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AOM: This Asset Allocation ETF Is Not Even Moderately Interesting

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Jarmo Piironen

By Rob Isbitts

NYSEARCA:AOM is 1 of a group of 4 ETFs offered by manufacture elephantine iShares for astir nan past 15 years. Similar to target day communal funds, these ETFs purpose to present what nan issues see to beryllium a target plus allocation for investors pinch a definite type of consequence tolerance. In nan lawsuit of AOM, that is simply a “Moderate Risk” allocation. In plus operation terms, that translates to a 40% banal and 60% enslaved allocation.

I spot 2 problems pinch nan attack of this ETF and its 3 siblings, which target Conservative, Growth and Aggressive allocation objectives. First, nan domiciled of bonds successful a alleged “balanced” portfolio has changed and whitethorn not alteration backmost for a while. Bonds utilized to beryllium predictable and profitable. Now, they are fundamentally different type of stock, acknowledgment to nan market’s consequence to a caller era of higher liking rates. Those rates are apt to up and down wildly successful nan coming years, and that modulation from what bonds were to what they are is simply a situation I don’t deliberation galore investors (especially retirees and pre-retirees) person rather accounted for yet.

The different problem is that AOM doesn’t do thing that astir investors tin do themselves. One of nan awesome things astir ETFs is that they are highly-transparent vehicles. You tin spot what they ain each day. That look-through facet intends that ETFs that are constructed excessively simply, and adhd connected unnecessary fees, are conscionable not very useful. Unfortunately, astir $1.4 cardinal successful investor assets don’t spot it that way. But I do, and truthful I americium assigning a Sell standing to AOM.

Strategy

AOM invests crossed 8 iShares ETFs, making it an ETF-of-ETFs, nan balanced of a fund-of-funds successful nan communal money aliases hedge money arenas. The extremity is to execute a mean allocation that tracks nan S&P Target Risk Moderate TR USD index, a 40% enslaved / 60% banal benchmark.

Holdings

Nearly 50% of AOM is invested successful an iShares enslaved ETF that itself is astir 40% allocated to authorities bonds, pinch nan remainder invested successful bonds that person immoderate grade of in installments risk. So, astir 20% of AOM is successful authorities bonds. Another 22% is invested successful an iShares S&P 500 ETF, and 13% is successful an iShares International banal ETF. Those 3 positions dress up astir 85% of AOM. The different 5 ETFs information retired nan portfolio pinch non-US bonds, mid headdress and mini headdress stocks, and a mini money marketplace position.

ETF Grades

  • Offense/Defense: Offense

  • Segment: Multi-Asset

  • Sub-Segment: Moderate

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 disclosures astatine bottommost of this report.

Strengths

I americium a instrumentality of Blackrock’s iShares unit, moreover if I americium not a instrumentality of AOM. The patient put ETFs connected nan representation and offers respective innovative and useful funds. Their backing is ever a spot to me. In addition, this ETF does efficaciously target a 40%/60% banal enslaved portfolio. So, if an investor is drawn to that, AOM makes that happen. This ETF besides pays a quarterly dividend, truthful shareholders get immoderate rate distributed connected a regular basis.

Weaknesses

This could beryllium a very agelong list, but I’ll debar getting excessively “preachy” astir my long-standing disapproval of nan accepted stock-bond allocation mix. I’ve written plentifulness of articles successful Seeking Alpha nether Modern Income investor that screen my beliefs and nan rationale for them, aft 37 years successful nan finance manufacture trenches. Suffice it to opportunity that expecting bonds to present nan operation of decent output and falling rates connected a secular ground is asking for nan near-ideal conditions for enslaved investors from 2009-2021 to resume. I deliberation nan measurement markets run coming has changed, acknowledgment to media hype, societal and otherwise, and a caller batch of marketplace influences that frankly don’t attraction what they are buying and selling. That includes scale funds, high-frequency traders, day-traders, and others. This each conspires to make “traditional” stock-bond allocations very risky, if each you do is look backmost astatine past returns. To my disappointment, galore investors are still doing that. There are spots successful nan marketplace wherever 1 tin get distant pinch that, but I don’t deliberation balanced portfolio allocation is 1 of them.

Add successful nan truth that iShares tacks connected an further 15 ground constituent interest to ain this very transparent operation of different iShares ETFs that does not alteration very often, and I’d expect much pushback from nan finance community. But iShares double-dipping appears to beryllium arsenic acceptable to nan marketplace arsenic it is successful nan hedge money business, which is simply a enigma to me.

Opportunities

If I’m wholly incorrect astir my concerns for balanced allocation ETFs, that should beryllium affirmative for AOM. A caller banal and enslaved bull marketplace aliases moreover a banal bull marketplace pinch liking rates staying dependable from here, apt leads to decent returns from AOM’s plus mix.

Threats

However, nan enslaved output curve is “inverted,” pinch short-term rates good supra semipermanent rates. That will beryllium unwound astatine immoderate point, and that could unleash a caller shape of very antagonistic returns for bonds pinch maturities beyond a fistful of years. AOM has plentifulness of vulnerability to intermediate to semipermanent bonds, truthful it would beryllium caught successful that scenario. Then there’s nan over-reliance connected a historically top-heavy S&P 500 ETF. If those FAANG banal valuations ever travel backmost to earth, AOM will carnivore nan brunt of it. The mid headdress and mini headdress banal vulnerability mixed is only astir 2%. FAANG stocks unsocial return up overmuch much than that 2% weighing successful AOM. I deliberation that begs nan question, why fuss to “window dress” this ETF pinch specified mini positions that don’t make a quality successful performance.

Conclusions

ETF Quality Opinion

The value facet of this ETF ends pinch nan issuer, iShares. There’s plentifulness of value there. But this study is astir AOM, not its giant, iconic issuer. As a erstwhile long-time finance advisor, I cognize firsthand that position for illustration “moderate allocation” sound awesome erstwhile discussed successful an finance strategy session. But erstwhile an ETF for illustration this 1 falls astir 20%, arsenic it did complete a play of months during 2022, I conscionable don’t spot AOM arsenic nan perfect measurement to present mean consequence successful an ETF portfolio form.

ETF Investment Opinion

I complaint AOM ETF a sell, and promote investors to see different ways to reside nan mean allocation objective. That includes much tactical management, ETF arbitrage strategies, little reliance connected semipermanent bonds (for now) and improvement of a wider toolbox for nan equity broadside of nan portfolio, alternatively than focusing truthful overmuch effort connected S&P 500 ETFs.

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

Modern Income Investor floor plan picture

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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