Target-Date ETFs: A Simple, All-In-One Investment Strategy

ETF Trends

More investors are turning to diversified target-date strategies and related exchange traded funds for a simplified, all-in-one retirement savings plan.

Brooks Herman, head of research at BrightScope, said that assets in target-date funds have increased 24% to $624 billion in 2013, Reuters reports.

Target-date strategies take their namesake from the year when investors plan to retire or stop contributing to their savings. The fund allocates a diversified mix of stocks, bonds and cash equivalents that correspond to an investor’s retirement outlook. For instance, someone who plans on retiring near 2020 can consider a target-date 2020 fund.

“It really comes down to behavioral finance,” Herman said in the article. “The average American worker has this mentality of ‘set it and forget it.’”

The funds have adjusted holdings that depend on an investor’s time horizon and risk appetite. For instance, a later-dated target fund would heavily tilt toward riskier equities, with a smaller position in fixed-income and cash equivalents.

On the other hand, a near-term fund would include heavy positions in bonds and cash equivalents since someone who is about to retire would more focused on income generation and preserving wealth.

ETF investors have a couple of options available from iShares and Deutsche Bank. The iShares line includes iShares Target Date 2020 ETF (TZG) , iShares Target Date 2030 ETF (TZL) , iShares Target Date 2040 ETF (TZV) and iShares Target Date 2050 ETF (TZY) . Deutsche Bank offers db X-trackers 2020 Target Date Fund (TDH) , db X-trackers 2030 Target Date Fund (TDN) and db X-trackers 2040 Target Date Fund (TDV) . [Target-Date ETFs That Fit Your Retirement Outlook]

Looking at the holdings, investors who are nearing their golden years will find their target-date ETFs show greater allocations toward bonds. TZG has a 37.9% allocation toward bonds and TDH includes 45.3% weight in bonds. On the other end of the spectrum, younger investors will be heavily exposed to stocks, with TZY including a 90.0% tilt and TDV showing a 93.0% weight toward equities.

The target-date funds “recognize that individuals are at very different phases of their lives, and invests them accordingly,” Jerome Clark, portfolio manager for T. Rowe Price’s target date products, said in the article.

For more information on target-maturity funds, visit our target-date ETFs category.

 

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