60/40 is dead.
Long live 60/40.
I’m a fan of asset allocation ETFs that target a particular risk profile. These are easy options for most investors to use instead of going through a traditional financial advisor. To that end, the iShares Core Growth Allocation ETF (NYSEARCA:AOR) is worth a look here. It aims to mimic the investment results of an index composed of a diversified portfolio of underlying equity and fixed-income funds, adhering to a growth allocation target risk strategy. It offers a straightforward way for investors to build a diversified core portfolio centered on growth, using one cost-effective fund.
AOR utilizes iShares ETFs to create a portfolio that tracks a 60/40 stock/bond asset allocation strategy – a mix that has gone through the wringer over the last 2+ years during the fastest rate hike cycle in history. And despite constant media coverage of just how poorly 60/40 portfolios have done, on a go-forward basis the expected return profile looks quite appealing here.
AOR’s Holdings
AOR is comprised of seven iShares ETFs. Its bond side is dominated by a core US bond ETF, accounting for 34% of the total fund, and an international bond ETF, contributing an additional 6%. The equity portion of AOR, which is primarily in the large-cap blend area of the style box, is composed of an S&P 500 ETF and an international/developed markets ETF. It also includes minor allocations to emerging markets, as well as mid-cap and small-cap equities.
This is an elegant solution for many investors. As a fund of funds, it’s diversified and basically in one wrapper provides access to ETFs that have hundreds of securities.
Performance Analysis
AOR’s performance since its inception has been solid, with a steady growth trajectory. By definition, a diversified asset allocation fund will underperform its best-performing components, so don’t expect a fund like this to beat the S&P 500 when it’s the secular leader as the price ratio below shows. Should we be entering a time where bonds perform better than stocks given where yields are at now, however, this can do fairly well on a relative basis in a portfolio.
Risk Metrics
AOR’s beta is currently at 0.66, which suggests that the fund’s movements are generally less volatile than the market. Its three-year standard deviation is 12.25%, indicating a lower degree of price fluctuation compared to a traditional equity ETF. When compared to similar ETFs, AOR’s low expense ratio, broad diversification, and solid performance set it apart. However, it’s crucial to take into account that past performance is not indicative of future results and that every investment comes with a level of risk. And because this is a 60/40 portfolio, it’s most suitable for those investors with a longer-time investment horizon who can stomach moderate or aggressive sell-offs.
The Case for Balanced Funds
In the current macro landscape, balanced funds like AOR are increasingly making sense. Given the likely end of the Federal Reserve’s rate hike cycle, the risk/return profile of these funds might be particularly appealing to investors now. The fund’s low expense ratio, broad diversification, and solid historical performance make it a strong contender for your consideration.
Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.
The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).
Read the full article here