Stock pickers have long sought to beat the market, and most continue to fail, with the rate of underperformance of U.S. large-cap mutual funds, after fees, against the S&P 500 between 80%-90% of all funds over a decade. But there are ways to think about generating what is known as alpha — outperformance of a benchmark — at a broader portfolio construction level, using strategies that involve assets from cash to bonds to commodities. This approach is a focus for asset management firms from Pimco to State Street Investment Management, both of whom joined this week’s CNBC “ETF Edge” to discuss where they are looking for differentiated returns outside the U.S. large-cap stock market.
These managers are not saying that the U.S. stock market won’t continue to do well. But amid big swings in equity markets on geopolitical headlines, macro uncertainty, and central bank interest rate policies around the world that are diverging, the classic advice to seek diversification in a portfolio and make tweaks on the margins may lead to a little extra juice in 2026 returns.
Matthew Bartolini, State Street Investment Management’s global head of research strategists, noted that 2025 was the first year since 2019 that stocks, bonds, gold and commodities all outperformed cash. “That’s where the idea of craftsmanship alpha or portfolio construction alpha can come from, not beating an index alpha,” he said.
Start with your cash
Investors can start thinking about that in the context of their cash.
With a huge amount of assets being held in cash-equivalent accounts, “even that is alpha from departing from that cash,” Bartolini said.
“To manage cash is the first step,” said Jerome Schneider, Pimco’s head of short-term portfolio management, adding that enhanced cash accounts can generate 1%-2% more than a traditional cash account.
Pick bonds, not stocks
Investors can also think about it in terms of looking for extra return from bonds while not attempting to beat the S&P 500, according to Schneider. Pimco offers an ETF corresponding to this idea, recently launching the actively managed PIMCO US Stocks PLUS Active Bond ETF (SPLS) that combines passive exposure to the S&P 500 with active fixed income strategies.
Schneider said Pimco expects economic growth to remain healthy in 2026, even as the U.S. economy shows signs of uneven performance across households and sectors. But he added it is important to look beyond U.S. markets, and cited the divergent monetary policy paths across countries, from Canada to Japan and Australia to the United Kingdom, as a source of relative-value opportunities. “[We] have monetary policies that are very divergent for the first time in almost a financial generation,” Schneider said.
He said investors should also think broadly about fixed-income exposure, including securitized assets such as agency mortgages, rather than just corporate credit late in the cycle. Schneider cautioned passive benchmarks could limit flexibility at a time when valuation and geopolitical issues are at a high. He pointed to longer-term performance of active fixed-income funds versus benchmarks that he says has been much better than equity funds, but according to the S&P Global SPIVA scorecard, which tracks all funds against their benchmarks, bond funds’ track record is mixed and varies greatly category by category.
Tweak S&P 500 exposure and risk profile
Bartolini said improving on traditional portfolio design doesn’t mean abandoning the U.S. market, which was a popular topic this week amid fears of a “sell America” trade based on the uncertainty associated with President Trump’s foreign policy.
But it can mean looking at additional asset classes to buffer U.S. market risks. State Street does offer the SPDR Bridgewater All Weather ETF (ALLW), which it launched last year in conjunction with hedge fund Bridgewater Associates, which corresponds to this idea, investing across global equities, bonds, inflation-linked bonds and commodities.
“We see so many portfolios that are U.S.-equity dominant or equity dominant,” Bartolini said. “You do see an upward bias relative to inflation-linked bonds, and into commodity complex as well,” he added.
Gold had its best return since 1979 last year, according to Bartolini, while 70% of international stocks beat the U.S. market. Gold, silver and platinum all hit record highs on Friday. The situation argues for greater “blending” of assets by investors who today in many cases have as much as 80% exposure to U.S. equities. “Clients are structurally underweight real assets, whether gold, commodities, or inflation-linked bonds,” he said. “And you don’t have to pick one, but own the risk premium across all, move towards the ones maybe underrepresented,” he added.
Over the last 15 years, he said, investing in U.S. stocks is “the winningest trade you could have,” and he does not believe there will suddenly be some mass “sell” on U.S. assets. “‘Sell’ is a headline, not a through line for portfolio construction,” Bartolini said. But he added that an 80% allocation to one country’s stock market also runs counter to diversification and balance.
Rotation rather than wholesale risk aversion is the idea, according to Bartolini, and that can mean instead of a portfolio that is 80% U.S. large-cap stocks, taking it down to 75% or 70%. He also highlighted renewed interest in small-cap equities in the second half of 2025 following expectations for easier monetary policy and fiscal support. Small-cap stocks have outperformed large-caps since mid-year 2025, alongside improving earnings expectations for 2026. The Russell 2000 Index is trading at an all-time high and has risen close to 9% this year, versus a near flat return for the S&P 500, as the small-cap index has bested the large-cap index over the past 14 consecutive market trading sessions, the longest streak of relative outperformance since May 1996. Over the past six months, it has doubled the return of the large-cap stock benchmark.