Exchange-traded funds are designed to be building blocks that are easy to put together. You can find stock-focused ETFs of all kinds, which you can mix and match to customize your own particular exposure to stocks. You can then pepper in ETFs containing other types of investments, including bonds, commodities, cryptocurrencies, or just about any asset class you can think of.
Some investors, though, would prefer to have a single ETF that would handle all of their investment needs for them. This led the fund management industry to come up with multi-asset ETFs with portfolios that include not just stocks but a broader range of investments. As the Voyager Portfolio closes its month-long look at exchange-traded funds, it’s time to turn our attention to one such fund, the State Street Bridgewater All Weather ETF (NASDAQ: ALLW).
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One simple philosophy that many cautious investors follow is to maintain a simple portfolio allocation strategy with their investments. In one of the most popular, investors put 60% of their assets into the stock market. The remaining 40% gets invested in bonds. Historically, this mix has tended to provide solid returns with less volatility than stocks alone, because bond prices often — though not always — rise when stocks are falling and vice versa.
It’s easy to implement a 60/40 stock/bond investing strategy with two ETFs, one providing the stock exposure and the other investing in bonds. Some fund companies have even come out with simple multi-factor ETFs that combine both assets in a single fund. But the fund management company behind the SPDR S&P 500 (NYSEMKT: SPY) wanted to take a different approach, and so it enlisted the help of partner Bridgewater Associates to offer a more sophisticated alternative.
Bridgewater founder Ray Dalio has a strong reputation for investing success, and Dalio and his team came up with the All Weather approach 30 years ago. The idea behind the strategy was to build a diversified portfolio including stocks, bonds, and commodities. With this mix, Bridgewater believes that it can better protect against risks such as recessionary economic slowdowns, inflationary pressures, and country- or region-specific geopolitical and global macroeconomic challenges.
You’ll find several different types of investments inside this ETF:
Conventional bonds currently make up the largest allocation in the fund, with U.S. Treasury bonds being the biggest piece of its bond exposure. You’ll also find European, Australian, and U.K. bonds in the fund.
Inflation-linked Treasury Inflation Protected Securities also make up a sizable chunk of the ETF’s assets.
The ETF’s equity exposure is divided into several pieces, with U.S. stocks getting about a third of the allocation, Eurozone and U.K. assets getting another third, and the remainder split across developed markets in the Asia-Pacific region and emerging markets worldwide.
Finally, the fund’s commodity exposure comes from gold futures as well as contracts tied to the Bloomberg Commodity Index, which measures prices of 24 different commodities.
What’s essential to understand about the All Weather ETF is that it uses leverage. When you add up notional exposure of nearly 70% to conventional bonds, 35% to inflation-linked bonds, 42% to stocks, and 33% to commodities, you get roughly 180%. That added exposure comes from the ETF’s use of derivatives to implement the strategy.
The theoretical underpinnings of the State Street Bridgewater All Weather ETF’s methodology look sound. But investors want actual performance to match up to what the fund prospectus says should happen. In the second article of this three-part series for the Voyager Portfolio, you’ll see how the All Weather ETF has performed early in its history as a publicly traded fund.
Before you buy stock in SPDR Bridgewater All Weather ETF, consider this:
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
