Investment Style Diversification Matters | ETF Trends

By Todd Rosenbluth, CFRA


  • Fixed income exposure helped these ETFs during a volatile start to the year.

Positive Implications

  • iShares Core Aggressive Allocation ETF (AOA)
  • iShares Core Growth Allocation ETF (AOR)
  • iShares Core International Aggregate Bond ETF (IAGG)
  • iShares Core Moderate Allocation (AOM)
  • iShares Core Total USD Bond Market ETF (IUSB)

Negative Implications

  • iShares Core S&P 500 ETF (IVV)

With the sharp selloff last week in global equity markets, investors were reminded the role fixed income funds can play in their portfolio. Fixed income provides ballast, offering not only downside protection but also moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty. How much exposure to dedicate to fixed income should be a matter of risk tolerance but certainly impacted returns so far in 2020.

iShares Core S&P 500 ETF (IVV) was down 8.5% year-to-date through February according to First Bridge Data, a CFRA company. Despite the sector diversification of this ETF, there was no place to hide as all 11 sectors were down more than 10% in the final eight trading days of the month, even the typically defensive Real Estate and Utilities sectors.

Meanwhile, based on ETF flows data some investors headed into 2020 believing that international equity markets would perform better than the U.S. Yet they could not have foreseen that the coronavirus would emerge in China and spread further into Asia and to Europe. iShares Core MSCI Emerging Markets ETF (IEMG), which declined 9.4% YTD through February, had 34% of assets in China and additional 13% in Taiwan and 12% in South Korea at the end of the month. iShares Core MSCI International Developed Markets ETF (IDEV) was down even more, 9.9% YTD through February. Japan (23% of assets), United Kingdom (14%), and Canada (9%) were its largest country exposures.

Though equity ETF investors may be experiencing some pain so far in 2020, bond fund investors are likely in better shape as demand for the stable income inside climbed higher. The yield on the 10-year Treasury, which opened the year at 1.88%, fell to a minuscule 1.16% at the end of February. (Bond yields decline as bond prices rise).

iShares Core Total USD Bond Market ETF (IUSB) rose 3.2% in the first two months of 2020, aided by its 34% stake in U.S. Treasuries, 22% in mortgage backed securities. and most of the remainder in investment-grade corporate bonds from the likes of AT&T and JPMorgan. The ETF’s duration of five-and-a-half years also helped as the fund benefits from falling bond yields. IUSB has a 2.2% 30-day SEC yield.

Just as U.S. investors can gain exposure to international stocks through ETFs such as IEMG and IDEV, they can also gain exposure to international bonds through ETFs. iShares Core International Aggregate Bond ETF (IAGG) holds sovereign and corporate bonds issued in Japan (12% of assets), France (11%), Germany (10%), China (7%), and more. Though bond yields were lower in many of these markets than in the U.S. and IAGG only has a 0.7% 30-day SEC yield, the ETF was up 2.6% year-to-date.

These are just examples of the broadly diversified and low-cost U.S. and international equity and fixed income ETFs available. Vanguard, SSGA, and other ETF providers offer a similar suite of ETFs to support asset allocation though the exposure and holdings differ. We highlight iShares as the firm also offers funds of funds, based the risk tolerance of the investor, that can be illustrative of the benefits of investment style diversification.

For example, iShares Core Aggressive Allocation ETF (AOA) had 79% of assets in equities and 21% in fixed income at the end of February. AOA held IVV (37% of assets), IDEV (30%), IUSB (18%), IEMG (8%), and IAGG (3%) in addition to modest positions in small- and mid-cap U.S. equities. AOA was down 7.4% this year, less than IVV.

In contrast, iShares Core Growth Allocation ETF (AOR) declined just 4.5% in the first two months. AOR had 59% of assets in equities and 41% in fixed income at the end of February. The fund held more IUSB (35% of assets) and IAGG (6%), but less IVV (27%), IDEV (22%), and (IEMG (6%) than AOA, which limited downside.

The stock market correction in late February was swifter than many could have imagined. But Sam Stovall, CFRA Chief Investment Strategist, likes to say, “a boxer is rarely felled by the punch he expects.” Investors need to make sure their portfolio reflects their risk tolerance and ETFs can provide the necessary low-cost tools to build and support the portfolio that allows investors to both achieve their goals and sleep easy at night.

This story originally appeared at You can reach the author on Twitter @ToddCFRA.

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