An alpha toolkit for a more fragmented world

Rising macroeconomic volatility is challenging assumptions around portfolio diversification and how portfolios are constructed and managed.

Matt Quaife, Global Head of Multi-Asset

Tom Taw, Head of ETF Distribution, Asia ex-Japan

The global backdrop is becoming more fragmented. Countries are increasingly acting in their own economic and security self-interest, with less regional alignment than in the past. Trade relationships are evolving, supply chains are being reshaped, and policy paths are diverging. For investors, this shift is starting to redefine both the sources of risk and the structure of opportunity.

One consequence has been a rise in macroeconomic volatility. Recent developments, including the introduction of “Liberation Day” tariff measures and the conflict in the Middle East, highlight how quickly the macro environment can change and how significant the impact can be across asset classes. These types of shocks are becoming more frequent features of the landscape, adding to uncertainty around growth, inflation, and policy direction.

A wider range of potential outcomes can support more differentiated return drivers, but it also makes portfolio performance less predictable. Assumptions that held when growth and inflation were relatively stable are being tested, particularly when shocks are driven by trade policy or supply-side disruptions rather than demand cycles.

As a result, investors may need to rethink how they achieve diversification. Traditional approaches built around a limited set of asset class exposures have become less reliable in a world where inflation and policy uncertainty play a larger role in shaping returns. There is a stronger case for building portfolios that draw on a broader mix of exposures, with a clearer understanding of how each behaves under different macro conditions.

This also raises the importance of how exposures are implemented and managed. In a more fragmented and volatile environment, outcomes are likely to depend more heavily on positioning, timing, and the ability to adapt as conditions change. Active decision-making can play a larger role here, both in managing risks and in accessing more differentiated sources of return. Such an environment also increases the value of flexible implementation tools, which allow investors to express views with greater precision while maintaining overall portfolio discipline.

Figure 1. Diversification matters as macro shock impact diverges

Asset class returns and the effect of geopolitical / inflation shocks ( in EUR )

For illustrative purposes. Past performance is not indicative of future outcomes.
Source: Bloomberg, Fidelity International, April 2026. Total returns in EUR. "New US Admin." data from 1 Nov 2024 to date; "Tariffs shock" from 18 Feb 2025 to 21 Apr 2025; "Iran war shock" from 27 Feb 2026 to date. Latest date is 24 Apr 2026.

Rise of a new toolkit

In this new paradigm, active ETFs have emerged as an integral part of portfolio construction: designed to deliver excess returns through disciplined security selection with the familiar characteristics of transparency, liquidity, flexibility, and efficiency of a traditional ETF.

The versatility of active ETFs appears to have captured the attention of global investors: active vehicles now account for more than 30 per cent of overall ETF flows. Of the roughly 1,000 ETFs launched in 2025, over 85%are active.

Research-driven active ETFs enable investors to express active views with greater precision and flexibility whilst preserving a common language for sizing exposures, budgeting risk, and operating within governance constraints.

In the following sections, we explore ways active ETFs can be used within a modern portfolio framework to address today’s investment challenges.

The challenge: Squaring growth with equity benchmark concentration risk

Equities continue to be a primary growth engine and among the most reliable ways to outpace what is likely to be a higher inflation baseline in future. Indeed, we expect corporate earnings over the next 10 years to exceed their historical averages, as surging investment in AI infrastructure continues to support GDP growth and breakout earnings seasons.

The problem is that a significant proportion of this CAPEX and earnings growth is concentrated in a relatively small number of already large companies. The 10 largest stocks in the S&P 500 now account for roughly 40%of capitalisation and earnings and 50%of volatility.

Many allocators recognise these concentration risks but are understandably reluctant to make large directional bets against dominant trends. Even for investors willing to tilt exposures, the growing dispersion of factors and sectors can be difficult to gauge and time. Active ETFs can provide a middle ground, allowing investors to systematically introduce differentiated sources of factor and security-selection alpha while remaining broadly aligned with benchmark exposures.

The opportunity set increasingly lends itself to such an approach. Equity valuations in the US look very different outside of the tech hyperscalers. Small caps are in their cheapest quintile relative to large caps since 1990. Outside the most concentrated parts of the US, there are opportunities in Japanese and emerging market equities, as well as the potential for exposure to the global AI value chain across Asia. At the same time, execution, policy, and geopolitical risks remain material, reinforcing the case for diversified, fundamentally driven exposure across regions, sectors, and factors.

Instead of: relying primarily on broad passive exposures concentrated in a narrow set of US- and growth-dominated indexes

Try: complementing cap-weighted exposures with active strategies designed to broaden sources of alpha while maintaining appropriate benchmark and risk discipline. For investors willing to assume greater benchmark deviation, selective use of strategies focused on particularly high-dispersion areas such as US small and mid caps may also prove attractive.

The challenge: Investing in AI within growth targets and risk budgets

As AI investments continue to grow and expand across industries, investors may find themselves in a dilemma of how to achieve growth targets whilst managing portfolio risk constraints. We increasingly view many of the risks and opportunities associated with AI through the lens of fragmentation. Trade restrictions and export controls can influence the AI value chain as much as innovation itself. Beyond its effects on earnings and earnings expectations, AI is reshaping labor markets, energy demand, capital spending, and productivity.

None of these implications can be assessed through a narrow sector lens alone. The ultimate winners will depend on adoption, policy choices, and the extent to which productivity gains diffuse across the broader economy over years. Yet many of the infrastructure, energy, and connectivity requirements needed to support that transition are already coming into focus.

Instead of: passively accepting increasing concentration risk in benchmark exposures dominated by mega-cap platform and semiconductor companies

Try: adding high-conviction US growth exposure focused on the infrastructure and strategic control points of the broader AI ecosystem, where enormous backlogs across areas ranging from power to upstream hardware have created conditions for high, sustained earnings growth.

The challenge: Ensuring higher yields ultimately help, not hurt, total returns

Our fixed-income research continues to indicate a structural rise in term premia, driven by factors such as higher debt-to-GDP ratios, central banks' retreat from sovereign bond markets, and elevated macroeconomic volatility. In some ways, this is positive news for investors, as higher starting yields generally translate into higher expected returns. At the same time, geopolitically driven volatility has made policy more uncertain, leaving investors potentially exposed to interest-rate volatility.

The ability to navigate deeper into the asset class and select securities with favourable characteristics will be increasingly important for returns. Short-term bonds can help dampen interest volatility, while government bonds can still serve as recession hedges and sources of income. At the same time, securitised and corporate credit continue to offer appealing carry. In such a large opportunity set, research will play a key role in security selection.

Instead of: relying exclusively on broad passive bond exposure

Try: complementing core fixed income allocations with active strategies that can dynamically manage duration, sector exposures, security selection, and risk.

The challenge: Diversifying the diversifiers

Recent events have shown that asset class correlations are increasing, and expectations based on historical behaviour may no longer hold. Figure 1 illustrates this divergence: gold fell during the Iran conflict, in contrast to its positive performance during the Liberation Day tariff shock.

The rapid development of active ETFs has led to a growing range of alternative and outcome-oriented strategies designed for use as overlays or satellite allocations to pursue specific objectives, such as enhanced income, downside management, or absolute-return targets. These can be especially valuable as traditional diversification patterns weaken and portfolio outcomes become more dependent on the nature of each shock.

Instead of: counting solely on stocks and bonds to drive portfolio diversification

Consider: complementing traditional allocations with alternatives-based income, hedging, and absolute-return strategies. Whether through collared equity exposure or inflation+ return targets, these strategies can provide portfolio resilience across a broader range of environments whilst remaining as easy to deploy as other active ETF wrappers.

Active ETFs as modern portfolio building blocks

The examples above underscore the complex reality facing investors today: a market environment where fragmentation, inflation shocks, technological disruption, and shifting diversification dynamics overlap and reinforce one another.

Discipline, patience, and strategic asset allocation remain essential to long-term investing. However, return drivers are becoming more dispersed, benchmark concentration remains high, correlations are less reliable, and investment opportunities are increasingly differentiated. In this environment, resilience comes from building portfolios that can adapt to multiple outcomes rather than relying on a single macro scenario playing out. Investors need greater precision in how they source growth, income, and diversification, and greater flexibility to respond as market conditions evolve.

That is why we believe research-powered active ETFs are increasingly valuable portfolio building blocks: combining the discipline and agility needed to navigate a more complex market backdrop with the transparency and accessibility investors expect. In a world where traditional anchors are proving less dependable, adaptability may become the most valuable anchor of all.

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