The Globe and Mail’s personal finance columnist Rob Carrick has been doling out advice for the paper’s readers for years. Recently, Carrick suggested investors consider simplifying part or all of their investing in these tricky times. One way to do this is with these ten asset allocation exchange traded funds (ETFs) to buy.
Here’s what Carrick had to say on the subject on Feb. 22:
The easy option is set up an account at a digital broker and use it to buy an asset allocation ETF, which is a fully diversified portfolio of stocks, bonds and, in one case, a dash of cryptocurrency
ETF stands for exchange-traded fund, which is in simple terms a mutual fund that trades like a stock. The cost of owning asset allocation ETFs is extremely low, and the cost of buying them ranges from zero to just under $10 per purchase
Now, it’s important for me to note that Carrick is speaking to a Canadian audience, but generally, the same principles apply. In most cases, the KISS (keep it simple stupid) rule still applies south of the border.
As best I can, I’ll try to include one asset allocation fund from 10 different ETF providers with five active and five passive ETFs. Here’s my list of ETFs to buy:
- Adaptive Core ETF (BATS:RULE)
- Cambria Global Asset Allocation ETF (BATS:GAA)
- First Trust CEF Income Opportunity ETF (NASDAQ:FCEF)
- FormulaFolios Smart Growth ETF (BATS:FFSG)
- Invesco Growth Multi-Allocation ETF (BATS:PSMG)
- Amplify High Income ETF (NYSEARCA:YYY)
- Arrow Dow Jones Global Yield ETF (NYSEARCA:GYLD)
- iShares Core Aggressive Allocation ETF (NYSEARCA:AOA)
- SPDR SSGA Global Allocation ETF (NYSEARCA:GAL)
- First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FVC)
Here’s to simplifying your investments.
ETFs to Buy: Adaptive Core ETF (RULE)
The Adaptive Core ETF is an actively managed fund that uses a “tactical go-anywhere approach” to invest in multiple asset classes through ETFs and individual stocks.
It currently owns seven ETFs and 15 stocks. The top 10 holdings account for 55% of its $13.6 million in total assets.
Its top three ETFs by weight are the iShares MSCI USA Minimum Volume Factor ETF (BATS:USMV), Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), and Pimco Enhanced Low Duration Active ETF (NYSEARCA:LDUR). Its top holding is Raymond James Financial (NYSE:RJF) at 3.88%. The ETF’s split between equity securities and fixed income is approximately 75/25.
The fund charges 0.91%. Anything under 1.0% for active management is reasonable. However, the fund was only launched in November, so it’s too early to tell if the active management provided by Mohr Capital Management is up to snuff.
Cambria Global Asset Allocation ETF (GAA)
Cambria Investment Management L.P. is the investment advisor for GAA. The portfolio manager is Meb Faber, the co-founder and CEO of the advisor. Faber has managed the ETF since its launch in December 2014.
Page one of the ETF’s prospectus it gives us the gist of the fund:
The Fund is designed to provide absolute positive returns with reduced downside volatility, manageable risk, and smaller drawdowns (i.e., peak-to-trough declines in performance) by identifying an investable portfolio of exchange-traded vehicles that provide diversified exposure to all of the major asset classes in the various regions, countries and sectors around the globe
Faber, for those unfamiliar with the portfolio manager, has an excellent podcast — “The Meb Faber Show’ — that does a good job explaining what’s happening in the markets. I highly recommend it.
The ETF currently has 25 h0ldings, all ETFs. Of those funds, six are other Cambria Funds. Its top 10 holdings account for 63% of the ETF’s $49.6 million in total net assets.
The top three sectors by weight are financial services (18.14%), basic materials (14.59%), and consumer cyclical (12.77%). The U.S. accounts for 57.98% of the portfolio, followed by Taiwan (4.50%) and China (3.62%).
GAA has a good dose of equities and fixed-income securities spread across all sizes of companies. As a result, the ETF’s average market capitalization is $4.68 billion, much lower than its World Allocation peers at $84.7 billion.
The ETF charges 0.41%, which are the fees of each of the ETFs held by the fund. There is no fee on top of that for providing an actively-managed fund-of-funds.
ETFs to Buy: First Trust CEF Income Opportunity ETF (FCEF)
This actively managed ETF from First Trust seeks to provide investors with current income and some capital appreciation. It invests in closed-end investment funds (CEFs) listed on U.S. stock exchanges.
FCEF was launched in September 2016. Since its inception, it has had an annual total return of 8.20%, 79 basis points higher than its blended benchmark, which consists of the Morningstar US All Equity CEF Index (60%), and the Morningstar US All Taxable Fixed Income CEF Index (40%).
The ETF currently has 52 holdings including a 4.68% cash weighting. The top 10 holdings account for 35% of its $34.0 million in total net assets. It has a high yield of 5.61%. Equity ETFs account for 64% of the portfolio, fixed income (31%), and cash accounts for the remainder. Mid and large-caps account for 89% of the portfolio.
Here’s a little insight into the ETFs portfolio construction:
“Funds within the investable universe are scored based on fundamental and performance factors,” states the Dec. 31, 2021, fact sheet.
Fund scores are reviewed and analyzed via a proprietary model which takes into account more than just yield and discount. The portfolio manager seeks to avoid small, illiquid funds and unproven fund managers, while also considering tactical opportunities such as corporate actions, market pricing and calendar events. The model is reviewed and overlaid with a top-down macroeconomic outlook to determine what the portfolio manager believes to be the most opportunistic areas in which to invest.
It’s important to be aware that its fees, including the fees of funds included in the portfolio, are high at 2.46%. However, that’s because 65% of the total fee is the fees paid for the CEF funds within the portfolio. You’d have to pay those even if you went directly.
FormulaFolios Smart Growth ETF (FFSG)
This actively managed ETF can best be described as utilizing a top-down macroeconomic approach to its portfolio construction. When macroeconomic conditions suggest the broad markets are bullish, it invests 100% in growth-oriented ETFs. When these conditions are bearish, it goes to 50% growth-oriented ETFs and 50% invested in Treasuries.
FFSG currently holds six iShares Extended Fund Facilities (EFFs): IVV (29.84%), IJH (17.59%), IYR (10.15%), IJR (17.74%), IEFA (14.36%), and IEMG (9.54%). The portfolio gives investors a little bit of small, mid-, and large-cap stocks, real estate, and non-U.S. equities in a simple fund of funds.
The ETF was launched in October 2017. In the over four years since its launch, it has had an annualized total return of 12.02% through the end of December. Over the past three years through March 9, it has had an annualized total return of 12.34%. Down 9.44% in 2022, if it holds, 2022 would be its first year in negative territory.
While the portfolio managers have yet to go to 50% Treasuries, I would expect that to happen if the Ukraine war carries on for long.
Until this happens, it’s hard to know just how proprietary its macro-focused investment screen truly is. I like the simplicity but I wonder whether it’s been battle-tested.
ETFs to Buy: Invesco Growth Multi-Allocation ETF (PSMG)
This actively managed ETF seeks to invest 65% – 95% of its $23.6 million in total net assets in U.S. equity ETFs, between 5% and 35% in fixed income ETFs, and 15% – 35% in ETFs that invest in foreign equities and fixed-income securities.
PSMG currently has 20 holdings with 58% in U.S. equity ETFs, 20% in fixed income ETFs, and 22% in foreign ETFs. Morningstar gives it four out of five stars for both three- and five-year periods.
In terms of market capitalizations, large caps account for 54% of its equity holdings, while mid-caps and small caps account for 25% and 21%, respectively. The top 10 holdings represent 78% of its total holdings. The individual stocks in the ETF have an average market cap of $30.04 billion with price-to-sales and price-to-earnings ratios of 15.1x and 1.3x, respectively.
The three top sectors by weight are technology (15.15%), financial services (14.41%), and industrials (11.44%). Since its inception in February 2017, it’s had an annualized return of 10.36%.
PSMG charges a reasonable 0.30% annually.
Amplify High Income ETF (YYY)
Unlike FCEF, YYY is a passively managed ETF that tracks the performance of the ISE High Income Index. It ranks closed-end funds based on their yield, discount to net asset value (NAV), and liquidity.
In July 2021, the index increased the number of holdings by 50% to 45 from 30. The initial weight of the index after their semi-annual reconstitution and rebalancing in January and July is 3%.
YYY was launched in June 2013. It’s grown to $368.3 million in total net assets. It has a 10.56% yield. Since its inception, it has had an annualized total return of 5.98% through the end of February.
Approximately 80% of its total net assets are invested in bonds with stocks accounting for the remaining 20%. Out of its 45 holdings, the top 10 account for 30% of the fund. It turns the portfolio once every 16 months.
The top three asset classes by weight are multisector bond funds (26.45%), high-yield bond funds (22.07%), and loan participation funds (12.33%).
Just as with the other CEF funds in this article, YYY has a total expense ratio of 2.26%, which includes 0.50% for the management fee, and 1.76% for acquired fund fees and expenses.
ETFs to Buy: Arrow Dow Jones Global Yield ETF (GYLD)
This ETF from Arrow Funds tracks the performance of the Dow Jones Global Composite Yield Index. The index provides equal-weighted exposure to five different global asset classes including equities, real estate, alternatives, corporate debt, and sovereign debt.
The index is rebalanced quarterly — March, June, September, and December at end of the quarter — with a 20% weighting across each of the five asset classes. Each asset class consists of 30 holdings for a total of 150. The index’s five asset classes have 12-month yields ranging from 13.38% for equities to 4.08 for sovereign debt. The overall 12-month composite yield is 7.47%.
As for the fund, it currently has weightings of 22.83% (alternative), 19.07% (corporate debt), 19.20% (equity), 19.77% (real estate), and 19.13% (sovereign debt).
GYLD was launched in May 2012. Its total net assets are $35.2 million. It has a current yield of 5.73%. This is definitely an ETF for investors in search of yield, rather than capital appreciation.
iShares Core Aggressive Allocation ETF (AOA)
This is unquestionably the largest asset allocation ETF on my list of ETFs to buy. AOA has total net assets of $1.5 billion. It’s been around since November 2008, so it’s probably the oldest, too.
As the iShares page for AOA suggests, “[It is] A simple way to build a diversified core portfolio based on more aggressive risk considerations using one low-cost fund.”
The ETF tracks the performance of the S&P Target Risk Aggressive Index. The index is intended to be an aggressive target risk allocation strategy with a large equity representation and a small amount of fixed income thrown in for good measure.
AOA currently has seven ETFs in its portfolio with five equity ETFs and two fixed-income. Equities account for 78.83%, fixed income (20.51%), and cash/derivatives (0.65%). The top three industries by weight are banks (9.32%), software and services (7.07%), and capital goods (6.08%). Geographically, the U.S. accounts for 60.77% of AOA, with Japan (5.64%), and the UK (3.65%), the next highest by weight.
If you’re a believer in the S&P 500, this is the fund-of-funds ETF for you. And it only charges 0.15% annually. One of the lowest on this list of ETFs to buy.
ETFs to Buy: SPDR SSGA Global Allocation ETF (GAL)
This particular ETF fund-of-funds tracks the performance of the MSCI ACWI IMI Index and the Bloomberg U.S. Aggregate Bond Index. It tends to use a traditional 60/40 split between equities and fixed income. At least 30% of its $266.0 million in total net assets is invested outside the U.S.
GAL got its start in April 2012. Over the past five years, it has had a 25.5% cumulative return, about 750 basis points less than AOA. While the past doesn’t predict the future, the fact that AOA is 20 basis points cheaper than GAL, does help explain some of the underperformance.
The fund-of-funds currently has 19 ETFs in its portfolio with equities and fixed income accounting for 61.69% and 26.52%, respectively. Cash and other investments account for the remainder.
The ETFs top 10 holdings represent 78% of the fund. With 58.85% of GAL invested outside the U.S., it truly is a global asset allocation fund of funds.
First Trust Dorsey Wright Focus 5 ETF (FVC)
This index behind this ETF has an interesting investment strategy. The Dorsey Wright Dynamic Focus Five Index provides targeted exposure to five First Trust sector and industry ETFs and the First Trust Enhanced Short Maturity ETF (NASDAQ:FTSM).
Launched in March 2016, has grown to $211.7 million in total net assets. Per the summary prospectus:
The Index is designed to provide targeted exposure to the five First Trust sector and industry-based ETFs that the Index determines offer the greatest potential to outperform the other First Trust sector and industry-based ETFs and that satisfy certain trading volume and liquidity requirements
Essentially, the index ranks all of the First Trust sector and industry ETFs by momentum and relative strength. The top five are included in the ETF. It is at the portfolio manager’s discretion whether to include FTSM.
The five sectors and industry ETFs currently held by FVC include FTXN (26.80%), FXR (19.05%), FTXR (18.58%), FXD (18.31%), and QTEC (17.25%). It doesn’t currently own FTSM.
Since its inception in May 2016, it has had an annualized total return of 11.13%, 467 basis points less than the S&P 500.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
