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AOK: There's Plenty That Is Not OK With This Allegedly Conservative ETF

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By Rob Isbitts

What does "conservative investing mean?" Let's commencement pinch what I do not deliberation it means. I don't deliberation a blimpish investor wants this:

ChartData by YCharts

That's a drawdown (peak-to-trough decline) of astir 19%, which occurred past twelvemonth in AOK (NYSEARCA:AOK), an ETF that has nan connection "conservative" successful its name. Now, this has ne'er happened successful nan 12-year history of this ETF. But it has happened successful past inflationary periods, for illustration nan 1970s, erstwhile stocks and bonds besides fell together. And AOK besides had a 15% drawdown during nan abrupt marketplace daze successful 2020, acknowledgment to nan commencement of nan Covid-19 pandemic.

My constituent is that while history has shown that nan mostly of nan time, a 70% bond/30% banal plus allocation has offered humble volatility, that history is very misleading. The markets enjoyed a super-cycle, successful which enslaved prices generally roseate for 40 years, and nan banal marketplace had much roar than bust. But today's marketplace climate, its obsession pinch nan Fed's each word, nan surging information of unit investors, and nan power of "price-insensitive" trading (index costs and algorithms are rules-based buyers and sellers) each conspire to time off maine highly skeptical astir nan early of "traditional" plus allocation coming adjacent to what investors received successful nan past. The easy, lazy times are over. Thus, I spot AOK arsenic a dinosaur of a strategy and complaint it a Sell for nan agelong run.

Strategy

AOK allocates among 7 iShares ETFs, making this fundamentally an ETF of ETFs. This money is designed to connection investors a 1-stop shop to allocate assets successful an allegedly blimpish manner, utilizing banal and enslaved ETFs that agelong crossed aggregate capitalization sizes and geographies, and pinch nan ascendant allocation to bonds.

ETF Grades

  • Offense/Defense: Offense

  • Segment: Multi-Asset

  • Sub-Segment: Conservative

Technical Ratings

  • Short-Term (next 3 months): D

  • Long-Term (next 12 months): D

Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor

For a elaborate explanation of MII's proprietary method standing system, spot nan disclosures astatine bottommost of this report.

Holding Analysis

AOK is really a 4-ETF investment, pinch very mini pieces of further ETFs added, moreover though they really are not large capable to adhd value. iShares Core Total USD Bond Market ETF (IUSB) is 58% of AOK, and astir each of nan remaining enslaved vulnerability is done an iShares world enslaved ETF (10%). The equity broadside of nan portfolio is chiefly divided betwixt an iShares S&P 500 ETF and an world banal ETF, which dress up 16% and 10% of AOK's assets, respectively. Those 4 ETFs relationship for astir 94% of nan full portfolio. Large-cap stocks and finance people bonds predominate nan allocation.

Strengths

AOK is simply a very straightforward, and for immoderate investors, a convenient ETF to own. One ticker, traded connected nan banal exchange, pinch instant world diversification. AOK is simply a liquid vehicle, pinch complete $700mm successful assets and an mean dollar trading measurement of complete $13mm a day. When taken together, those 2 figures show that only astir 2% of AOK's assets are traded connected an mean day. That tells maine what I'd dream and expect from a semipermanent allocation ETF for illustration this one: that its investor guidelines is simply a buy-and-hold crowd.

Weaknesses

ChartData by YCharts

The issues I spot pinch AOK are not based connected really it did until astir a twelvemonth ago. As you tin spot successful nan floor plan above, for astir of this ETF's life, it was a dream script for blimpish investors. The chart shows that successful astir each 3-year clip framework (monthly moving windows), AOK's annualized full return was betwixt 3% and 10%. What blimpish investor wouldn't motion up for that?

But among nan galore aspects of investing coming that person been invaded by investor complacency, and fed by Wall Street's buzz-word-filled trading (asset allocation, buy-and-hold, semipermanent investing, etc.), nan astir vulnerable could beryllium nan increasing spread betwixt blimpish allocation approaches and nan realities of modern markets. AOK is nan poster kid for this predicament.

Adding to my concerns astir this ETF is nan truth that iShares, which is getting paid its guidance interest connected each of nan constituent ETFs successful AOK, tacks connected a 15 ground constituent yearly interest to ain AOK. That has caused this ETF to underperform its ain benchmark by 1% cumulatively complete nan past 5 years.

Opportunities

I could beryllium wholly incorrect astir this. And that would perchance crank up nan bully aged days for AOK, alternatively than my dire forecast for a 70% bond/30% banal allocation ETF successful a changed finance era. If liking rates drifted little aliases stayed astatine existent levels for years, and nan banal marketplace resumed its double-digit returns complete agelong clip periods (as we saw pinch only little interruptions from 2009-2022), AOK could beryllium a gem. And, while I'm nan type of investor that ne'er assigns a 100% probability to immoderate finance scenario, I deliberation nan likelihood that stocks and bonds together return to nan days of yore (pre-2022) is simply a agelong shot.

Threats

What we saw successful 2022 and truthful acold successful 2023 was inevitable. I wrote much articles than I tin retrieve complete nan past decade (in different publications, earlier joining nan Seeking Alpha community) astir nan threat of relying connected high-quality bonds arsenic a banal portfolio partner successful plus allocation strategies.

Bond rates were going to yet assistance disconnected from zero, and there's a beardown anticipation that ostentation will stay elevated for rather a while. Maybe it won't stay anyplace adjacent nan 9% highest we saw recently. But moreover 3-5% sustained ostentation will alteration nan measurement nan enslaved marketplace and banal marketplace operate. And I don't spot grounds that investors are prepared for really that tin make enslaved prices and returns look excessively overmuch for illustration volatile banal prices. That changes nan full attack to "conservative" investing. At least, it should.

What's nan replacement for blimpish investors? It starts pinch looking for alternatives to simply accepting bonds arsenic nan offset to stocks successful a alleged balanced portfolio. I americium a large instrumentality of long-short investing utilizing ETFs, isolated from that nan shorting is not done by really shorting ETFs. I person profiled respective single-inverse ETFs that tin beryllium utilized successful operation pinch equity ETFs, and successful today's marketplace conditions, short-term US Treasury exposure, to create a blimpish allocation operation that does not origin investors to property their luck regarding nan early guidance of nan banal and enslaved markets. Even erstwhile conditions "normalize" again (if they ever really do), an all-in-one allocation ETF of this quality will apt autumn short. Sure, AOK has suffered from low-interest rates successful a bond-dominated ETF. But my constituent is, nan style itself did not let AOK to do thing astir that. Stock/bond allocation nan accepted measurement is astatine champion connected an extended vacation, and astatine worst a relic of history.

Conclusions

ETF Quality Opinion

Conservative investors person amended choices than to judge nan imaginable for drawdowns nan likes of which we've seen from AOK. And pinch accrued unit building successful world in installments and equity markets, location is simply a existent anticipation that AOK, could break its ain drawdown record. That would beryllium a horrific result for investors who thought they were getting thing that wouldn't driblet much, moreover successful reliable markets. Welcome to nan modern investing era.

ETF Investment Opinion

If you person publication this far, you cognize that I americium standing AOK a Sell, connected a semipermanent basis. Stocks and bonds will rally together astatine times successful nan future, possibly moreover for a twelvemonth aliases two. But reasoning for illustration AOK investors apt do (long-term), I deliberation blimpish investing coming is much astir mounting up a portfolio that is genuinely system to debar large losses, return little in installments and long consequence erstwhile nan times request and germinate pinch changing markets.

Modern Income Investor's proprietary method standing strategy was created by nan firm's founder, Rob Isbitts, a chartist for much than 40 years. The ratings stress risk-management, and nan belief that while immoderate finance tin admit successful value astatine immoderate time, each finance carries a different level of imaginable for awesome loss. The equilibrium of reward and consequence is calculated each nighttime for thousands of securities, utilizing a look that analyzes value trend, spot of that inclination and cardinal value levels. It analyzes information complete aggregate clip frames to nutrient a short-term standing (looking 3 months out) and a semipermanent standing (looking 12 months out).

This article was written by

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The conception of Modern Income Portfolios was created by seasoned finance strategist Rob Isbitts, a erstwhile finance advisor who sold his believe successful 2020 to attraction connected converting his decades of portfolio building and investigation into thing that could beryllium delivered successful a subscription-based format. The result: Modern Income Investor! Modern Income Investor is connected a ngo to lick nan biggest finance situation of this era: spinning disconnected regular distributions from portfolio profits, while keeping nan main magnitude intact. This is what securities for illustration firm bonds and dividend stocks utilized to do well, but do not anymore. We prosecute this by offering subscription-based finance research, exemplary portfolios and timely insights, communicated successful a concise, easy-to-use format.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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