Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Five Reasons I’m Skeptical About Target-Date Retirement ETFs

Companies / Exchange Traded Funds Mar 11, 2010 - 12:38 PM GMT

By: Ron_Rowland

Companies

Best Financial Markets Analysis ArticleAre you planning to retire someday? Unless you are already retired the answer is almost certainly “Yes.” It’s the American Dream!

Of course, there’s nothing magical about age 65. Some people end their careers earlier and busy themselves in different ways. Others enjoy their work so much they keep on going as long as their health allows.


In either case, you probably have some idea when you’ll want to retire. And you probably consider it when planning your investment strategy — or at least you should. That’s because there’s a big difference between age 25 and age 60 when it comes to deciding what to do with your money.

ETF sponsors know this. They also know many people are looking for an “easy answer” that will let them save for retirement without having to think very much. Their solution: Target-date ETFs.

Your age governs your investment strategy.
Your age governs your investment strategy.

What’s Your Target Date?

For example, suppose you’re 40 years old. You’re in good health and live carefully. You like your work and think you can keep doing it until you are 70. That’s 30 years from now — year 2040.

With that many years to go, you can afford to be a little more aggressive now. When you get to 60+, you should probably pull back on your risk a bit.

Target-date ETFs automatically do this for you …

For instance in the above case, you might take a look at iShares S&P Target Date 2040 Index Fund (TZV). This ETF buys other iShares ETFs. The proportions are weighted to be more growth-oriented now, and will gradually change to be more conservative as the year 2040 gets closer.

Currently, TZV is allocated like this:

iShares Chart

Source: iShares

As you can see in the above chart, the portfolio is invested almost completely in stocks — roughly 90 percent. This is what most advisors would probably recommend for someone with a 30-year time horizon.

The allocation won’t stay this way. As time passes, you will see less of TZV devoted to stocks and more going into bonds …

  • In ten years, it should look much like the Target 2030 ETF (TZL) does today, with around 80 percent in stocks.
  • In twenty years, it will look like the Target 2020 ETF (TZG) now, with about two-thirds in stocks and the rest in bonds.
  • And in thirty years, it should look a lot like the 2010 fund (TZD) does now, with over half the portfolio in bonds.

iShares has a whole series of ETFs keyed to specific retirement years. Other firms offer similar products. They vary in the details of the asset allocation strategy and how it is applied, but the general idea is the same.

So What’s the Problem?

Target-date ETFs offer one-stop shopping with no need to make adjustments along the way. But I’m skeptical for five reasons …

First, their advantage is based on the assumption you will buy and hold them for many years. My experience tells me that very few people will actually do this. Investors get scared in bear markets and greedy in bull markets. They don’t just sit still like the “professionals” tell them.

Circumstances can change, too. For instance, you may decide to retire earlier than anticipated, or later. Then what? You spent decades paying for someone to implement a strategy you end up not even needing.

Second, the target-date strategy isn’t free. In fact you’re adding an extra layer of fees when you buy one of these funds. You pay once for someone to decide what ETFs to allocate your money into, and again for the ETFs they decide to buy.

Is the fee very much? In some ways, no. TZV charges 0.25 percent on top of the component ETF fees. Part of this is being waived right now, but the numbers add up over time. It could be thousands of dollars if you stick with TZV for as many years as they want you to.

Third, each fund family treats the target date differently. This means the stock and bond allocations will often be dramatically different between two funds with the same target date.

My guess is that you're the kind of investor who pays attention to what's going on in the markets.
My guess is that you’re the kind of investor who pays attention to what’s going on in the markets.

Many of these funds that were at or near their “target date” still got clobbered in the recent bear market. The reason is that many took on more risk in an attempt to look favorable when compared to funds with similar target dates.

Fourth, you probably don’t need them. The fact that you read Money and Markets tells me you want to educate yourself about investments. Chances are you can decide for yourself how to split your money between the different categories of stocks and bonds.

Fifth, investors like you are not the intended market for target-date funds. They are designed for people who don’t pay attention — folks who would otherwise keep all of their money in a low-yielding bank account.

But since you do pay attention, you can do a lot better! So it might not make sense to pay extra for something you don’t need.

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in