Skip to Content

section header ETF fundamentals

subsection header Strategies

Asset allocation

Decades of research at Vanguard and elsewhere has shown that asset allocation—how you divide assets across broad asset classes—is the primary driver of a portfolio's risk and return.

One of the most famous of these studies—Determinants of Portfolio Performance (1986) by Brinson, Hood and Beebower—found that asset allocation accounts for 94% of the variation in returns in a portfolio, with market-timing and security selection accounting for only 6% (Figure 1). Vanguard papers by Wallick et al. (2012),Philips et al. (2014), and Scott et al. (2016) supported these findings. The 2016 paper, The global case for strategic asset allocation and an examination of home bias showed that, over time, the asset allocation decision was responsible for between 80% and 91% of the return patterns of balanced funds available to investors in five global markets: the U.S., Canada, U.K., Australia, and Japan.1


Figure 1. Investment outcomes are largely determined by asset allocation

Source: Vanguard illustration, based on data from "Determinants of Portfolio Performance" (1986) by Brinson, Hood and Beebower.


A portfolio composed of broadly diversified ETFs can help ensure that performance and risk exposure are based primarily on your asset allocation decisions. In fact, holding even a small number of broad-market ETFs can provide a convenient and low-cost way to diversify across asset classes for long-term investors (Figure 2).


Figure 2. Investors can diversify across asset classes with a small number of ETFs.

Source: Vanguard. Hypothetical portfolios are shown for illustrative purposes only and shall not be construed as a recommendation to buy or sell any security or financial instrument, or an offer or recommendation to participate in any particular trading or investment strategy.


Over time, the varying returns of different asset classes will cause nearly every asset allocation to change, resulting in a change to the portfolio's risk and return characteristics. That's why we believe periodic portfolio rebalancing is important. ETFs' trading flexibility and ease of access make them ideal tools for rebalancing a portfolio back to its strategic asset allocation.


Points to consider

  • In a diversified portfolio, gains from some investments may help offset losses from others. However, diversification does not ensure a profit or protect against a loss.
  • An all-index portfolio removes the potential for market outperformance that can result from active management or individual security selection.
  • All ETFs are subject to market risk, which may result in the loss of principal. International ETFs involve additional risks, including currency fluctuations and the potential for adverse developments in specific countries or regions. Bond ETFs are subject to interest rate, credit, and inflation risk.


1 Sources: Vanguard calculations, using data from Morningstar, Inc. For each fund in our sample, a calculated adjusted R2 represented the percentage of actual-return variation explained by policy-return variation. The results by country were as follows: 91.1% for the United States, 86.0% for Canada, 80.5% for the United Kingdom, 89.1% for Australia, and 87.9% for Japan. The percentages represent the median observation from the distribution of percentage of return variation explained by asset allocation for balanced funds. For the period January 1990–September 2015, the sample included: for the United States, 709 balanced funds; for Canada, 303; for the United Kingdom, 743; for Australia, 580; and for Japan, 406. Calculations were based on monthly net returns, and policy allocations were derived from a fund’s actual performance compared with a benchmark using returns-based style analysis (as developed by William F. Sharpe) on a 36-month rolling basis. Funds were selected from Morningstar’s Multi-Sector Balanced category. Only funds with at least 48 months of return history were considered in the analysis. The policy portfolio was assumed to have a U.S. expense ratio of 1.5 basis points per month (18 bps annually, or 0.18%) and a non-U.S. expense ratio of 2.0 bps per month (24 bps annually, or 0.24%).




Learn the basics of ETFs, including their history, how they compare to mutual funds, what types are available and more.



Learn about the advantages of indexing, how ETFs are indexed, the differences between excess return and tracking error, and more.



Learn how ETFs trade, where they get liquidity, common order types, how premiums and discounts work and more.

Your use of this site signifies that you accept our terms and conditions of use and privacy policy.

© 2022 VIGM, S.A. DE C.V. Asesor en Inversiones Independiente (“Vanguard Mexico”). All rights reserved.

This website is for institutional and sophisticated investors only. Vanguard Mexico will not have any responsibility for the use given to the information contained in this website.

Vanguard Mexico registration number: 30119-001-(14831)-19/09/2018. The registration of Vanguard Mexico before the Comisión Nacional Bancaria y de Valores (“CNBV”) as an Asesor en Inversiones Independiente is not a certification of Vanguard Mexico’s compliance with regulation applicable to Advisory Investment Services (Servicios de Inversión Asesorados) nor a certification on the accuracy of the information provided herein. The supervision scope of the CNBV is limited to Advisory Investment Services only and not all services provided by Vanguard Mexico.

The content of this website is solely for informational purposes and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, nor shall any such securities be offered or sold to any person, in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. Reliance upon information in this website is at the sole discretion of the recipient.

Securities information provided in this website must be reviewed together with the offering information of each of the securities which may be found on Vanguard’s website: or

Vanguard Mexico may recommend products of The Vanguard Group Inc. and its affiliates, and such affiliates and their clients may maintain positions in the securities recommended by Vanguard Mexico.

The information contained in this website derived from third-party sources is deemed reliable, however Vanguard Mexico and The Vanguard Group Inc. are not responsible and do not guarantee the completeness or accuracy of such information.

You may leave Vanguard South America’s website when you access certain links on this website. In so doing, you may be proceeding to the site of an organization that is not regulated under the Mexican regulation. Vanguard Mexico has not examined any of these websites and does not assume any responsibility for the contents of such websites nor the services, products or items offered through such websites.

The information contained in this website should not be considered as an investment recommendation, a recommendation can only be provided by Vanguard Mexico upon completion of the relevant profiling and legal processes.

This website is for educational purposes only and does not take into consideration your background and specific circumstances nor any other investment profiling circumstances that could be material for taking an investment decision. We recommend getting professional advice based on your individual circumstances before taking an investment decision.

The information contained herein does not constitute an offer or solicitation and may not be treated as such in any jurisdiction where such an offer or solicitation is against the law, or to anyone for whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.