 3: The Critical Advantage of Tax Efficiency
Options and trend-oriented strategies implemented through ETF structures offer significant tax advantages compared to traditional bond investments. While bond income typically faces ordinary income tax rates, options-based strategies often benefit from deferred taxation and more controllable realization of gains. The structural differences are meaningful: bond funds frequently generate regular income distributions, while options-based ETFs can maintain positions longer to allow investors to realize capital gains more strategically.
Additional tax benefits emerge from the ability to harvest losses across different strategy components and align gain realization with client-specific cash flow needs. Perhaps most importantly, these approaches avoid the "phantom income" problem common in bond funds, where investors may owe taxes on income they don’t actually need.
The chart below highlights the meaningful impact deferring taxes can have on portfolio growth over time.
Part 4: Implementation - Building the Modern Resilient Portfolio
A modern resilient portfolio incorporates several core elements. Equity exposures remain the foundation for long-term growth but are now enhanced with options overlays that provide both downside protection and consistent income. Trend-following components add a layer of dynamic risk management, allowing the portfolio to respond to changing market conditions. Combined with tax-optimized implementation, this framework can improve pre-tax and post-tax returns and investor behavior.
Importantly, this structure reduces reliance on traditional fixed income, while offering the potential for better risk-adjusted performance. The result is not just a portfolio engineered for returns—but one that’s designed to help investors stay disciplined when markets turn volatile.
To illustrate, consider a reimagined allocation that replaces the traditional 60/40 model. Rather than 60% S&P 500 Index and 40% Bloomberg U.S. Aggregate Bond Index, a modern version might include 60% in an S&P 500 trend-following strategy, 20% in a Dynamic PutWriting strategy (which allocates only when the VIX Index is below 20 or trending down), and 20% in a Cboe 95/110 Collar structure (a strategy with returns protected against losses beyond 5% during the quarter, with gains capped above 10%).
Since the inception of the VIX Index in 1993, this revised allocation has delivered similar—or slightly better—returns than a traditional 60/40 portfolio. More importantly, it has done so with improved downside management, enhanced tax efficiency and no reliance on traditional fixed income.
Conclusion: Evolution, Not Revolution
The traditional 60/40 portfolio isn’t being abandoned—it’s being evolved. By integrating options-based tools, data-driven market signals and tax-aware implementation, advisors can create more stable, flexible and behaviorally resilient portfolios. These enhancements preserve long-term growth potential while offering better protection in today’s complex market environment.
To learn more about options-based strategies in ETFs, please visit: https://aptusetfs.com
About the Author
Brian Jacobs, CFA is a Portfolio Manager and Investment Strategist at Aptus Capital Advisors, where he focuses on building options-based models and ETFs that seek to enhance returns, manage downside risk, and maintain tax efficiency. He led the development, and is Portfolio Manager, of the Aptus Large Cap Upside ETF (UPSD) an equity alternative and the Aptus Deferred Income ETF (DEFR) a tax efficient. Prior to Aptus, Brian held senior roles at PIMCO, Mellon Capital, and RS Investments, with experience spanning asset allocation, custom solutions, and strategic product development. He earned the Chartered Financial Analyst (CFA) designation in 2014.
Aptus Capital Advisors manages several options-based ETFs including the Aptus Collared Investment Opportunity ETF (ACIO), Aptus Defined Risk ETF (DRSK), Aptus Large Cap Upside ETF (UPSD), Aptus Large Cap Enhanced Yield ETF (DUBS), and Aptus Enhanced Yield ETF (JUCY), among others.
This content is intended for educational purposes only and should not be construed as investment advice or an offer to buy or sell any securities. For more information on the strategies mentioned, please refer to each fund’s summary prospectus.