Asset location and asset allocation are two of the biggest levers investors can pull to improve long-term investment outcomes. While they sound similar, they refer to two very different concepts.
Asset location refers to where you hold your investments. This matters because different account types receive different tax treatment. Simply placing the right investments in the right accounts can meaningfully improve after-tax returns over time.
For example, a traditional 401(k) allows investments to grow tax deferred until withdrawal, a Roth IRA offers tax-free qualified withdrawals in retirement, and a taxable brokerage account provides complete flexibility but may generate annual tax liabilities from dividends, interest and capital gains.
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Asset allocation, however, is arguably even more important. This refers to the mix in your portfolio, such as stocks, bonds, commodities or other investments. Your allocation is one of the primary drivers of both risk and return because different asset classes respond differently to economic conditions.
For example, stocks generally perform best during periods of economic growth, while high-quality bonds have often provided stability during market downturns.
Because these assets are not perfectly correlated, they can complement one another within a diversified portfolio. This also creates an opportunity to earn what is commonly referred to as a “rebalancing premium.”
As markets move, one asset class may outperform while another lags. By periodically trimming the outperformers and adding to the underperformers, investors systematically sell high and buy low.
The challenge is that maintaining an asset allocation requires discipline. Many investors struggle to rebalance according to a predetermined plan.
Instead, they attempt to time the market, chase whichever asset class has recently performed the best, or abandon their allocation during periods of volatility. Over time, these behaviors can reduce long-term returns.
For investors who would rather avoid making ongoing allocation decisions, outsourcing the process to an ETF may be worth considering.
Although these funds charge a fee, they automatically maintain the target allocation behind the scenes. That reduces the investor’s role to consistently contributing new savings, reinvesting distributions, and staying the course through changing market conditions.
Here’s what you need to know about how all-in-one ETFs work and how to choose the right one for your portfolio.
What Is an All-in-One Asset Allocation ETF?
Most ETFs specialize in a single asset class. They may hold only stocks, only bonds, only commodities, or even cryptocurrency. Asset allocation ETFs are different because they combine two or more asset classes into a single investment.
Most accomplish this using what is known as a “fund-of-funds” structure. Rather than purchasing hundreds or thousands of individual securities directly, the ETF simply owns other ETFs, each designed to provide a specific exposure.
For example, traditional 60/40 portfolios typically allocate roughly 60% to stock ETFs and 40% to bond ETFs.
That is only the starting point, however. Asset allocation ETFs can vary considerably depending on the underlying building blocks selected by the manager.
On the equity side, one portfolio may simply own broad market cap-weighted index funds, while another may deliberately tilt toward factors such as value, quality, momentum or low volatility.
(Image credit: Getty Images)
Likewise, the bond allocation may consist of broad aggregate bond funds, Treasury-only ETFs, investment-grade corporate bonds or a combination of several fixed-income strategies.
Some of the more specialized asset allocation ETFs even incorporate alternative assets such as commodities or bitcoin.
What ties these funds together is their rebalancing process. Depending on the issuer, rebalancing may occur on a predetermined schedule such as monthly, quarterly, semi-annually or annually.
Others use tolerance bands, rebalancing only when an asset class drifts beyond a specified percentage away from its target allocation.
Regardless of the approach, their primary benefit remains the same: asset allocation ETFs remove most of the ongoing portfolio management decisions from the investor’s hands.
How we picked the best all-in-one ETFs
Comparing asset allocation ETFs on an apples-to-apples basis is difficult because every provider has a different investment philosophy, portfolio mandate, and selection of underlying funds.
Rather than attempting to rank one allocation strategy over another, we focused on a few core characteristics that we believe most long-term investors should prioritize.
First, every ETF we selected had to be globally diversified. The purpose of an asset allocation ETF is to provide broad diversification, not simply across asset classes, but across markets as well.
That means exposure not only to companies of different sizes, sectors and investment styles, or bonds spanning different maturities and credit qualities, but also to developed and emerging international markets.
Market leadership rotates over time. While U.S. equities have dominated returns over much of the past decade, there’s no guarantee that trend will continue indefinitely.
Second, we focused on funds offering a balanced mix of stocks and bonds rather than 100% equity portfolios.
Ultimately, the right allocation depends on an investor’s time horizon and risk tolerance. However, balanced portfolios tend to occupy a practical middle ground, making them suitable starting points for a broad range of self-directed investors.
Finally, we placed a strong emphasis on costs. Asset allocation ETFs are typically somewhat more expensive than traditional index ETFs because they often hold other ETFs internally, resulting in layered portfolio management.
Even so, fees remain one of the few variables investors can directly control.
To keep costs reasonable, we required every ETF on our list to maintain an expense ratio of 0.40% or less. For a $10,000 investment, that translates into no more than approximately $40 per year in fee drag.
iShares Core 60/40 Balanced Allocation ETF
(Image credit: Pavlo Gonchar/SOPA Images/LightRocket)
- Assets under management: $3.7 billion
- Expense ratio: 0.15%
- 30-day SEC yield: 2.6%
The iShares Core 60/40 Balanced Allocation ETF (AOR) is a straightforward asset allocation ETF built around the classic 60/40 portfolio, allocating approximately 60% of its assets to stocks and 40% to bonds. Rather than holding individual securities directly, the fund uses a fund-of-funds approach, investing in seven underlying iShares index ETFs.
On the equity side, investors receive broad exposure to the S&P 500, international developed markets, emerging markets and U.S. mid-cap stocks and small-cap stocks. The bond allocation is simpler, consisting primarily of a U.S. aggregate bond ETF alongside an international aggregate bond ETF.
The 60/40 portfolio has historically been one of the most widely used asset allocation strategies because combining stocks and bonds has generally reduced overall portfolio volatility while still allowing investors to participate in long-term equity growth.
Although both asset classes declined together when interest rates were rising in 2022, they have historically exhibited lower correlations over longer periods, allowing periodic rebalancing to systematically sell appreciated assets and add to those that have lagged.
The result is a portfolio with materially lower risk than an all-equity strategy. AOR currently has a three-year equity beta of 0.63 and a three-year standard deviation of 8.89%, both substantially below those of a typical 100% stock portfolio.
The ETF also trades with an exceptionally tight 30-day median bid-ask spread of just 0.01%, which further reduces the total cost of ownership for investors.
Learn more about AOR at the iShares provider site.
Capital Group Core Balanced ETF
(Image credit: Timon Schneider/SOPA Images/LightRocket)
- Assets under management: $7.1 billion
- Expense ratio: 0.33%
- 30-day SEC yield: 2.2%
Not every asset allocation ETF follows a rigid allocation like AOR’s traditional 60/40 split. Many, particularly actively managed strategies, give portfolio managers discretion to adjust the allocation between stocks and bonds as market conditions evolve.
The rationale is straightforward. Rather than mechanically maintaining a fixed allocation through every environment, managers can modestly overweight or underweight equities based on valuation, economic conditions, expected returns or their broader investment outlook.
While there’s no guarantee that tactical asset allocation will outperform, it offers flexibility that purely rules-based strategies do not.
The Capital Group Core Balanced ETF (CGBL) is a good example. The ETF maintains a flexible mandate that generally allows between 50% and 75% of the portfolio to be invested in equities, with the remainder allocated to fixed income. Both sleeves are built primarily using underlying Capital Group ETFs.
Although the strategy maintains global diversification, its international allocation is more modest than some of the previous ETFs, with up to 15% of assets invested outside the U.S.
One distinguishing feature of Capital Group’s ETF lineup is its multi-manager system. Rather than relying on a single portfolio manager, each underlying ETF is managed by a team of investment professionals. While they collaborate and share research, each manager independently oversees a portion of the portfolio and makes their own investment decisions.
This approach seeks to diversify not only the underlying holdings but also the decision-making process itself.
Performance has been encouraging so far. Over the trailing one-year period, CGBL generated a 19.9% return based on net asset value. Over the same period, its benchmark, a traditional 60/40 blend of the S&P 500 and the Bloomberg U.S. Aggregate Bond Index, returned 19.5%.
The outperformance is notable because CGBL achieved it after deducting its management fees, whereas the benchmark represents an unmanaged index with no associated investment expenses.
Learn more about CGBL at the Capital Group provider site.
Avantis Moderate Allocation ETF
(Image credit: Getty Images)
- Assets under management: $78.1 million
- Expense ratio: 0.21%
- 30-day SEC yield: 2.3%
The traditional 60/40 portfolio provides a useful starting point for asset allocation, but in practice many active managers deviate from that framework to reflect their investment philosophy.
Some make only modest adjustments, however, and the Avantis Moderate Allocation ETF (AVMA) is a good example. Despite being actively managed, the ETF uses a blended benchmark consisting of 65% of the MSCI ACWI IMI Index and 35% of the Bloomberg U.S. Government/Credit 1–5 Year Index. The portfolio is built entirely through a collection of underlying Avantis ETFs.
What distinguishes Avantis from many traditional index providers is its approach to stock selection. Rather than simply weighting companies according to market capitalization, Avantis incorporates factors that it believes can improve long-term expected returns.
These generally include tilts toward smaller companies, lower-valued stocks and businesses with stronger profitability. The portfolio remains globally diversified, with exposure spanning both developed and emerging markets.
On the fixed income side, the largest allocation is a core aggregate bond ETF. However, Avantis also intentionally overweights short-term fixed income, helping reduce interest-rate sensitivity, while adding an investment-grade credit ETF that provides greater corporate bond exposure.
Performance has been encouraging. Over the trailing one-year period, AVMA delivered a 24.9% return based on net asset value, outperforming its blended 65/35 benchmark, which returned 20.8%.
Learn more about AVMA at the Avantis provider site.
State Street Global Allocation ETF
(Image credit: Pavlo Gonchar/SOPA Images/LightRocket )
- Assets under management: $303.9 million
- Expense ratio: 0.35%
- 30-day SEC yield: 3.0%
The State Street Global Allocation ETF (GAL) also takes a more sophisticated approach to asset allocation than AOR. Rather than adhering to a rigid 60/40 stock and bond split, it operates within much broader allocation guidelines.
According to State Street, the ETF will typically invest around 60% of its assets in equities, but it also incorporates a tactical asset allocation component. This allows the portfolio managers to overweight or underweight equities relative to fixed income based on their assessment of the macroeconomic environment.
At present, the portfolio is allocated roughly 65% to risk assets and 35% to defensive assets, broadly corresponding to stocks and bonds. As its name suggests, GAL also maintains a global mandate. At least 30% of the portfolio must be invested outside the United States.
The underlying construction is also considerably more complex than AOR. Rather than investing in a small collection of broad market ETFs, GAL currently holds 18 underlying State Street ETFs. Even within individual asset classes, the exposures are more specialized.
On the fixed income side, investors receive allocations not only to U.S. and international aggregate bond markets, but also to senior loans, emerging market debt, high-yield corporate bonds, and Treasury Inflation-Protected Securities (TIPS). The portfolio also includes dedicated real estate exposure through both U.S. and international real estate investment trust (REIT) ETFs.
While GAL offers a higher 30-day SEC yield than AOR, its active management and more complex collection of underlying ETFs contribute to a 0.35% expense ratio. The ETF also trades with a wider, though still reasonable, 30-day median bid-ask spread of 0.08%.
Learn more about GAL at the State Street provider site.
Cambria Global Asset Allocation ETF
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- Assets under management: $71.9 million
- Expense ratio: 0.40%
- 30-day SEC yield: 4.1%
The Cambria Global Asset Allocation ETF (GAA) is another example of an asset allocation ETF that goes well beyond the straightforward, largely passive approach taken by AOR. According to Cambria, this actively managed ETF follows an unconstrained, “go anywhere” global asset allocation strategy.
Rather than hugging a traditional benchmark, the portfolio managers have the flexibility to allocate across a universe of up to 30 underlying ETFs as they see fit. Despite that flexibility, the fund does maintain a target allocation. Under normal market conditions, Cambria aims for approximately 45% in equities, 45% in fixed income and 10% in alternative investments.
The underlying holdings include both Cambria ETFs and funds from other issuers. Within the Cambria lineup, investors gain exposure to strategies targeting the value and momentum factors, global real estate and shareholder yield. Cambria defines shareholder yield as a broader measure of capital returns that combines dividend payments with share buybacks and debt paydown.
One unique aspect of GAA is its fee structure. Technically, Cambria doesn’t charge a separate management fee for assembling the portfolio. Instead, nearly all of the ETF’s stated 0.40% expense ratio comes from acquired fund fees and expenses. These are the expenses charged by the underlying ETFs that GAA owns.
In other words, investors indirectly pay the operating expenses of the component funds rather than an additional layer of management fees charged by Cambria itself. This helps avoid an extra layer of fees on top of the underlying ETFs, although the acquired fund expenses still represent a cost that ultimately reduces investor long-term returns.
Learn more about GAA at the Cambria provider site.