In a recent analysis, we explored how incorporating a small allocation to Bitcoin (BTC) into a traditional 60/40 portfolio could impact its risk-return profile. The initial adjustment involved reducing equity exposure by 2% to accommodate BTC. The results showed improved returns with a manageable increase in volatility.
But what if we wanted to maintain full equity exposure while still introducing BTC? This question led us to a variation of the strategy—one that reduces the bond allocation instead of equity to make room for crypto exposure. Here’s how it plays out.
We analyzed two portfolios to evaluate the trade-offs:
- Portfolio 1 (Traditional 60/40):
- 60% SPY (equities)
- 40% AGG (bonds)
- Result: 17.97% YTD returns with a volatility of 7.90.
- Portfolio 2 (Modified with BTC):
- 60% SPY (equities)
- 38% AGG (bonds)
- 2% BTC
- Result: 20.28% YTD returns—a significant 2.31% improvement.
- Volatility increased slightly to 8.28%, reflecting BTC’s higher risk profile.
While Portfolio 2 offers higher returns, it introduces additional volatility. To address this, we considered how Buffer ETFs could be incorporated to balance the portfolio.
Buffer ETFs (for the purposes of this exercise, we selected Innovator ETFs' BALT, as it tracks the SPY index—allowing us to maintain equity exposure) are designed to mitigate equity return risk while providing asymmetric return profiles. In this case, we allocated 2% of SPY to BALT, creating a new portfolio:
- Portfolio 3 (Risk-Managed with BTC and BALT):
- 58% SPY (equities)
- 38% AGG (bonds)
- 2% BTC
- 2% BALT
This adjustment maintained overall equity exposure while aiming to offset the added risk from BTC through the hedging capabilities of the Buffer ETF.
When comparing Portfolio 2 and Portfolio 3, the differences are subtle yet meaningful:
- YTD Returns:
- Portfolio 2: 20.28%
- Portfolio 3: 19.91% (a 37-basis-point difference).
- Volatility:
- Portfolio 2: 8.28%
- Portfolio 3: 8.09%.
The slight reduction in returns is offset by lower volatility, demonstrating the effectiveness of using Buffer ETFs to manage risk while maintaining equity exposure and incorporating BTC.
This exploration highlights how thoughtful allocation adjustments and modern tools can open the door to higher-growth opportunities like BTC without significantly increasing risk. By reallocating bond exposure and leveraging Buffer ETFs, we achieved:
- Preserved equity exposure.
- Managed volatility closer to the original 60/40 portfolio.
- Enhanced returns by incorporating BTC exposure.
As always, this analysis serves as a thought experiment rather than financial advice. It underscores how tools like Buffer ETFs can support risk-aware investors exploring allocations to higher-risk assets like cryptocurrency.
