Early 2026 portfolio update for the BFIA ETF

After a strong year in 2025, the BFIA ETF portfolio appears to be well-positioned for the upcoming year

Our exchange-traded fund (ETF) portfolio hasn't changed since April, which aligns with our objective of changing it as infrequently as possible. The BFIA ETF portfolio has performed as we had hoped, holding up well during the US tariff shock in April (down about 7 percent at worst) and recovering as markets surged, closing the year up 14.5 percent.

Not only did the rest of the world perform better than America, but we also benefited from our 10 percent gold position, which has been incredibly strong. We have equal amounts in the US, Europe, Japan, and emerging markets for the core equity portion of the portfolio. This implies that, in comparison to most portfolios, we are significantly underweight America (US stocks make up roughly 65% of the MSCI ACWI global benchmark). In recent years, this has been a major hindrance to returns; however, starting in 2025, it started to benefit us.

Nevertheless, the March transition from a standard SandP 500 ETF to an equal-weighted fund has not yielded positive results. Although it is obvious that we moved too soon and would have been better off in the original fund last year, we believe that this move, which lessens the concentration of our US exposure in the tech giants, is the right medium-term decision.

The ETF portfolio's bond dilemma.

Our choice to focus only on real estate has so far paid off because European real estate, including the UK, is beginning to show some tentative signs of recovery. We still prefer the higher yield that the ETF we currently own offers, and it has outperformed the global one we previously held, which is heavily weighted towards the US.

We own an energy ETF not because we are particularly optimistic about oil, but rather because we believe that energy prices are one of the most likely causes of persistent inflation and that there are risks of both short-term shocks and longer-term underinvestment. Energy stocks still seem like a reasonably priced hedge against these risks because they seem to be fairly cheap.

Because we believe that longer-dated bonds do not provide adequate compensation for the additional fiscal and political risks, we have concentrated our bond investments in shorter-dated bonds. Our investments are in US government bonds, but this is partially due to the fact that we have far more options for US bonds than for UK ones thanks to the current ETF selection. However, we believe that the outlook for the dollar has become much riskier and that there is no longer much benefit in having unhedged dollar bond exposure, so we are now using bond ETFs that hedge the currency exposure back to sterling.

This section of the portfolio appears to be the most problematic in many respects. Bonds currently have little value, and there is a good chance that interest rates will drop even further than investors anticipate (particularly in the US). As a result, bond yields would be even lower. Therefore, we might need to change our bond positions at some point in 2026, but not just yet.