- This exchange traded fund of funds is lagging the market, but can it be a way to diversify?
- Will the blended aggressive strategy work in a falling market or rising rate environment?
- We examined this ETF to determine if it is an appropriate ETF for the investor who prefers low expenses in a fund of funds.
The iShares Aggressive Allocation ETF (NYSEARCA:AOA) is an aggressive allocation ETF founded in November 2008 that presently has 267.98M in net assets at the present time. According to Yahoo, the fund seeks to track the investment results of an index composed of a portfolio of underlying equity and fixed income funds intended to represent an aggressive rich allocation strategy. The fund is considered a fund of funds, and seeks its investment objective by investing primarily in the securities of other iShares funds that themselves seek investment results corresponding to their own underlying index. The underlying index measures the performance of S&P's proprietary allocation model. The fund generally invests at least 90% of its assets in securities of the underlying index.
We looked into the fund, its holdings, its yield and whether it is a good diversification tool at market high and low bond yields.
The fund presently has ten holdings that represent 99.95% of its total assets. 84.63% of its holdings are in stocks, and 11.89% are in bonds. What is interesting about the bond/fixed income portion is, as an aggressive holdings ETF, a large percentage of the fixed income investments are rated AA, with only 1.87 rated AAA. The fund presently has 60.08% rated AA and 22.95% rated BB or lower (aka junk) or unrated. The fund has a small allocation with 1.71% in the iShares TIPS bond ETF (NYSEARCA:TIP) and 1.30% in the iShares Short Treasury Bond ETF (NYSEARCA:SHV). Though these are small amounts, they are a diversification tool against higher rates. TIPS adjust when rates and inflation goes higher, and short treasuries are, of course, reinvested at higher rates when they come due.
In terms of equities, the fund is actually quite diversified, with almost 30% of the fund in the iShares Core S&P 500 ETF (NYSEARCA:IVV) and almost 22% in the iShares MSCI EAFE ETF (NYSEARCA:EFA). The EFA is quite a large ETF, with over $54B in net assets. It provides investors exposure and diversification to various companies in Europe, Australia, Asia, and the Far East, excluding US and Canada. It presently has over 900 companies in its fund. Nestle (OTCPK:NSRGY) and Roche Holdings (OTCQX:RHHBY) are just a few of the names in this fund. The one-year return on this moderate-risk fund (based upon its standard deviation) was over 23%. The third-largest fund holding is iShares Core S&P Mid-Cap ETF (NYSEARCA:IJH), with over 17%. This fund's objective is long-term growth with mid-sized companies. This fund has over $23B in assets, a modest return of 6.97% YTD and a few known and unknown companies, such as United Rentals, Equinix, SL Green Reality REIT Corp. Again, when we analyzed the risk, we view a moderate-risk fund. We are trying to find high risk and not finding it here, in spite of the "aggressive allocation" term (and index). We went to the next fund holding on the list, the iShares Core US Aggregate Bond ETF. This fund, with over $18B in assets, has exposure to U.S investment-grade bonds in its portfolio, and allows investors to diversify and pursue income and stability. Again, with a modest return of 4.33% and a low risk profile, we are not really seeing "aggressive" funds. For our final fund review (all other funds are below 5% each in percentage of the total assets), we looked at the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM). Have we found risky or aggressive holdings here? The fund, with over $43B in assets, has a one-year return of 14.11%. It has over 800 stocks of large and mid-sized companies in emerging markets. It, too, would be considered a moderate-risk fund with an objective of long-term growth. Some very notable companies, such as Samsung Holdings (OTC:SSNLF), Tencent Holdings (OTCPK:TCEHY), Gazprom (OTCPK:OGZPY) and our personal favorite of Hon Hai Precision Industries, or FoxConn (OTC:FXCOF). FoxConn Technology Group is one of the firms that has assembled and continues to assemble Apple and other consumer and business electronic products.
Returning to AOA now, its total return has been 13.24% for twelve months and 3.98% YTD, with a Beta for the past three years of only 1.44 and a current equity Beta of only .90. Its yield is an attractive 2.01%, and it has an extremely tight trading range for the past year. Its 52-week low hit on August 30, 2013 was $40.25, and its 52-week high was $47.61 on July 1, 2014, before it paid a dividend of .418 on July 2, 2014. In terms of expenses, its total expense ratio is a low .30, with total holdings of 6,760. Overall, though we look at the holdings as a very attractive way of diversification, with markets at record highs and interest rates continuing to be at multi-year lows. Despite the "aggressive" category, we look at this funds of funds as a very attractive way to global diversification. With the diversification, an investor, of course, gives up the upside of investing directly in individual iShares ETFs and obviously the individual stocks and bonds. The benefit is lower downside when markets correct or individual sectors correct due to cyclicality and changes in both interest rates and geopolitical issues. As such, we recommend this fund as an excellent diversification tool and long-term investment into 2015 and beyond.