Archives for February 2025

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iShares Core Allocation ETFs vs. Vanguard’s LifeStrategy Funds

A reader writes in, asking:

“I recently learned about the ‘core allocation’ ETFs from iShares. I haven’t seen these discussed before on Bogleheads or elsewhere, but upon researching they seem like a good option to recommend to anybody who isn’t interested in really managing a portfolio on their own. Any thoughts on the core allocation ishares ETFs?”

The short answer is that I think they’re excellent.

For anybody who hasn’t encountered the iShares Core Allocation ETFs before, they’re funds that (like the LifeStrategy funds from Vanguard) offer a static, diversified allocation. In other words, they seek to offer a diversified portfolio in a single fund.

As far as differences, first and most obviously, they’re ETFs rather than traditional mutual funds. That means you can get commission-free access to the iShares Core Allocation funds at most brokerage firms, whereas generally you must have an account with Vanguard in order to buy the LifeStrategy funds without paying a commission.

In addition, when held in a taxable account, the iShares Core Allocation ETFs are somewhat more tax-efficient than the Vanguard LifeStrategy funds, due to being ETFs. For instance, if you look at the historical distributions of the iShares Core Allocation ETFs, you’ll see no capital gain distributions other than a single one in January 2018 or December 2017 depending on the fund, whereas the LifeStrategy funds make capital gain distributions every year.

As far as costs, the iShares Core Allocation ETFs have expense ratios of 0.15%. That’s ever so slightly higher than the 0.11-0.14% expense ratios for Vanguard’s LifeStrategy funds. In either case, you’re paying somewhat more than what you’d pay with a DIY portfolio of individual ETFs or index funds. But I would not hesitate to describe both the LifeStrategy funds and iShares Core Allocation ETFs as “low-cost funds.” And for anybody who doesn’t want to bother with rebalancing a portfolio, the cost is likely to be worth it.

As far as asset allocation, the overall stocks/bond allocations are as follows:

If you’re familiar with the LifeStrategy allocations, you’ll notice that this is very similar, with the one difference being that the iShares Core Allocation ETFs only go as low as 30% stocks, whereas the LifeStrategy Income Fund has a 20% stock allocation.

With regard to the actual underlying holdings, it’s pretty run-of-the-mill stuff. Nothing esoteric in any way. (That’s a good thing!) For instance, here’s the underlying allocation of the iShares Core Aggressive Allocation ETF (AOA), according to Morningstar as of 2/21/2025:

  • iShares Core S&P 500 ETF 46.62%
  • iShares Core S&P Mid-Cap ETF 2.7%
  • iShares Core S&P Small-Cap ETF 1.25%
  • iShares Core MSCI International Developed Markets ETF 21.8%
  • iShares Core MSCI Emerging Markets ETF 8.29%
  • iShares Core Total USD Bond Market ETF 16.34%
  • iShares Core International Aggregate Bond ETF 2.83%
  • Cash 0.17%

You may notice from the above that the iShares funds have slightly higher international stock allocations and slightly lower international bond allocations than the LifeStrategy funds. Frankly, I like the iShares funds ever so slightly better in that regard.

As I’ve written several times in the past, while I don’t think performance charts are especially useful for deciding which of two funds is better than the other, I do think such charts are helpful for showing how similar (or dissimilar) two funds are. The chart below shows the Vanguard LifeStrategy Moderate Growth Fund (in blue) as compared to the iShares Core 60/40 Balanced Allocation ETF (in red) since December 2011 (i.e., the point at which Vanguard switched the LifeStrategy funds so that they no longer include actively managed mutual funds).

iShares Vanguard

As you can see, they’re very similar.

In short, the iShares Core Allocation ETFs are perfectly fine, boring funds. They’re slightly more expensive than the LifeStrategy funds, with slightly different allocations. And they’re ETFs rather than traditional mutual funds, which makes them more accessible to people with accounts anywhere other than Vanguard and which makes them somewhat more tax-efficient in a taxable account. If you’re looking for a one-fund solution that provides a static allocation, they’re a perfectly reasonable choice.

February 24, 2025

Investing Blog Roundup: ACATS Transfer Fraud

For years I’ve been of the opinion that it’s a good idea not to check your investment accounts very often, as it leads many people to participate in one form or another of performance chasing.

I still, emphatically, think that changing your asset allocation on any regular basis is not a good idea. But I definitely see the value in checking your accounts on a regular basis as a fraud-prevention mechanism.

This week we have a story of a particularly devious method of fraud (which involves direct theft, straight out of the victim’s brokerage account).

Other Recommended Reading

Thanks for reading!

February 17, 2025

Roth vs. Tax-Deferred Contributions — Evaluating a Bad Rule of Thumb

A reader writes in, asking:

“I recently read about a rule of thumb for deciding whether to contribute to Roth or traditional accounts. The idea is to divide your current balance in traditional accounts by 25, subtract the standard deduction, and if the remaining amount of taxable income would be in a low tax bracket, contribute to traditional. What do you think about that?”

I haven’t encountered this rule of thumb before. I think the most positive things I can say about it are that:

  • It isn’t the worst personal finance rule of thumb I’ve ever seen. (That award clearly goes to Dave Ramsey’s “spend 8% per year in retirement” rule.)
  • There are only two options for this decision (i.e., contribute to Roth or contribute to tax-deferred), so even a rule that makes no sense will accidentally get it right pretty often.
  • For this decision, both options are good choices. That is, in a given year, if you should have contributed to Roth, but you contributed instead to tax-deferred (or vice-versa), you still did something good (i.e., you’re saving and investing in a tax-advantaged account). So even a rule that makes no sense can only do so much harm.

But it should not be controversial to say that proposed rule makes no sense.

To back up a step, in general, the driving force behind the “Roth or tax-deferred” decision is that:

  • If your current marginal tax rate is greater than the marginal tax rate that would be paid on the money whenever it comes out of the account later, tax-deferred contributions are generally preferable (i.e., make a deductible contribution now, while your tax rate is high).
  • If your current marginal tax rate is lower than the marginal tax rate that would be paid on the money whenever it comes out of the account later, Roth contributions are generally preferable.

And then there are three other factors, all of which favor Roth contributions:

  1. Roth accounts have no RMDs during the original owner’s lifetime.
  2. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time, so Roth IRAs (as well as Roth 401(k) or Roth 403(b) contributions that have been rolled over to a Roth IRA) can do double-duty as an emergency fund in some cases.
  3. A maximum contribution to a Roth account in a given year allows you to effectively contribute more than the same contribution to a tax-deferred account. (For instance, with a $7,000 Roth IRA contribution, the whole $7,000 is yours. You get to take advantage of $7,000 of tax-advantaged space. With a $7,000 traditional IRA contribution, a portion of that account is essentially the government’s money. You’re letting the government use a portion of your tax-advantaged space.)

The proposed rule of thumb is taking a stab at the “future tax rate” end of the analysis. But it doesn’t even try to account for the current tax rate part of it. It completely ignores one of the two most important factors in the decision! At its core, this decision is a comparison. And you can’t do a comparison by only looking at one side. This, by itself, should be enough to comfortably discard the proposed rule.

But it’s worse than that.

With respect to the “future tax rate” part of the analysis, the proposed rule doesn’t account at all for other sources of income. You’ll likely have taxable Social Security benefits. Maybe you’ll have taxable pension benefits. Maybe you’ll have taxable dividends, interest, or capital gain income. Those will all affect the tax rate that would be paid on distributions from a tax-deferred account.

The proposed rule also doesn’t account for any deductions you might have other than the standard deduction.

It doesn’t account for the fact that your marginal tax rate may be different than just your tax bracket.

It doesn’t account for the fact that somebody other than you (i.e., your beneficiary) might ultimately be the one taking a large portion of the money out of the account.

It doesn’t account for the fact that in most years you’ll be taking out some percentage other than 4% from the account.

It doesn’t account for the three “other factors” mentioned above that favor Roth accounts.

Truly, the proposed rule does not strike me as better than flipping a coin. But again, as ridiculous as it would be, flipping a coin wouldn’t actually be a total disaster — because both choices are good choices and because you’d still get it “right” a meaningful portion of the time.

February 10, 2025

Investing Blog Roundup: Vanguard’s S&P 500 (VOO) About to Become Largest ETF

Vanguard was a bit late to the game on ETFs. For instance their S&P 500 ETF was created 17 years after State Street’s similar SPY. Nonetheless, people’s general preference for Vanguard funds has allowed the fund to very nearly catch up, in terms of assets under management.

Other Recommended Reading

Thanks for reading!

February 3, 2025
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