Market Correction Brings Portfolio Rebalancing Into Focus

The S&P 500 officially entered correction territory during intraday trading Tuesday, having fallen 10% from its all-time high. This pullback, often seen as a natural part of market cycles, has caused anxiety among short-term traders but presents an opportunity for long-term investors.

The SPDR S&P 500 ETF (SPY) and other exchange-traded funds that track the broader U.S. stock market have mirrored this decline, weighed down by concerns over an escalating trade war, inflation, geopolitical tensions and eroding market sentiment.

Meanwhile, other traditional portfolio holdings that cover diverse areas of the market, including the iShares MSCI EAFE ETF (EFA), the iShares Core U.S. Aggregate Bond ETF (AGG) and the SPDR Gold Shares ETF (GLD) have seen gains in recent weeks.

While market corrections can be unsettling, history shows that they often provide attractive entry points for disciplined investors. The key to successful investing isn’t to avoid declines but to take advantage of them by strategically buying more shares of high-quality stocks when prices are lower.

Long-term investors may find this downturn to be an ideal opportunity to rebalance their portfolios by accumulating more shares of U.S. stock ETF like SPY while trimming off recent gains in other ETFs like EFA, AGG and GLD.

Bonds, European Stocks and Gold on the Rise

The S&P 500’s 10% decline, as other asset classes have held up or even gained value, underscores the importance of diversification. AGG, which tracks the broad U.S. bond market, has seen modest single-digit gains in recent weeks as investors flock to safer assets amid stock market uncertainty. Bonds often perform well in times of economic slowdown or market stress, providing stability in a balanced portfolio.

Meanwhile, European stocks, as represented by EFA, have outperformed U.S. equities this year to date. Many European economies, such as Germany, have benefited from government stimulus measures, a more balanced interest rate environment and a weaker U.S. dollar, which makes European exports more competitive. Investors seeking global diversification may find opportunities in European stocks, which have demonstrated relative strength compared to the S&P 500.

Gold, widely seen as a safe-haven asset, has also surged to record highs amid market uncertainty. GLD has climbed higher as investors look for protection against inflation, currency volatility and geopolitical risks. Gold tends to perform well when confidence in equities wanes, making it a valuable hedge in a well-diversified portfolio.

Related: How to Build an ETF Portfolio in 7 Steps

The Benefits of Portfolio Rebalancing

With the market shifting, now may be an opportune time for investors to rebalance their portfolios. Rebalancing involves adjusting the allocation of assets to maintain a preferred mix of stocks, bonds and other asset classes. For example, if a portfolio was originally 60% stocks and 40% bonds, but a stock market decline caused stocks to drop to 50%, rebalancing would involve buying more stocks to restore the original 60/40 allocation.

Investors who regularly rebalance their portfolios take advantage of market corrections by buying assets at lower prices while locking in gains from outperforming asset classes.  

Whether through increasing exposure to SPY or other S&P 500 ETFs as stocks decline, reducing bond holdings after a rally in AGG or trimming gold positions in GLD after a surge, a systematic rebalancing approach can help smooth volatility and enhance long-term performance.

Investors can use etf.com's Portfolio Builder tool for additional portfolio construction resources.