AOA: Passive Bond-Equity Allocation Questionable (NYSEARCA:AOA) | Private Equity Weekly

angle of attack strategy

iShares Core Active ETF Allocation (NYSE:AOA) started investing business on November 4, 2008 and tracks the S&P Target Risk Aggressive Index.This is a fund that holds 7 funds, with a 12-month trailing return of 2.09%, with a net expense ratio of 0.15%. Distributions are paid quarterly.

as described S&P Dow Jones Indices, the underlying index consists of 80% stocks and 20% fixed income. It is an ETF index whose eligible components are 3 U.S. stock funds, 2 international stock funds, 1 U.S. bond fund and 1 international bond fund, as follows:

• ISHARES Core S&P 500 ETF (IVV)
• ISHARES Core S&P MidCap ETF (IJH)
• ISHARES Core S&P SmallCap ETF (IJR)
• ISHARES CORE MSCI INT DEVEL ETF (IDEV)
• ISHARES Core MSCI Emerging Markets (IEMG)
• ISHARES Core USD Bond Market Total (IUSB)
• Aigu Core International Aggregate Bond ET (IAGG)

If necessary, funds can be removed and added to the eligibility list.

With an 80% equity allocation, the fund is weighted based on the relative market capitalization of its equity universe (as expressed in a specific index). Of the 20% bond allocation, 85% is allocated to U.S. bond funds and 15% is allocated to international bond funds. The index is rebalanced twice a year. The portfolio turnover rate for the most recent fiscal year was 5%.

angle of attack combination

The table below lists all of the fund’s holdings. As of this writing, 81.9% of the asset value is in stocks, 18% in bonds, and 0.1% in cash equivalents. Foreign securities exposure is 34.8%.

Click to enlarge

As the chart below shows, the equity segment has a lower valuation ratio than the U.S. stock market, represented by the Vanguard Total Stock Market ETF (VTI). Growth indicators are similar. This does not mean that foreign equity markets are more attractive: valuation ratios are affected by country risk discounting and industry segmentation. In particular, the U.S. market is overrepresented in the information technology field, which is an expensive industry.

Click to enlarge

Data: Fidelity.

Performance and Benchmarks

The table below compares AOA’s performance and risk metrics since inception, with the US 80/20 portfolio (SPY, BND) and the permanent portfolio inspired by Harry Browne and modeled with equal weightings of SPY, BND, BIL, GLD.

Click to enlarge

123 on a portfolio basis.

In terms of annualized return, AOA outperformed the permanent portfolio by 5.3% and lagged “US 80/20” by 2.7%. Part of the reason for the underperformance relative to the “US 80/20” is currency risk: the U.S. dollar index has risen about 20% since the inception of the AOA, dragging down international indices denominated in U.S. dollars. The permanent portfolio appears to be more effective in reducing risk as measured by maximum drawdown and volatility, resulting in better risk-adjusted performance (Sharpe ratio).

AOA and competitors

The table below compares the 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)
• Strategic Stock Nasdaq 7HANDL Index ETF (HNDL)
• WisdomTree U.S. High Efficiency Core Fund (NTSX).

Click to enlarge

AOA has the lowest fees, comparable to its siblings AOR and AOM, which implement similar strategies with 60/40 and 40/60 equity-bond allocations.

The chart below compares 5-year total returns. AOA ranks second behind actively managed fund NTSX.

AOA was also the second-best performing company over the past 12 months.

take away

The iShares Core Aggressive Allocation ETF is a fund of funds that implements an 80/20 allocation model among global stock and bond indexes. It aims to maintain an aggressive risk profile by overweighting equities relative to fixed income. Its exposure to foreign securities is about 35%, which implies some currency risk. Currency risk has two advantages: Currency risk has been negative for AOA asset values ​​since its inception in 2008, but could be beneficial if the U.S. Dollar Index fell.

AOA’s performance compares favorably to some multi-asset tactical ETFs from 2019, but there’s a caveat: This time frame is good for stocks and may not be indicative of the fund’s long-term potential. Since the short-term negative correlation between stocks and bonds has been broken for several years, AOA’s strategy is now questionable like all passive debt-equity allocations. Additionally, AOA lags far behind actively managed fund WisdomTree US Efficient Core Fund (NTSX).