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An atypical fund of funds. An unusual construct containing non-traditional ETF sectors. Surprisingly good capital appreciation and consistent monthly dividends. Any individual investor who might catch equity and bond market news in bits and pieces during the course of the day is most likely feeling a bit of angst. Analyst and economist have seemed to become ‘polarized’ in their thinking. Some argue that impending inflation looms on the horizon; other that a fathomless deflation has already begun. Some argue that the global economy is still growing at an above average pace while others claim we’re on the verge of a deep global recession. Who has time to study markets and also go about the daily routine? Then again, what investor can ignore the change in sentiment over the past year? Well, there’s a way to continue with a well-disciplined, consistent investment strategy without taking undo risks and still do quite well. BlackRock’s iShares Core Conservative Allocation ETF (NYSEARCA: AOK ) ma y be the exact right place to stick with a long term disciplined investment plan and protect those hard earned retirement or future college fund savings until the time is again right to diversify. There are advantages in choosing this ‘fund of funds’ over traditional conservative investments. First, investment dollars are not being locked in as they would be if one had purchased U.S. Treasuries or a major financial institution’s certificate of deposit. Further, its Treasury holdings diversify across the span of all maturities. It’s not exclusively fixed income U.S. Treasuries, but also allocates among equities via other iShares “Core” funds including S&P 500 large, mid and small caps, European and Asia-Pacific core holdings as well as a small emerging market allocations. However, the greatest portion of all of the fund’s asset classes are U.S. focused, or global companies whose business is mostly in U.S. markets. (Data from BlackRock) In order to grasp this fund as a good safe haven play in uncertain times, a closer examination of the allocations, individual components and returns need to be examined in greater detail. For example, a large portion of the fund is classified as ‘ Other ‘ and as ‘ Supranational’ . That’s an unusual name for a sector to say the least! (Data from BlackRock) According to Investopedia, Supranational is: … an international organization, or union, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the wider grouping … As examples, the European Union, the International Monetary Fund, and World Trade Organization are ‘Supranational organizations’. Indeed, scrolling through iShares comprehensive asset listings, there is indeed a ‘Supranational’ sector. The breakdown is summed up in the following table, and well worth noting. Supranational Organization Fund Symbol Fund Weighting Brief Description African Development Bank Medium Term Notes AFDB 0.06% NGO for economic development in Africa Asian Development Bank Medium Term Notes ASIA 0.13% NGO for economic development in Asia Development Bank of Latin America CAF 0.01% NGO Financing and Technical Assistance Council of Europe Development Bank COE 0.06% NGO Social Investment Projects European Bank for Reconstruction Medium Term Notes EBRD 0.07% NGO for Entrepreneurship European Investment Bank EIB 0.43% Bank of the European Union for EU Member States Inter-American Development Bank IADB 0.17% NGO Financial and Technical Support Latin America and Caribbean International Bank for Reconstruction Medium Term Notes IBRD 0.24% WTO Sponsored for Developing Countries International Finance Corporation IFC 0.10% NGO Private Sector Development in Emerging Markets Nordic Investment Bank NIB 0.03 NGO Financial Development for Nordic and Baltic Countries Total 1.3% (Data from BlackRock) Most, if not all of the above mentioned Non-Government Organization (NGO) Banks do receive support from governments, or other supranational organizations but operate mostly independent of governments for the social and economic betterment in developing regions. The point of the matter is that the ‘medium term notes’ or other NGO investments seem reasonably secure since they are ‘backed’ by larger ‘parent’ organizations or part of a government’s foreign aid budget. The second undefined label, ‘ Other ,’ is a bit more complicated, to say the very least. Scrolling through the holdings, it seems that ‘Other’ includes a wide ranging, globally diversified collection of assets. The number of global holdings was quite surprising. There are small holdings of equities, bonds and agency notes allocated in over 52 countries. They are summarized in the Bar chart below. The sum total of ‘other’ holdings is 7.7%. Other Holdings: All less than 1.00%; Total: 7.7% of all holdings. (Data from BlackRock) Hence, there’s a bit more risk in that sector; however to be fair, these other holdings are extremely diverse, and very lightly weighted. What remains to be examined then, are the actual funds in the fund. A little care must be taken here, too. First, when the number of holdings is considered in each of the funds, all part of iShares “Core” ETFs theme, there is bound to be ‘overlaps’. So the fund does lack efficiency. However, with most of the Fund in U.S. Treasuries and S&P large cap equities, it should serve its purpose as a defensive holding in the current global economic environment. The investor should keep in mind, though, that the steady capital appreciation may have much the do with the extraordinary advanced economy bond purchasing programs and flight to quality trade into sovereign bonds. That being said, the fund has, in fact, performed rather well and has consistently paid monthly dividends since inception, November of 2005. (click to enlarge) As noted, the fund is composed mostly of fixed income; about 69%. Investors should also take note that it has become a common practice for corporations or governments to issue bonds denominated in stronger foreign currencies, for example, in Euros, Pound Sterling, Yen or U.S. Dollars. There are many good reasons for this strategy. It might be that two nations share a special trade relationship, for example the U.S. and Mexico. Another is to attract foreign fixed capital investments by having a large foreign currency reserve of the foreign investor. Also, it is a means to make bonds with weak domestic economies more attractive to investors seeking an added measure of security. However, the strategy could backfire if the issuer’s native currency weakens sharply against the stronger currency, thus making it more expensive to service the debt. Bond ETF Funds Symbol Number of Holdings Type of Holdings Distribution Yield Weighted Average Coupon Weighted Average Maturity Premium / Discount Expense Fee Weight in AOK Fund iShares Core U.S. Treasury Bond ETF GOVT 120 1 to 30 year U.S. Treasuries 1.36% 2.24% 7.05 years Premium 0.02% 0.15% 16.18% iShares Core Total USD Bond Market ETF IUSB 1547 Global U.S. Dollar Denominated Bonds 1.68% 3.26% 7.11 Years Premium 0.18% 0.15% after 0.01% waiver 41.93% iShares Core U.S. Credit Bond ETF CRED 2542 U.S. Dollar denominated, sovereign, supranational, corporate, local authority notes and bonds 3.35% 4.17% 10.18 years Premium 0.16% 0.15% 11.49% (Data from BlackRock) Next, the fund extends globally with comprehensive U.S., European and Pacific index equity holdings. It’s also important to keep in mind, as described above, that the “Supranational” and the “Other” holdings have a “theme” all their own as well as a structure just like a sector with merely a skeleton of weightings. However, in total, the ‘Other’ and ‘Supranational’ sectors carry a rather heavy allocation weight: Supranational ranks between Switzerland and China, and the “Other” is the fund’s second largest ‘geographic allocation’. Equity ETF Fund Symbol Number of Holdings Type of Holding Distribution Yield Price / Earnings Price / Book Equity Beta Premium / Discount Weight in AOK Fund iShares Core S&P 500 ETF IVV 505 S&P 500 2.20% 19.13 2.75 1.20 Discount -0.04% 13.83% iShares Core MSCI Europe ETF IEUR 991 Large, Mid and Small Cap Europe 4.02% 17.65 1.83 0.99 Premium 0.49% 7.31% iShares Core MSCI Pacific ETF IPAC 861 Large, Mid and Small Cap Pacific 2.45% 14.31 1.37 0.82 Premium 0.19% 4.62% iShares Core MSCI Emerging Markets ETF IEMG 1787 Large, Mid, Small Cap emerging Market 1.93% 19.21 3.13 0.72 Premium 1.10% 2.81% iShares Core S&P MidCap ETF IJH 401 Mid Cap S&P 500 1.51% 20.08 2.29 1.09 At NAV Par 0.00% 1.21% iShares Core S&P SmallCap ETF IJR 602 Small Cap U.S. Equities 1.30% 20.57 1.96 0.97 Premium 0.02% 0.51% (Data from BlackRock) Lastly, just a few quick facts about the fund in the table below. iShares AOK Symbol Number of Holdings Type of Holding Distribution Yield 12 Month Trailing Yield Expense Ratio Equity Beta Premium / Discount Average Volume iShares Core Conservative AOK 9 ETFs plus Supranational and Diversified Global Assets Mostly Equities plus Government, Agency, Corporate Fixed Income 1.46% 2.10% 0.39% 0.25% Discount -0.08% Appx 6000 daily; Recent 11,000 Appx (Data from BlackRock) All said and done, on the surface the fund seems rather simple: nine ETF holdings mostly in U.S. assets. However, when the details are examined, there’s nothing small nor simple about this fund, at all. Although a core conservative fund of funds, it’s quite diversified, global, comprehensive and complex! The main point being that either for short term safety or in terms of long term performance, the fund is, without a doubt, A-OK! Scalper1 News
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