As the U.S. economy powers through 2026 with robust corporate earnings, several wealth advisors are quietly repositioning client portfolios toward quality and value factors, citing mounting leverage in the financial system. Anna Rathbun, founder and CEO of Grenadilla Advisory, points to rising borrowing tied to artificial intelligence infrastructure and recent failures in the private credit market as early warning signs. "Even though the economy is charging ahead and the earnings season has been strong, there is still a lot of leverage being built into the system," she says.
Rathbun recommends tilting toward factors that have historically cushioned portfolios during market downturns. "As risks build, it may be wise to lean the portfolio toward quality and value," she advises, though she cautions against overcommitting. Her preferred vehicles are the Vanguard Quality Factor ETF (VFQY) and the Vanguard US Value Factor ETF (VFVA), which offer broad exposure to these styles.
Not all advisors are focused on defense. Jeffrey Ingraham, managing director and head of portfolio strategy at EP Wealth Advisors, notes that 2026 has finally rewarded investors who stayed diversified beyond U.S. large caps. "Non-US equities and US small-cap equities have outperformed US large cap for the first time in a long while," he says, adding that this validates a long-term, disciplined approach. His firm uses the Vanguard Small Cap Growth ETF (VBK) and the Dimensional US Targeted Value ETF (DFAT) for small-cap exposure, and the iShares Core MSCI Emerging Markets ETF (IEMG) for international diversification. Ingraham emphasizes the importance of country classifications, noting that South Korea's status can significantly affect returns.
Both advisors are sharply critical of leveraged and single-stock ETFs, echoing recent regulatory scrutiny. Rathbun warns that products like 3x leveraged index funds (e.g., SOXL) and newer single-stock leveraged ETFs "do not work the way one might assume." The daily reset mechanism leads to volatility decay, meaning the underlying index can rise while the ETF loses value. She also flags closure risk for thinly traded thematic funds, noting that a fund with only $50 million in assets could shut down, forcing taxable gains on investors. "Product proliferation, especially of leveraged products, tells me we may be heading into late-cycle market dynamics," she adds.
Ingraham is equally blunt: "The leveraged daily return aspect introduces volatility decay and sequence of returns risk that is often misunderstood by investors and doesn't fit with our goals-based, long-term philosophy." He advises clients to avoid these strategies altogether.
For core holdings, both advisors prefer low-cost, broad-market funds. Rathbun holds ETFs tracking the Russell 1000 growth and value indexes, the Russell 2000, and the MSCI ACWI ex-US index, alongside actively managed fixed income ETFs like the T. Rowe Price Total Return ETF (PSDM). Ingraham's core equity lineup includes the Vanguard Growth ETF (VUG), Vanguard Value ETF (VTV), and Vanguard International Dividend Growth ETF (VIGI), with fixed income anchored by the iShares Core US Aggregate Bond ETF (AGG), iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB), and Janus Henderson Securitized Income ETF (JSCP).
Eddie Ghabour, co-founder and CEO of Key Advisors Wealth Management, is more optimistic, expecting the economy to accelerate due to AI-driven productivity gains and accommodative monetary policy. He favors industrials, citing data-center buildouts, and small caps, which he believes could benefit from the ongoing expansion. This divergence in outlooks underscores the uncertainty facing advisors as they navigate a market with both tailwinds and hidden risks.
As leverage concerns persist, advisors are increasingly looking to global regulators' warnings on AI concentration and the broader implications for portfolio construction. The shift toward quality and value, while not a dramatic pivot, reflects a prudent response to a complex environment. For more on how advisors are managing operational challenges, see this analysis of private market access.
