The question
An allocation fund holds stocks and bonds in one ETF. Its name says "Conservative" or "60/40". How do I know what it really holds, and how bumpy it will be?
The idea
- ETFIQ places every allocation fund by one measured number: its stock share, the percent of its money in stocks. It reads this looked through: when a fund holds other funds, ETFIQ counts the stocks inside them. The stock share puts the fund in one of five bands:
| Band | Stock share |
|---|---|
| Conservative | over 15% to 30% |
| Moderately conservative | over 30% to 50% |
| Moderate | over 50% to 70% |
| Moderately aggressive | over 70% to 85% |
| Aggressive | over 85% |
- A fund with 15% or less in stocks is not an allocation fund. Each band has a matching ETFIQ benchmark (Beginner lesson 3): Strategic 20, 40, 60, 80 or 95, named for its percent in stocks.
- The band tells you the mix. It does not tell you the risk. For that, read the fund's own realised volatility (lesson 1): how much its returns actually swung.
Worked example
The 3 steps beside the drawing at the top work this through on ETFIQ data. Point at a step to light the part of the drawing it describes.
| Fund | Name says | Stock share | Band |
|---|---|---|---|
| AOK | 30/70 Conservative | 31.1% | Moderately conservative |
| AOM | 40/60 Moderate | 41.3% | Moderately conservative |
| AOR | 60/40 Balanced | 61.1% | Moderate |
| AOA | 80/20 Aggressive | 80.6% | Moderately aggressive |
AOK's name says 30% and "Conservative". It held 31.1%, just over the 30% line, so ETFIQ places it one band up and measures it against Strategic 40.
| Fund | Stock share | Volatility | Worst fall |
|---|---|---|---|
| AOK | 31.1% | 6.90% | −18.94% |
| AOM | 41.3% | 7.76% | −19.96% |
| AOR | 61.1% | 9.99% | −22.95% |
| AOA | 80.6% | 12.28% | −28.38% |
From AOK to AOA, the stock share rose by 49.5 points and volatility rose by about three quarters: 12.28 ÷ 6.90 = 1.78. For these plain index mixes, the band is a good guide.
- Volatility: GYLD 17.00%, AOR 9.99%. 1.7 times the swing.
- Worst fall: GYLD −47.88%, from Jan 24, 2018 to Mar 23, 2020. AOR's was −22.95%.
Same stock share, same band, more than twice the worst fall. Which stocks and bonds a fund holds shapes the ride as much as how much it holds in each. That is why ETFIQ prints volatility beside the band on every row.
The common mistake
"Moderate means moderate risk." The band is a rule about the mix. AOR and GYLD share a band and swung very differently. Read the band for the mix, then volatility and worst fall for the ride.
A second mistake: trusting the name. "Conservative" is the issuer's word; the band is a dated measurement.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. A fund holds 72% in stocks, looked through. Which band is it in?Answer: B. Moderately aggressive. 72% is over 70% and up to 85%. Not A: Moderate stops at 70%.2. A fund named "Balanced Growth" holds 45% stocks. Which ETFIQ benchmark is it measured against?Answer: D. Strategic 40, because 45% sits in the 30% to 50% band. The band comes from the measured stock share, and that band's benchmark is Strategic 40. Not A: the name is not a measurement.3. Two funds sit in the Moderate band. One swung 9% a year over ten years, the other 16%. What is the best reading?Answer: A. They hold a similar share in stocks, but very different stocks or bonds. The band fixes the stock share, not which stocks and bonds. Not C: both are between 50% and 70% stocks; the difference is in what they hold.
Takeaways
- Find a fund's band from its measured stock share, never from its name.
- Read volatility and worst fall beside the band; the band is the mix, not the risk.
- Judge an allocation fund against the benchmark for its band.