AOA: The One-Stop Shop ETF For Retirement (NYSEARCA:AOA) #NewsETFs

The One-Stop Shop

In my eyes, the AOA iShares Core Aggressive Allocation ETF, ticker symbol (NYSEARCA:AOA), is one of the best “Set it and forget it” funds available. It’s a fund I would have no problem putting 100% of my portfolio in. Although I still like to pick stocks for fun here and there, AOA is currently my core holding as we navigate a more volatile index.

Per iShares Investment Objective – “The iShares Core Aggressive Allocation ETF 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 target risk allocation strategy.”

In other words, it’s a one-stop shop for those interested in portfolio optimization between global stocks and other uncorrelated assets, but don’t want to mess around with the tweaking of weighting, tax loss harvesting, reallocation etc, or paying expensive fees to a fund manager. Time and energy wasted on these sort of activities may be more useful spent on other income generating ventures.

AOA

AOA is a mix of several different individual IShares Core exchange traded funds (“ETF”) that track different factors. Seeking Alpha provides current holdings below:

There is quite a blend of US and International stocks and bonds. when you boil it down to simpler terms, generally it follows 50% US Stocks, 30% International Stocks, 17% US Bonds, and 3% International Bonds. In other words, this follows a popular 80/20 split between equities and fixed income. Theoretically, we should expect the bonds to help improve volatility and drawdown at the cost of less expected returns. Through back testing, we can dive into the details a little more.

Back Testing

AOA was introduced to the public in 2008. By back testing AOA versus a standard S&P 500 index, this would only give us 16 years of results. In my opinion, this isn’t enough evidence considering the investment cycle for this ETF would be a lifetime. Furthermore, we are also coming out of some century highs of S&P 500 indexes so to conclude expected returns would remain this high for the index would be pretty marvelous for US investors but perhaps not likely.

I think a better approach is to back test a sample asset allocation structure dating back to 1987. This would give us around 37 years of history, which is more reasonable for a lifetime investor.

Remember, AOA breakdown is essentially 50% US Stocks, 30% International Stocks, 17% US Bonds, and 3% International Bonds. Unfortunately, I was not able to find data for the International Bonds tracking back that far. Since it only makes up 3% of the portfolio, I opted to push this asset up into the Total US Bonds. Although its not a perfect representation to AOA, its pretty close. I went for 50/30/20 US stocks, Ex-Us Stocks, US Bonds creatively named “Portfolio 1”.

From a performance standpoint, there are a few things to point out. The 500 Index investor would’ve had nearly $500K with an initial investment of $10K, whereas the Portfolio 1 would only have $215K. This amounts to a 10.94% Annualized Return, or compound annual growth rate (“CAGR”), and 8.49% respectively. At this point, one might look at this and assume there is no reason to stick to Portfolio 1, however the international exposure and fixed income did help with max drawdown. With Portfolio 1 having a max drawdown of 43% and the 500 Index Investor having a 50.97%.

What this means is although Portfolio 1 didn’t reach the same end balance, it didn’t draw down as much during turbulent times. This can be very beneficial for those who cannot stomach losing 50% of their portfolio in a short period of time. This is further exasperated by the standard deviation values. Portfolio 1 had a standard deviation of 12.27% whereas the 500 Index investor has a standard deviation of 15.27%. The lower the standard deviation, the lower volatility.

For a visual indication, you’ll notice Portfolio 1 stood a little during times when the 500 index investor drew down. An example is in 2008, when the 500 index investor drew down to nearly the same level as the Portfolio 1 investor.

Expenses

AOA expense ratio is 0.15% which is higher than other index tracking ETFs but still reasonable.

As a reminder, this is how much AOA will charge you per year to cover costs of the fund. With this ETF being passively managed, and using a rules-based approach to picking, you get two advantages.

1. The fund gets by with a low expense ratio because there are no “stock-picking” fund managers to compensate. Whereas some actively managed funds can go from 0.5% expense ratios up to 1-2% for some mutual fund advisers. This may not seem like much, but this can be the difference of up to $10k in expenses on a $500k retirement portfolio.
2. The rules-based approach means there are reduced bias risks when picking funds based on what the manager feels like that day. Several data shows up to 90% of fund managers fail to beat the market. In other words, the $10k expense previously mentioned is a bet that your special fund manager will beat the 10% odds of beating the market. I for one, do not like those odds and would rather use that money to buy more AOA – Or literally anything else.

Dividends

On top of the advantages stated above, AOA pays a quarterly dividend. Currently, it sits at a 2.11% and grows on average 5.70% CAGR over the last 10 years. This means a $500k retirement portfolio will pay $10,550, or $2637.5 quarterly and this payment will grow about 5.7% a year if we use historical estimates.

Conclusion

I think AOA is one of the better one-stop shops for a public retirement ETF. It offers global diversity through both equities and fixed income, which should perform better than 100% US equities through turbulent times. Furthermore, it exhibits a low expense ratio and on a $500K portfolio, it pays you $10k a year instead of charging you $10k for a mutual or actively managed fund that will most likely not beat the market. Although I didn’t get too much into international benefits here, it’s quite clear we’ve been in decades long US bull market and wouldn’t be surprised if we see a cycle shift to international. I cover this cycle in more detail in a different Seeking Alpha Article.

Whether we see international stocks bull run, or bonds be the next best investment, or the US continues to dominate the next 50 years, AOA should provide a great risk-adjusted return for a retirement fund.