In these volatile times, most investors are faced with the
dilemma of deciding which asset class to put their hard earned
capital to work in. During times of economic uncertainties, most
investors turn to less risky securities in order to help defend
against volatility.
However, these safe haven assets, more often than not, are not
as safe as they seem and often times the yield on these securities
are not up to par. For example, bonds are considered to be safer
than equities by most investors in a medium time frame (assuming
flat interest rates).
Yet, at current levels when the 10 year benchmark rates are
nearing an all time low, bond investors are almost certain to lose
money when rates again begin to rise (read
Should Retail Investors Invest In Treasury
Bonds?
).
Recent developments in domestic as well as global markets have
led to increased volatility across all asset classes. The broader
markets have recovered strongly since the start of fiscal 2012,
mainly thanks to two quarters of better-than-expected earnings
season, and a somewhat impressive GDP growth rate.
However, exchange traded funds (ETFs) have gained immense
popularity in the recent past, given their holistic investment
approach and tax efficiency, coupled with flexibility and ease of
investing (see
Two ETFs that Have Surged from Their Lows
). ETFs can be viewed as the ultimate asset allocation instrument
providing investors a readymade portfolio of stocks or fixed income
securities or both.
Allocation ETFs
Among the many options available to the investors in the form of
ETFs, we would like to highlight four unique funds by the iShares
fund family which could go a long way in aligning investors'
risk-return tradeoff based on their risk appetite, especially in
times of economic uncertainty.
These ETFs are allocation ETFs which provide investors with a
blended portfolio of fixed income securities and equities to suit
their preferences.
iShares S&P Aggressive Allocation ETF (
AOA
), iShares S&P Conservative Allocation ETF (
AOK
), iShares S&P Growth Allocation ETF (
AOR
) and iShares S&P Moderate Allocation ETF (
AOM
)
provide investors the balanced approach required to tap the
potential of each market segment.
From an allocation point of view, each of these ETFs tries to
justify its investment objective by striking a balance between
equity and debt exposure. However, these ETFs are not complimentary
to each other and the performance of each is heavily dependent on
the level of assets that are dedicated to each asset class (read
Build a Complete Portfolio with These Three
ETFs
).
For example, the performance of AOA which has an 81% allocation
towards the equity markets would be more dependent on the equity
market performance, rather then the fixed income market segment to
which it has a 19% allocation.
The table below (i.e. table 1) summarizes the attributes of the
ETFs from a risk return trade off point of view. In order to
highlight this we have simulated the past performances of the
individual ETFs and ascertained a
return per unit of risk score
(to simulate the risk adjusted returns) and then ranked them on the
basis on this score.
To get a better picture, we have used the three year price
performance data of the individual ETFs to ascertain the
standard deviation (risk)
and the
total returns
. The score was ascertained by dividing the returns by the risk and
higher score signifies a better risk adjusted performance.
Table: 1 (data as of 31
st
August 2012)
|
ETF
|
Allocation
|
Fixed income to Equity ratio
|
3 Year Annualized Standard Deviation
(Risk)
|
3 Year Returns
|
Returns per unit of Risk score
|
Rank
|
|
AOA
|
Aggressive
|
19
:
81
|
18.09%
|
36.71%
|
2.03
|
4
|
|
AOK
|
Conservative
|
74
:
26
|
4.94%
|
19.96%
|
4.04
|
1
|
|
AOR
|
Growth
|
40
:
60
|
12.10%
|
27.93%
|
2.31
|
3
|
|
AOM
|
Moderate
|
60
:
40
|
7.91%
|
22.50%
|
2.84
|
2
|
Not surprisingly, it is noticed that standard deviation (risk)
tends to increase with the ETFs having more allocations towards
equity. Also, from an absolute returns point of view the returns
tend to increase as allocation towards equity increases. However,
taking a look at the table from another point of view, it is
another story.
From a risk adjusted returns point of view, the ETFs with
greater allocation towards fixed income securities have
outperformed as of late when compared to their equity concentrated
cousins. For example,
AOK
which has a conservative
allocation of 74% debt and 26% equity
has a returns per unit of risk
score of 4.04
and a
rank of 1
, compared to its aggressive counterpart
AOA
, which has an
aggressive
allocation of
19% fixed income and 81% equity
, yet a
score of 2.03
and is
ranked 4
th
(see more in the
Zacks
ETF Center
)
However, it should be noted that the suitability of each ETF
depends on individual investor
risk appetite
and the
current scenario
of the capital markets. For example, in a
bull
market
AOA
is most likely to
outperform its peers
and is suitable for investors with an
above par
risk appetite.
On the contrary,
AOK
is most likely to post an impressive performance in a
bear
market and would be an appropriate choice for
conservative/risk averse
investors (see
Is It Time for an Equal Weight ETF?
).
It is also prudent to note that all these ETFs do not invest in
securities directly. However, they invest in a portfolio of other
ETFs belonging to the same fund family i.e. iShares. Therefore,
these allocation ETFs qualify to be called ETFs of ETFs, however,
unlike other ETF of ETF counterparts they do not charge a hefty
expense ratio, thanks to the fund manager focus being limited to
their own fund family (see
Five Cheaper ETFs You Probably Overlooked
).
All these iShares allocation ETFs were launched around the same
time in 2008 and charge pretty much the same expense ratios ranging
from 0.30% to 0.33%. Among the four ETFs the moderate and growth
allocation ETFs i.e. AOM and AOR have attracted the most inflows in
their asset base with $153.31 million and $ 136.41 million
respectively in total assets.
AOA and AOK have $97.30 million and $89.30 million in their
asset bases. Also, among the four allocation ETFs, AOK seems to be
the most popular from a volume perspective, trading 46,000 shares
per day on an average. The average daily volumes for other ETFs are
13,000 shares for AOA, 21,000 shares for AOR and around 27,000
shares for AOM. All these ETFs have yields around the 2% level.
The following table (i.e. Table 2) summarizes the general
attributes of the iShares allocation ETFs, any of which could be
interesting picks for investors seeking broad exposure in a certain
risk bucket:
Table 2:
|
ETF
|
Average Daily Volume
|
Expense Ratio
|
Total Assets
|
Yield
|
|
AOA
|
13,000
|
0.33%
|
$97.30 million
|
2.12%
|
|
AOK
|
46,000
|
0.30%
|
$89.30 million
|
1.95%
|
|
AOR
|
21,000
|
0.31%
|
$136.41 million
|
2.11%
|
|
AOM
|
27,000
|
0.31%
|
$153.31 million
|
2.06%
|
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ISHARS-SP AG AL (AOA): ETF Research Reports
ISHARS-SP CN AL (AOK): ETF Research Reports
ISHARS-SP MD AL (AOM): ETF Research Reports
ISHARS-SP GR AL (AOR): ETF Research Reports
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