College-saving programs known as 529 plans have been incorporating more exchange traded funds to take advantage of the financial products’ benefits. As investors become more familiar with ETFs, the 529 savings plan is becoming a competitive option for tax-savvy individuals.
“One of the simplest ways to save and pay for college — a state 529 savings plan — is still widely underused and often misunderstood. These plans are named for section 529 of the Internal Revenue Code. A 529 savings plan provides an excellent way to set aside money for your family’s future college education expenses, or even for your own college purposes,” Andrew Housser for WLOX 13 wrote. [ETFs Gaining Traction with 529 Plan Providers]
529 savings plans have been able to cut costs for investors simply by using a passive ETF versus an actively managed mutual fund. For example, Nebraska sliced expenses for small-cap exposure by 75 basis points when it removed an actively managed fund for a passive ETF in three of its plans, lowering the overall costs of its age-based options by several basis points, reports Kathryn Spica for Morningstar. There are other costs built into these plans, so investors must consider them in comparison to an advisor-sold plan for direct investors. [What is an ETF? - Part 19: 529 Savings Plans]
However, not all indices or ETFs are available for these plans. iShares was one of the first ETF lines that was introduced on a 529 savings plan platform. In 2007, Arkansas was the first state to introduce this plan, and it has since become the cheapest advisor-sold option on the market with strong risk-adjusted returns.
State Street Global Advisors is also in on the 529 college savings plan. The plan was launched in April 2012, and offers a diversified family of ETFs. Other states are in on these plans, such as Nevada, Maine and Indiana. Missouri and Ohio are using ETFs in age-based options, but not 100%, they are mixed in with other types of investments.
ETFs are gaining momentum in the 529 savings plan area however, there is not a long enough track record to justify any benefits or differences of using them yet. Over time, if using passive ETFs in the plans seems to cater to outperforming those using only actively managed mutual funds, providers and investors are going to take note. [ETFs Breaking into 401(k), 529 Savings Plans]
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.