AOA: Passive Bond-Equity Allocations Are Questionable

seekingalpha04-16

iShares Core Aggressive Allocation ETF is a fund of funds implementing a 80/20 allocation model in global equities and bonds.The AOA ETF has an exposure to foreign securities of about 35%, which ...

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SARINYAPINNGAM/iStock via Getty Images AOA strategy iShares Core Aggressive Allocation ETF (NYSEARCA:AOA) started investing operations on 11/04/2008 and tracks the S&P Target Risk Aggressive Index. It is a fund of funds with 7 holdings, a 12-month trailing yield of 2.09% and a net expense ratio of 0.15%. Distributions are paid quarterly. As described by S&P Dow Jones Indices, the underlying index is made up of 80% equities and 20% fixed income. It is an index of ETFs whose eligible components are 3 U.S. equity funds, 2 international equity funds, 1 U.S. bond fund and 1 international bond fund, listed below:  ISHARES CORE S&amp;P 500 ETF (IVV) ISHARES CORE S&amp;P MID-CAP ETF (IJH) ISHARES CORE S&P SMALL-CAP ETF (IJR) ISHARES CORE MSCI INT DEVEL ETF (IDEV) ISHARES CORE MSCI EMERGING MARKETS (IEMG) ISHARES CORE TOTAL USD BOND MARKET (IUSB) ISHARES CORE Intl Aggregate Bnd ET (IAGG)   Funds may be deleted and added in the eligibility list if necessary. Within the 80% equity allocation, the funds are weighted based on the relative market capitalization of their stock universes, represented by specific indexes. Within the 20% bond allocation, 85% is allocated to the U.S. bond fund and 15% to the international bond fund. The index is rebalanced twice a year. The portfolio turnover rate in the most recent fiscal year was 5%. AOA portfolio The next table lists all the fund’s holdings. As of writing, 81.9% of asset value is in equities, 18% in bonds and 0.1% in cash equivalent. Exposure to foreign securities is 34.8%.   Ticker Name Asset Class Weight (%)   IVV ISHARES CORE S&P 500 ETF Equity 45.66   IDEV ISHARES CORE MSCI INT DEVEL ETF Equity 23.87   IUSB ISHARES CORE TOTAL USD BOND MARKET Fixed Income 15.34   IEMG ISHARES CORE MSCI EMERGING MARKETS Equity 8.26   IJH ISHARES CORE S&P MID-CAP ETF Equity 2.9   IAGG iShares Core Intl Aggregate Bnd ET Fixed Income 2.67   IJR ISHARES CORE S&P SMALL-CAP ETF Equity 1.21   XTSLA BLK CSH FND TREASURY SL AGENCY Money Market 0.09   Click to enlarge As reported in the next table, valuation ratios of the equity part are cheaper than the U.S. stock market, represented by Vanguard Total Stock Market ETF (VTI). Growth metrics are similar. It doesn’t mean that foreign stock markets are more attractive: valuation ratios are biased by country risk discounts and sector breakdowns. In particular, the U.S. market is overweight in information technology, which is an expensive sector.     AOA VTI   Price/Earnings TTM 19.24 23.83   Price/Book 2.57 3.97   Price/Sales 1.86 2.56   Price/Cash Flow 12.56 16.19   Earnings growth 20.19% 20.77%   Sales growth 7.59% 8.15%   Cash flow growth 6.65% 8.82%   Click to enlarge Data: Fidelity. Performance vs. benchmark The next table compares performance and risk metrics of AOA since inception with a U.S. 80/20 portfolio (SPY, BND) and a permanent portfolio inspired by Harry Browne and modeled by SPY, BND, BIL, GLD in equal weights.     Total Return Annual Return Drawdown Sharpe ratio Volatility   AOA 293.33% 9.28% -28.38% 0.71 13.47%   US 80/20 476.58% 12.03% -27.92% 0.91 12.48%   SPY, BND, BIL, GLD 171.33% 6.69% -12.32% 0.86 6.39%   Click to enlarge Calculation by Portfolio123. Regarding annualized return, AOA beats the permanent portfolio by 5.3% and lags “US 80/20” by 2.7%. Underperformance relative to “US 80/20” is partly due to currency risk: the dollar index has gained about 20% since AOA inception, which has been a drag on international indexes measured in USD. The permanent portfolio looks more efficient at reducing the risk measured in maximum drawdown and volatility, which results in a better risk-adjusted performance (Sharpe ratio). AOA vs. competitors The next table compares characteristics of AOA and five other tactical multi-asset funds:  iShares Core Growth Allocation ETF (AOR) iShares Core Moderate Allocation ETF (AOM) SPDR SSGA Multi-Asset Real Return ETF (RLY) Strategy Shares Nasdaq 7HANDL Index ETF (HNDL) WisdomTree U.S. Efficient Core Fund (NTSX).      AOA AOR AOM RLY HNDL NTSX   Inception 11/4/2008 11/4/2008 11/4/2008 4/25/2012 1/16/2018 8/2/2018   Expense Ratio 0.15% 0.15% 0.15% 0.50% 0.96% 0.20%   AUM $1.83B $2.00B $1.35B $542.52M $830.88M $1.01B   Avg Daily Volume $6.92M $11.62M $4.99M $4.27M $2.31M $3.82M   Div. Yield TTM 2.18% 2.49% 2.84% 3.35% 6.94% 1.17%   5 Year Price Return 31.89% 20.35% 9.28% 9.99% -13.53% 57.21%   Click to enlarge AOA has the lowest fee, on par with its siblings AOR and AOM, which implement similar strategies with 60/40 and 40/60 equity-bond allocations. The next chart compares 5-year total returns. AOA is in second position behind the actively managed fund NTSX.   AOA vs competitors, 5-year return (Seeking Alpha) AOA is also the second-best performer over the last 12 months.   AOA vs. competitors, trailing 12 months (Seeking Alpha) Takeaway iShares Core Aggressive Allocation ETF is a fund of funds implementing an 80/20 allocation model in global equity and bond indexes. It aims at keeping an aggressive risk profile by overweighting equities relative to fixed income. It has an exposure to foreign securities of about 35%, which implies some currency risk. Currency risk has two edges: it has been detrimental to AOA asset value since inception in 2008, but it may be favorable if the dollar index goes down.  Compared to a few multi-asset tactical ETFs since 2019, AOA has performed quite well, with a cautionary note: this time frame was favorable to stocks and may not represent the long-term potential of the fund. As the short-term negative correlation of stocks and bonds has been broken for several years, the strategy of AOA is now questionable, like all passive bond-equity allocations. Additionally, AOA is far behind the actively managed fund WisdomTree U.S. Efficient Core Fund (NTSX).","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427569889"}