Why bond alternatives matter in portfolios

If you can believe it, the “60/40 Portfolio” pre-dates the Great Depression.

Walter L. Morgan at the Wellington Fund (the progenitor to Vanguard Group) first began implementing fixed-income into his portfolios to reduce the risk of the highly volatile Pre-WWII equities market. By including investment-grade corporate bonds, agency bonds, U.S. Treasuries into his portfolios, he built downside protection designed to avoid bearing the full brunt of a market crash. 

And in 1929, when the market began its infamous three-year, 89% decline, his theory mostly proved out. The Wellington fund got crushed just like nearly every other investment during that time period, but not as much as its competitors—and the industry took notice.

Ever since, we’ve designed portfolios much the same way: A portion allocated to stocks and a portion generally allocated to bonds—an investment strategy that both zigs and zags to produce downside protection.

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Let’s Recap: What is a bond? And why would I invest in one?

A bond is essentially a loan. When you buy a bond, you are lending money to a government or a company. 

In return, you receive regular interest payments and (assuming the bond holder doesn’t default) your original investment is returned at maturity. Bonds are bought and sold regularly in secondary markets.

Compared to stocks, bonds generally offer lower long-term returns because the return of principal is contractually defined. Stocks, by contrast, have no such guarantee, but offer greater growth potential. 

We include bonds in portfolios for the following reasons:

• To provide more predictable income 
• To reduce overall portfolio volatility 
• To help fund known future expenses
• To serve as a stabilizer when stock markets decline

Bond yields can be affected by several factors:

• Government interest rates, which are generally considered “risk-free”
• Time to maturity (longer bonds typically require higher yields) 
• Credit risk, or the risk that the borrower fails to repay

While bonds are often viewed as conservative investments, their prices can fluctuate—sometimes significantly. For example, if you own a bond paying 5% interest and newly issued bonds begin paying 6%, your bond becomes less attractive and its price falls. If new bonds pay only 4%, the value of your bond rises.

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Why bonds are more challenging to invest in today

For decades bond allocations—like the traditional 60/40 Portfolio—worked well. This was largely due to a long bond bull market beginning in the early-1980s. Interest rates peaked near 15 percent and continued up until reaching historic lows in the late-2010s. Falling interest rates boosted bond prices and helped bonds offset stock market declines. 

Investors now face several challenges in traditional bond markets:

• Higher inflation, which reduces purchasing power 
• After-tax bond returns that often fail to keep pace with inflation 
• Flat yield curves, offering little extra compensation for taking more risk 
• Lower diversification benefits, as bonds and stocks can now fall together (as seen in 2022)

As a result, many investors are exploring bond alternatives to fulfill the role of bonds within a portfolio. These bond alternative investments that aim to provide income and stability without relying solely on interest rates.

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Broadening our fixed-income horizons

It’s a good thing investors today aren’t limited to stocks and traditional bonds alone. The investment landscape has expanded to include a range of bond alternatives designed to produce income in different ways, under different conditions, and with different trade-offs. Rather than relying exclusively on interest rates and public markets, these instruments draw returns from real assets, private lending, contractual cash flows, or structured market outcomes. Each comes with its own mechanics, risks, and liquidity considerations—but together they offer investors more flexibility in how income is generated and how portfolios are positioned for an evolving economic environment.

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Private Infrastructure

When most people hear the word infrastructure, they think of things they use every day but rarely stop to consider as investments—highways, power lines, water systems, or the energy projects that keep the lights on. Private infrastructure investing simply means owning a small piece of those essential systems alongside other long-term investors.

Imagine a toll road outside a growing metro area. Thousands of commuters use it every weekday. The road doesn’t depend on market headlines or quarterly earnings calls—people still need to get to work. Each car that passes through generates a small fee, and those fees create a steady stream of income. That same concept applies to utilities that deliver electricity, pipelines that transport energy, or renewable projects like wind farms that sell power under long-term contracts.

What makes these investments different from traditional stocks or bonds is how the cash flows are generated. Many infrastructure assets operate under long-term agreements, regulated pricing, or usage-based contracts. That structure can make revenue more predictable than businesses whose profits rise and fall with consumer demand or economic cycles.

Historically, access to these types of investments was limited to large institutions—pension funds, endowments, and insurance companies—because of their size and complexity. Today, select strategies can make portions of this market accessible to individual investors who don’t necessarily view themselves as “ultra-wealthy,” but who want their portfolio to include assets designed for durability and income.

Why investors consider them 

• Revenues are often contracted or regulated 
• Cash flows tend to be long-term and stable 
• Many contracts include inflation adjustments 
• Historically low correlation to stock markets 

Why they can complement or replace bonds 

• Less day-to-day price volatility 
• Better long-term protection against inflation 
• Access to opportunities not available in public markets 

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Private Credit

At its core, private credit is simply lending money outside of the public bond market. Instead of buying a publicly traded bond issued by a large corporation, investors provide capital directly to borrowers through privately negotiated loans. These loans can finance many things—business expansion, equipment purchases, or real estate development. While private lending spans a wide range of uses, one area we focus on is real estate debt, where loans are secured by commercial property such as apartment buildings, office complexes, or industrial facilities.

To make this tangible, imagine a developer purchasing an apartment building. Rather than financing the entire purchase through a bank, they may work with a private lender for part of the loan. That loan is secured by the property itself, much like a mortgage on a home. If the borrower runs into trouble, the lender’s claim is tied directly to a physical asset with underlying value. Because of this structure, real estate debt often sits at the top of the borrower’s capital stack—meaning it is positioned ahead of equity investors and other forms of capital.

Private real estate lending is distinct from owning property outright. The investor is not responsible for managing tenants, fixing roofs, or dealing with vacancies. Instead, they are paid interest for providing capital, with repayment terms defined upfront. While private credit can take many forms, real estate-backed lending is an area we find particularly useful when building diversified portfolios, especially for investors who want exposure to contractual cash flows tied to tangible assets rather than the daily movements of public markets.

Why investors consider them 

• Floating interest rates, which adjust as rates rise 
• Collateral backed by physical property 
• Strong underwriting and lender protections 
• Shorter maturities than many bond funds 

Why they can complement or replace bonds 

• Lower sensitivity to interest-rate changes 
• Higher income potential than traditional bonds 
• Added protection through asset-backed collateral 

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Structured Income Notes

Structured income notes are a type of investment issued by large financial institutions that sit somewhere between a traditional bond and a more customized income strategy. At a high level, you can think of them as a loan to a bank—but with terms that are tailored using financial contracts called derivatives. Those contracts help define how income is generated and under what conditions it’s paid, allowing the investment to be shaped around specific market environments rather than relying solely on interest rates.

A simple way to picture this is to imagine an investor who wants income but is less concerned with capturing every bit of stock market upside. A structured income note might be designed to pay a defined level of income as long as a stock index stays within a certain range, or doesn’t fall beyond a predefined threshold. The derivatives embedded in the note are what make that possible—they adjust the payoff profile so income is tied to rules agreed upon at the outset, rather than daily price movements alone.

Because of this design flexibility, structured income notes are inherently more complex than traditional bonds. The return profile depends not only on markets, but also on the financial strength of the issuing bank and the specific mechanics of the structure itself. Understanding who is issuing the note, how the income is generated, and what scenarios could affect payments is essential. These instruments are typically used thoughtfully and selectively, with careful analysis, rather than as simple plug-and-play investments. 

Why investors consider them 

• Designed to generate enhanced income 
• Can include buffers against moderate market declines 
• Shorter time horizons than many bonds 
• Returns tied to markets rather than interest rates 

Why they can complement or replace bonds 

• Income does not depend on falling interest rates 
• Can perform well in flat or sideways markets 
• Allows customization based on risk tolerance

Important note: These instruments are more complex and require careful analysis of issuer strength and investment structure.  

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Fixed Income Annuities

A fixed income annuity is a way to turn a lump sum of savings into a predictable stream of income. Instead of relying on markets to generate returns, an investor transfers money to an insurance company in exchange for a contractual promise: regular payments that begin either immediately or at a future date. Those payments can be set to last for a specific number of years or, in some cases, for the rest of the investor’s life.

A familiar comparison is a pension. Many workers used to receive a monthly check for life from their employer after retiring. Fixed income annuities are designed to recreate that kind of paycheck using personal savings. For example, someone approaching retirement might allocate a portion of their assets to an annuity to help cover essential expenses—housing, utilities, groceries—knowing those payments will continue regardless of what markets are doing.

The guarantees behind fixed income annuities come from the insurance company issuing the contract, not from the stock or bond markets. That makes understanding the structure of the annuity and the financial strength of the insurer especially important. These products are straightforward in concept but vary widely in how payments are calculated, when they begin, and how flexible the terms are, which is why they’re typically evaluated carefully as part of a broader income-planning conversation.

Why investors consider them 

• Predictable, guaranteed income 
• No market price fluctuations 
• Higher effective income due to risk pooling 
• Useful for covering essential living expenses 

Why they can complement or replace bonds 

• Eliminates reinvestment risk 
• Provides certainty regardless of market conditions 
• Can deliver higher lifetime income than bonds alone 

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Covered-Call Strategies

A covered-call strategy is a way to generate income from stocks an investor already owns. Instead of relying solely on dividends or waiting for share prices to rise, the investor sells options—specifically call options—that give someone else the right to buy those shares at a predetermined price within a set period of time. In exchange for granting that right, the investor receives an upfront payment, known as the option premium.

A real-world analogy is renting out something you already own. Imagine owning a vacation home you don’t plan to sell anytime soon. You allow someone to rent it for a defined period and collect rent, even though you still own the property. With covered calls, the “rent” is the option premium. If the stock stays below the agreed-upon price, the option expires, the investor keeps the premium, and still owns the shares. If the stock rises above that level, the shares may be sold at the agreed price, and the investor has effectively traded some future upside for immediate income.

This approach is commonly used when investors are comfortable holding a stock but are less focused on capturing every dollar of potential growth. The income is generated by the options market rather than interest rates, which makes covered-call strategies behave differently than traditional bonds. Like other income-oriented tools, they require an understanding of how the strategy works, what trade-offs are involved, and how it fits within a broader portfolio rather than being used in isolation.

Why investors consider them 

• Regular income from option premiums 
• Lower volatility than owning stocks alone 
• Works best in flat or modestly rising markets 

Why they can complement or replace bonds 

• Income comes from market volatility, not interest rates 
• Can outperform bonds during inflationary periods 
• Retains partial exposure to stock market upside

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Why bond alternatives matter in portfolios

Traditional bonds have long served an important purpose in portfolios—providing income, stability, and a counterbalance to stock market risk. But today’s investment environment has challenged some of those assumptions. Interest rates, inflation pressures, and changing market dynamics have made it harder for bonds alone to deliver the level of diversification and income many investors expect. As a result, relying on a single source of “defensive” return can leave portfolios more exposed than intended.

Bond alternatives expand the toolkit. Instead of depending almost entirely on interest rates, these strategies draw income from a wider range of sources—real assets, contractual cash flows, lending structures, or market mechanics that behave differently than traditional bonds. Each comes with its own risks and complexities, but together they offer ways to spread exposure across multiple drivers of return rather than concentrating it in one part of the market.

When incorporated thoughtfully, bond alternatives are not about replacing bonds or chasing yield. They are about building portfolios that are better prepared for a variety of economic conditions. By combining traditional fixed income with carefully selected alternatives, investors can create more resilient income strategies—ones designed to adapt to changing markets rather than depend on a single outcome.