A reader writes in, asking:
“I noticed that iShares seems to have a platform of 4 ‘core allocation’ funds, e.g. AOM, AOK, AOR, AOA. I’m curious if you feel these are comparable to Vanguard’s LifeStrategy funds?”
For anybody who hasn’t encountered the iShares Core Allocation ETFs before, they’re funds that (like the LifeStrategy funds from Vanguard) offer a static, diversified allocation. In other words, they seek to offer a diversified portfolio in a single fund.
As far as differences, first and most obviously, they’re ETFs rather than traditional mutual funds. The differences between ETFs and traditional mutual funds are very small though for most individual investors. (Personally, I have a very slight preference for regular mutual funds, because I like to be able to place orders for round dollar amounts without having a few dollars of cash sitting around left over.)
As far as costs, the iShares Core Allocation ETFs have expense ratios of 0.25%. That’s somewhat higher than the 0.12-0.15% expense ratios for Vanguard’s LifeStrategy funds (which are themselves somewhat more expensive than what you’d pay with a DIY portfolio of individual index funds), but it’s still well below average for mutual fund expenses in general.
As far as asset allocation, the overall stocks/bond allocations are as follows:
- iShares Core Aggressive Allocation ETF (AOA): 80% stocks, 20% bonds;
- iShares Core Growth Allocation ETF (AOR): 60% stocks, 40% bonds;
- iShares Core Moderate Allocation ETF (AOM): 40% stocks, 60% bonds; and
- iShares Core Conservative Allocation ETF (AOK): 30% stocks, 70% bonds.
If you’re familiar with the LifeStrategy allocations, you’ll notice that this is very similar, with the one difference being that they only go as low as 30% stocks, whereas the LifeStrategy Income Fund has a 20% stock allocation.
Key point: As with target-date funds, it’s best to ignore the names and focus instead on the allocation. For instance, the iShares Core Growth Allocation ETF (AOR) is closer in asset allocation to Vanguard’s LifeStrategy Moderate Growth fund rather than Vanguard’s LifeStrategy Growth fund.
With regard to the actual underlying holdings, it’s pretty run-of-the-mill stuff. Nothing esoteric in any way. For instance, here’s the underlying allocation of the iShares Core Aggressive Allocation ETF (AOA), according to Morningstar as of 3/15/2017:
- iShares Core S&P 500 39.76%
- iShares Core S&P Mid-Cap 3.27%
- iShares Core S&P Small-Cap 1.43%
- iShares Core MSCI Europe 17.35%
- iShares Core MSCI Pacific 12.23%
- iShares Core MSCI Emerging Markets 7.64%
- iShares Core Total USD Bond Market 9.23%
- iShares US Treasury Bond 3.55%
- iShares US Credit Bond 2.63%
- iShares Core International Aggregate Bond 2.75%
You may notice from the above that the iShares funds have relatively higher international stock allocations and relatively lower international bond allocations than the LifeStrategy funds. Specifically:
- The iShares funds have about 45% of their stock allocation in international stocks and about 15% of their bond allocation in international bonds, whereas
- The LifeStrategy funds have about 40% of their stock allocation in international stocks and about 30% of their bond allocation in international bonds.
Frankly, I like the iShares funds ever so slightly better in that regard.
As I’ve written several times in the past, while I don’t think performance charts are especially useful for deciding which of two funds is better than the other, I do think such charts are helpful for showing how similar (or dissimilar) two funds are. The chart below shows the Vanguard LifeStrategy Moderate Growth Fund (in blue) as compared to the iShares Core Growth Allocation ETF (in orange) since December 2011 (i.e., the point at which Vanguard switched the LifeStrategy funds so that they no longer include actively managed mutual funds).
As you can see, they’re very similar — almost indistinguishable.
In short, the iShares Core Allocation ETFs are perfectly fine, boring funds. They’re slightly more expensive than the LifeStrategy funds, with slightly different allocations. And they’re ETFs rather than traditional mutual funds (which probably doesn’t matter to most people). So if you’re looking for a one-fund solution that provides a static allocation (as opposed to target-date funds which shift toward bonds over time), they’re a perfectly reasonable choice.