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A Guide to Target-Date ETFs


Cost-conscious investors have taken a liking to target-date exchange traded funds. These ETFs are intended for investors who are saving for retirement ,and would like to a take a buy-and-hold approach.

“It’s crucial for investors to pay attention to the fees they’re paying. The majority of assets in target-date funds are held in 401(k)s, and investment management fees typically make up two-thirds of overall costs in those plans. Those fees along with the administrative costs to run the plan are shaved off the top of investment returns, whether the stock market is up or down,” Mark Jewell for Bloomberg Businessweek wrote. [ETFs and Retirement: You're Not Saving Enough]

Most target date funds have a buy-and-hold strategy so that investors can purchase the investments and forget about them. It’s a hands off approach, and the professional fund manager usually adjusts the funds portfolio depending on how conservative the investor is. [Target Date ETFs Criticized by Regulators]

Lately, even those investors who are uninvolved with the process are concerned with fees. Fees can eat into principle and any earned capital, reducing the amount of returns. When it comes to retirement, capital preservation is key.

Patricia McGee for The WSJ reports that the world of fixed income has also entered into the target date universe. The ETFs have all the features that investors like, such as intraday trading and lower fees. Since there is not an active manager with an ETF, the fees are much less. [Life-Cycle ETFs Target Retirement]

However,the bond target date ETFs do mature just as a bond or target date mutual fund would. For any investor that is anticipating an uptick in interest rates, this type of investment would be riskier as fixed income assets drop in price, in relation to rising rates.

“In a traditional fund, on the other hand, a three-year ETF would continue to purchase similar assets as more cash flows in, so the average life of its holdings continues to be three years. An investor wanting to cash out $10,000 in 2015 might find interest rates have climbed since then, and because rising interest rates cause fixed-income assets to drop in price, the value of the fund would have declined,” McGee wrote.

There are still a lot of investors in the market that have not taken advantage of the lower cost-ETF target date option. About three-quarters of all target date assets are managed, according to Morningstar data.

As investor demand is growing rapidly for target date ETFs, providers are quick to answer it. Last year, the BlackRock LifePath Index series and Lincoln Financial Group’s Presidential Protected Profiles debuted.

ETFs will continue to be an important tool in the target date sector because of the competition. Low-cost funds with the desired level of diversification and risk are key ingredients that providers are working into their offerings.

Target-date ETFs include:

  • iShares S&P Target Date 2015 Index Fund ETF (NYSEArca: TZE)
  • iShares S&P Target Date 2050 Index Fund ETF (NYSEArca: TZY)
  • iShares S&P Target Date 2020 Index Fund ETF (NYSEArca: TZG)
  • db-X 2020 Target Date ETF (TDH)
  • db-X 2030 Target Date ETF (TDN)

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.