Stock pickers have long tried to beat the market, but most have failed, with large U.S. mutual funds underperforming the S&P 500 by 80% to 90% of all funds over a 10-year period. But there are ways to think about generating so-called alpha (outperforming a benchmark) at a broader portfolio construction level, using strategies that include assets from cash to bonds to commodities. This approach has become the focus of asset managers from Pimco to State Street Investment Management, who joined CNBC’s “ETF Edge” this week to discuss where they are looking for differentiated returns outside of the U.S. large-cap market.
These executives are not saying that the strong performance of the U.S. stock market won’t continue. But with stock markets volatile due to geopolitical headlines, macro uncertainty, and divergent interest rate policies from central banks around the world, the classic advice of diversifying your portfolio and tweaking your margins could lead to a little more positive returns in 2026.
Matthew Bartolini, global head of research strategist at State Street Investment Management, noted that 2025 was the first year since 2019 in which stocks, bonds, gold and commodities all outperformed cash. “That’s where the idea of craftsmanship alpha and portfolio construction alpha comes from, as opposed to beating index alpha,” he said.
Let’s start with cash
Investors can start thinking about it in relation to their cash.
With large amounts of assets held in cash-equivalent accounts, “even that is a plus to move away from cash,” Bartolini said.
“Managing your cash is the first step,” said Jerome Schneider, head of short-term portfolio management at Pimco, adding that enhanced cash accounts can generate 1% to 2% more returns than traditional cash accounts.
Choose bonds over stocks
Rather than trying to beat the S&P 500, Schneider said investors can also think of this in terms of seeking additional returns from bonds. Pimco offers ETFs that address this idea, recently launching the actively managed PIMCO U.S. Stocks PLUS Active Bond ETF (SPLS), which combines passive exposure to the S&P 500 with an active bond strategy.
Schneider said Pimco expects economic growth to remain healthy in 2026, even though the U.S. economy is showing signs of uneven performance across households and sectors. But he added that it’s important to look beyond the U.S. market, citing different monetary policy paths in countries from Canada to Japan and Australia to the UK as a source of relative value opportunities. ”[We] “For the first time in almost a financial generation, we have a very divergent monetary policy,” Schneider said.
He said investors should consider broader fixed income exposures, including late-cycle corporate credit as well as securitized assets such as agency mortgages. Schneider cautioned that negative benchmarks could limit flexibility at a time when valuations and geopolitical issues are heightened. He pointed to the long-term performance of active bond funds against benchmarks, saying they are much better than equity funds, but according to the S&P Global SPIVA Scorecard, which tracks all funds against benchmarks, bond funds’ performance is mixed and varies widely by category.
Adjust your S&P 500 exposure and risk profile
Bartolini said improving traditional portfolio design does not mean abandoning the U.S. market, a popular topic this week amid concerns about “sell America” trade given the uncertainty surrounding President Trump’s foreign policy.
But that could mean considering additional asset classes to cushion the risks of the U.S. market. State Street supports this idea with the SPDR Bridgewater All-Weather ETF (ALLW), launched last year with hedge fund Bridgewater Associates, which invests in global stocks, bonds, inflation-linked bonds and commodities.
“There are a lot of U.S. stock-heavy or stock-heavy portfolios,” Bartolini said. “We’re also seeing an upward bias in inflation-linked bonds and commodity complexes,” he added.
Bartolini said gold’s returns last year were the best since 1979, with 70% of foreign stocks outperforming the U.S. market. Gold, silver and platinum all hit record highs on Friday. This situation signals a growing “mixing” of assets by investors, who today often have as much as 80% exposure to US stocks. “Clients are structurally underweight in real assets such as gold, commodities and inflation-linked bonds,” he said. “And you don’t have to pick one, but you should own the overall risk premium and move on to those that may be undervalued,” he added.
For the past 15 years, investing in U.S. stocks has been “the easiest trade to win,” he said, adding that he doesn’t think U.S. assets will suddenly be “sold off” in large numbers. “‘Sell’ is a headline, not a passing point in portfolio construction,” Bartolini said. But he added that allocating 80% to one country’s stock market also goes against diversification and balance.
The idea is rotation, rather than massive de-risking, Bartolini said, meaning that instead of having 80% of the portfolio in large-cap U.S. stocks, that ratio would be lowered to 75% or 70%. He also stressed that interest in small-cap stocks will pick up again in the second half of 2025 on expectations for monetary policy easing and fiscal support. Small-cap stocks have outperformed large-cap stocks since mid-2025, and earnings expectations for 2026 have improved. The Russell 2000 index is trading at record highs and is up nearly 9% this year compared to the S&P 500’s nearly flat return. This is because the small-cap index has outperformed the large-cap index for the past 14 consecutive market sessions, making it the longest streak of relative outperformance. Over the past six months, large-cap benchmark returns have doubled.
