Investment Primer: The Multi-Asset Composite

Share

What, Why, and How of Multi-Asset Funds

The Multi-Asset composite includes funds that invest across a combination of different asset classes—typically equities, fixed income, and sometimes commodities or alternatives—within a single, packaged product. The “why” is to provide a pre-built, diversified portfolio solution. These funds can be used to achieve a specific risk/return profile (e.g., conservative, moderate, aggressive), to generate income from a wide variety of sources, or to gain access to complex, capital-efficient strategies.

The “how” varies dramatically across the composite. Strategies range from simple, passive Target Risk funds that hold a static mix of stock and bond ETFs, to actively managed Tactical funds that rotate between asset classes, to sophisticated Specialty funds that use derivatives to “stack” multiple return streams on top of each other.

Deconstructing the Multi-Asset Market

The Multi-Asset space is not monolithic. Understanding the different strategies is key to selecting the right fund for a specific portfolio role.

The Main Strategy Categories

  • Target Risk (Static Allocation): These are the most traditional multi-asset funds, often structured as a “fund of funds.” They hold a portfolio of other stock and bond ETFs in a fixed allocation that corresponds to a specific risk level (e.g., Conservative, Moderate, Aggressive Growth). They are designed to be simple, all-in-one portfolio solutions that are automatically rebalanced.
  • Multi-Asset Income: These funds have the primary goal of generating a high level of current income. They invest across a wide range of income-producing asset classes, which can include high-yield bonds, REITs, MLPs, preferred stocks, and dividend-paying equities. They can be either passively managed or actively managed, where a manager tactically shifts the allocation to what they believe are the most attractive income opportunities.
  • Tactical Asset Allocation: These are actively managed funds where the portfolio manager has broad flexibility to shift the fund’s allocation between different asset classes (stocks, bonds, commodities, cash) based on their macroeconomic outlook or proprietary models. The goal is to participate in rising markets while taking defensive action during downturns.
  • Alternative Asset Sleeve (“Return Stacking” or “Capital Efficiency”): This is a newer and more complex category of multi-asset funds. These strategies use leverage, typically through futures contracts, to provide exposure to two distinct and often uncorrelated return streams within a single fund. For example, a fund might invest 100% of its assets in a portfolio of bonds and then use futures to add an additional 100% exposure to a managed futures or merger arbitrage strategy. The goal is to allow investors to build a more diversified portfolio with less capital, potentially freeing up cash for other investments.

A Practical Guide to Locating Funds in the ETF Action Database

The Multi-Asset universe is diverse. ETF Action’s classification system is designed to help users precisely navigate this space.

Foundational Screening: Building the Initial Universe

  • Step 1: Select the Database. Navigate to the ETF, Mutual Fund, or other desired database.
  • Step 2: Filter by Asset Class. Select Asset Class = Multi-Asset.
  • Step 3: Filter by Composite. Select the type of Multi-Asset fund (e.g., AA: Specialty, AA: Target Risk).
  • Step 4: Filter by Category. This is a key filter to distinguish the main strategies:
    • Asset Allocation: Target Risk (Conservative, Moderate, Global Macro, etc.)
    • Asset Allocation: Specialty – (Multi-Asset Income, Real Assets, Alternative Asset Sleeve)

Advanced Filtering: Refining Your Peer Group

  • Sub-Asset Class: This is critical for understanding a fund’s structure. Use it to distinguish between Fund-of-Funds, Derivatives-based strategies, and Closed-End Funds.
  • Implementation: For “return stacking” funds, this field will often indicate the level of leverage (e.g., Levered: 2x).
  • Brand (Issuer), AUM, Expense Ratio, Liquidity: Use these standard filters to narrow the list to viable candidates.

A Framework for Evaluating Multi-Asset Funds

A thorough evaluation of a multi-asset fund requires a deep look “under the hood” to understand its true asset allocation and how its various components work together. Two funds in this composite can have vastly different risk profiles, even if their names sound similar.

Risk/Return Analysis: The Importance of Benchmarks

The foundational step is to analyze a fund’s historical risk and return profile. ETF Action assigns a Beta Tracker to each category (e.g., AOM for a moderate allocation fund) to provide a relevant peer for comparison.

  • Total Return: How has the fund performed over various time periods compared to its benchmark?
  • Standard Deviation (Volatility): Was the fund more or less volatile than its benchmark? This is a key measure of how well it met its risk objective.
  • Sharpe Ratio: Did the fund provide better risk-adjusted returns?
  • Distribution Yield: For Multi-Asset Income funds, this is a critical metric, but it must be analyzed in the context of total return to check for NAV erosion.

Quantitative Analysis: The Power of Look-Through Analytics

A fund’s name tells you its strategy, but its holdings reveal its actual exposures. Look-through analysis is critical for multi-asset funds.

  • Asset Allocation Breakdown: This is the most important analysis. What is the fund’s actual, current allocation to equities, fixed income, and alternatives? For a “fund of funds,” this means looking through to the underlying ETFs to determine the true aggregate exposure.
  • Equity & Fixed Income Characteristics: Within the equity sleeve, what are the geographic and sector exposures? Within the fixed income sleeve, what is the credit quality and duration profile?
  • For “Return Stacking” Funds: It is essential to understand the two distinct exposures being combined. For example, in a 100/100 stock/bond fund, an analyst must evaluate both the stock portfolio and the bond futures overlay as separate components to understand the fund’s overall risk profile.

Qualitative Analysis: Evaluating the Strategy

  • For Passive Funds (e.g., Target Risk): The key is to understand the index methodology. How is the allocation determined (static or dynamic), and how often is it rebalanced?
  • For Active Funds (e.g., Tactical Allocation): The focus is on the manager’s process. How do they make their allocation decisions? Is it based on a quantitative model or discretionary macroeconomic views?
  • For “Return Stacking” Funds: The qualitative review must focus on the mechanics of the derivatives used to gain the “stacked” exposure. Understanding the risks and costs associated with the futures contracts is paramount.

Ready to Put This Knowledge to Work?

The best insights come from the best tools. Join ETF Action to screen, compare, and analyze thousands of ETFs with our premium suite of resources for serious investors.