AOA: Diversified But Not That Safe In A Rate Hike Environment

The iShares Core Aggressive Allocation ETF (NYSEARCA:AOA) is composed of some other broad ETF allocations, major ones including the iShares Core S&P 500 ETF (IVV) and the iShares Core MSCI International Developed Markets ETF (IDEV). There are also bond exposures that make the AOA very diversified across the major asset classes. There is nothing 'aggressive' about it though in the traditional sense, except perhaps the duration in the iShares Core Total USD Bond Market ETF (IUSB). Ultimately, these wide bets don't make much sense in a global economy that is so rife with bifurcations, as all sorts of factors and considerations now come to the fore. We think broad based US exposures are possibly overbought, and we don't think Europe is all that fantastic either. High duration also continues to be a concern. AOA is not for us.

AOA Breakdown

Let's have a quick look at the top holdings, which include in large part the ETFs we mentioned above.

Our concerns with the IVV are pretty simple. The US economy is being belligerent to the rate hikes. We think it's coming from pent-up boomer demand that cannot be hurt by rate hikes as much as millennial wealth and income. Still, aggregate demand is too high, and aggregate supply remains a little impaired although the Ukraine issues have largely been digested by supply chains. Rate hikes will continue, and while that will be good for the dollar, it will be bad for costs of capital. Strong economic numbers are good for business fundamentals, but the skew of US markets to tech makes cost of capital a greater concern than economic fundamentals. Moreover, long-term rate expectations are still pretty low. If the current situation persists and the US economy can take a lot more rate hikes till inflation is at policy level, assets still have a lot of space to be priced down especially on the horizon values.

Europe is similarly seeing inflation re-accelerate. Some geographies like Italy are doing better and seeing further abating, but others not, specifically Germany which was most in bed with the Russians prior to the sanctions, which the Germans were not crazy about at all. While this will keep the EUR competitive with the dollar, Europe has stickier wage regimes due to tighter employee protection. The economy there is also generally weaker and less self-reliant in terms of supply chains. While this is reflected in the Europe dominated IDEV, it's still a worse set of circumstances for the geography where rate hikes might have to become more aggressive due to the stickier wage situation.

Finally, the bond allocations are high duration at 6 years. With the US economy belligerent there is more downside if rates continue to hike. At least the debt ceiling issue has been cleared.

Bottom Line

The net expense ratio is 0.15%, and when waivers expire at the end of 2026 it'll be back at 0.2%. Compared to global allocations ETFs, and other maximally diversified ETFs, it is actually a decent ratio. The issue is you can get cheaper rates on ETFs that don't compound costs by in turn holding other ETFs, like just buying the IVV directly. Most egregiously though, if you take the average expense ratio of the top 3 component ETFs you end up with a much lower rate below 0.1%. AOA isn't great in the expense department on that basis, but the bigger issue is that it just doesn't appear to be the right exposures in the current regime of persisting inflation and rate hikes.

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