2023-03-08 08:04:33 ET
Summary
- AOM is iShares Core Moderate Allocation ETF.
- 40% equity and 60% bonds.
- This feels like a fund that should have been designed decades ago.
There are a lot of great funds out there. Recently I have covered such ETFs and TACK, DEEP, AZTD and ASPY. I have given them either a buy or a strong buy rating and I stand behind that. But there are a lot of funds which have little rationalization for their existence. The suite of iShares Allocation ETFs fall into the latter category.
A Lofty Goal - Simplistic Execution
The principle is good - develop a product which matches the risk profile of the investor. The execution falls short.
The basic idea is that bonds are less risky and equity is riskier.
- A conservative investor will have a 30/70 mix of equity to bonds.
- An aggressive investor will have an 80/20 mix of equity to bonds.
- And this moderate risk allocation fund, iShares Core Moderate Allocation ETF ( AOM ) has a 40/60 allocation.
That's it. No more thought into the fund than this.
Underlying Funds
Below is a chart highlighting the underlying funds of AOM. Each one of these funds belongs to the iShares family. This keeps the fees flowing back to themselves. This ETF fund of funds charges 0.15% on top of the fees for the underlying ETFs.
Weighting
The weighting scheme within the equity and bond allocations are also un-inspiring.
The Equity Allocation. The cap weights are analyzed between a developed market index and an emerging market index. Within the developed market allocation, the cap weighting is compared between an index of US stocks and non-US stocks. Then the cap weighting is analyzed between US indexes of big, mid and small-cap stocks. This is one giant cap-weighting scheme.
The Bond Allocation. In the fixed income allocation, 85% of the weight is given to the US bond market and 15% to the International bond market.
What I Like About This Fund
The expense ratios for the iShares funds are low.
The iShares small-cap ETF is 0.06%, the S&P 500 is 0.03%, and the International Aggregate Bond Fund is 0.07%. Add on 0.15% for the AOM wrapper and you are still around the 0.20% annual expense ratio.
An expense ratio of 0.20% is very reasonable when compared to other ETFs.
What I Don't Like About This Fund
This fund is so simple and static that I cannot rationalize why someone wouldn't just purchase the underlying ETFs themselves and save the 0.15% expense ratio annually. Granted, the fee is low, but not having it is even lower.
The other aspect I don't like is the poor past performance. You can close your eyes and select almost any mix of equity and bond funds in a 40/60 mix and it will pretty much turn out the same or better.
To illustrate, look at this chart comparing AOM to a simple 40/60 benchmark of SPY and BND (total return). All measures are worse with AOM.
- 1.67% less annual return
- More drawdown
- Sharpe of 0.67 vs. 0.90
I am not a fan of cap-weighting. The underlying funds are cap-weighted. The ETF wrapper further cap-weights. Cap-weighting is sub-optimal. It favors over-priced markets and securities. It looks merely at the price.
Fundamental weighting at least considers the economic footprint of the company. Market cap is simply the pricing with no regard to fundamentals. Large-cap doesn't require the company to be the large, only the price of the stock to be expensive. An overpriced stock will get a larger weight attached to it than an underpriced stock of equal fundamental size.
Are Bonds Low Risk?
Perhaps my biggest beef is with the branding of this product. Bonds are being touted as low risk and equity as high risk. The more you allocate to bonds the less your risk. As we can see in the chart below, this doesn't always hold true.
The bond market can tank at the same time as the equity markets. As bonds increase their yields, the fund price drops. It is overly glib to say that bonds are low risk and equity is high risk.
Final Thoughts
If your sole objective is to have a specific bond to equity mix and you hate placing your own orders for multiple ETFs, then I guess you could pay the 0.15% expense ratio plus the fees for the underlying ETFs. But I can't imagine why you would want to.
I believe that there was a massive missed opportunity to put a little more thought into these products. I would have liked to see tactical allocation to equities, bonds and even the money market (when bonds and equities look weak). A static allocation of bonds to equities is not a good method to manage someone's risk tolerance. This feels like an outdated product that has a hard time being relevant in today's sophisticated market.
For further details see:
AOM: Outdated And Uninspiring