To The Moon

Balanced funds, which invest in a balance of stocks and bonds, have had a two-year run of poor performance, with some pundits proclaiming them dead. But with stocks and bonds both positive in 2023, funds with balanced portfolios are looking attractive again. 

See the top-performing asset allocation ETFs in 2023 and learn how these balanced ETFs work. 

What Is a Balanced Fund? 

A balanced fund, also known as a hybrid fund or asset allocation fund, is a type of investment fund that aims to provide a balanced mix of asset classes, typically stocks and bonds, within a single portfolio. The primary objective of a balanced fund is to achieve a balance between potential growth and income while managing risk. 

In the exchange-traded fund space, balanced funds are generally referred to as asset allocation ETFs. 

ETF Definition: What is an Exchange-Traded Fund? | Investment U

Here are some key features of a balanced fund: 

• Asset allocation: Balanced funds typically hold a combination of stocks and bonds, with the specific allocation varying based on the fund's investment strategy and objectives.  

• Diversification: Balanced funds are designed to provide diversification by investing in different asset classes. By holding a mix of stocks and bonds or other assets, balanced funds aim to spread risk across different sectors and securities, potentially reducing the impact of market fluctuations. 

• Risk and return: The balance between stocks and bonds in a balanced fund influences the fund's risk and potential return. Generally, the higher the allocation to stocks, the greater the potential for growth but also the higher the risk. Conversely, a higher allocation to bonds may provide more stability and income but with lower risk and lower growth potential. 

• Income and capital appreciation: Balanced funds aim to generate both income and capital appreciation for investors. The bond portion of the portfolio tends to provide regular income through interest payments, while the stock portion offers the potential for capital appreciation and dividend income. 

• Active or passive management: Balanced funds can be actively managed, where fund managers make investment decisions based on their analysis and market outlook, or passively managed, where the fund aims to replicate the performance of a specific index or benchmark. 

• Investor profile: Balanced funds are often suitable for investors seeking a moderate level of risk and a balanced approach to investing. They may be suitable for investors who prefer a single investment option that provides exposure to both stocks and bonds. 

• Fund objectives: Balanced funds may have different objectives, such as capital preservation, income generation, growth or a combination of these goals. The specific objective should align with an investor's financial goals and risk tolerance. 

Balanced Funds and Asset Allocation ETFs 

While many balanced funds are mutual funds, balanced ETFs, which are generally classified as asset allocation ETFs, provide a low-cost alternative that can be traded intraday on an exchange like a stock. Like balanced mutual funds, asset allocation ETFs typically invest in a fixed blend of stocks and bonds but may invest in other assets.  

Asset allocation ETFs are designed to simplify the investment process by offering a predetermined asset allocation strategy, which takes into account various risk profiles and investment horizons. 

For example, a typical balanced ETF might invest in a target allocation of roughly 60% stocks and 40% bonds. But asset allocation ETFs may take on a more focused objective and aim to cater to specific risk profiles, such as conservative, moderate or aggressive. Asset allocation ETFs may be passively managed or actively managed. 

With 126 ETFs traded on the U.S. markets, asset allocation ETFs have total assets under management of $15.53 billion. The average expense ratio is 0.92%. The largest asset allocation ETF is the iShares Core Growth Allocation ETF (AOR) with $1.81 billion in assets. 

Pros and Cons of Investing in Balanced Funds 

Investing in balanced funds can offer several advantages and disadvantages. It's important to consider these pros and cons before making investment decisions.  

Here are some key pros and cons of investing in balanced funds: 

Pros of Investing in Balanced Funds 

• Diversification: Balanced funds provide built-in diversification by investing in a mix of stocks, bonds and potentially other asset classes. This diversification can help spread risk across different investments, reducing the impact of individual security or market fluctuations. 

• Simplified portfolio management: Balanced funds offer a single investment option that provides exposure to multiple asset classes. This simplifies portfolio management, particularly for investors who prefer a hands-off approach or lack the time or expertise to manage a complex portfolio. 

• Risk management: The balanced nature of these funds allows for a balance between potential growth and income while managing risk. The inclusion of both stocks and bonds can provide stability and income from bonds while offering potential growth from stocks. 

• Professional management: Balanced funds are typically managed by professional fund managers who make investment decisions based on their expertise and market analysis. Investors benefit from the expertise of these professionals in asset allocation and security selection. 

• Convenience: Balanced funds offer convenience, as they provide a ready-made portfolio solution. Investors don't need to allocate time and effort to select and monitor individual securities or manage asset allocation themselves. 

Cons of Investing in Balanced Funds 

• Limited customization: Balanced funds have predetermined asset allocations that may not perfectly align with an investor's specific risk tolerance or investment goals. Investors seeking customization may prefer to construct their own portfolios to better meet their individual needs. 

• Fees: Balanced funds, like other managed funds, have management fees and operating expenses. These costs can reduce overall investment returns, particularly if the fees are relatively high. It's important to compare fees and expense ratios across different funds to ensure they are reasonable. 

• Performance constraints: Balanced funds aim to strike a balance between asset classes, which means they may not fully capture the potential gains of a bull market in stocks or the potential safety of a bear market in bonds. The performance of a balanced fund can be influenced by the performance of the underlying asset classes. 

• Potential for underperformance: The performance of a balanced fund is reliant on the fund manager's asset allocation decisions and security selection. There is a risk that the fund may underperform its benchmark or other investment options if the manager's decisions do not align with market trends or if their strategies are not effective. 

Five Best Asset Allocation ETFs by Performance in 2023 

Here are the five best asset allocation ETFs for year-to-date performance through May 31, 2023: 

ATAC US Rotation ETF 

The $ATAC US Rotation ETF(RORO)$ is an actively managed fund-of-funds, focused on capital appreciation by toggling between U.S. equities and long duration U.S. Treasurys based on a proprietary market risk indicator. 

Adaptive Alpha Opportunities ETF 

The $Adaptive Growth Opportunities ETF(AGOX)$ is an actively managed, multi-asset fund that tactically allocates for capital appreciation. 

WisdomTree International Efficient Core Fund 

The $WisdomTree International Efficient Core Fund(NTSI)$ is an actively managed portfolio of developed markets equity securities, excluding the U.S. and Canada, and U.S. Treasury futures contracts. 

iShares Core Aggressive Allocation ETF 

The $iShares Core Aggressive Allocation ETF(AOA)$ tracks a proprietary index that provides significant exposure to equities, and a small portion to fixed income securities with a goal of long-term capital appreciation. 

Saba Closed-End Funds ETF 

The $Saba Closed-End Funds ETF(CEFS)$ is an actively managed fund-of-funds that seeks to generate high income by investing in closed-end funds trading at a discount to net asset value and hedging for duration risk. 

Bottom Line 

Balanced funds provide investors a convenient means of holding a low-cost diversified portfolio of multiple asset types, such as stocks and bonds, in a single investment security. It's important for investors to carefully assess their investment goals, risk tolerance and individual circumstances before investing in balanced funds, asset allocation ETFs or any other investment option.

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