From the November 2008 issue of Research Magazine • Subscribe!

November 1, 2008

How Target-Date ETFs Are Holding Up

Target-date or life-cycle funds have been available on a mutual fund chassis for decades. In theory, this breed of a balanced fund automatically adjusts the allocation between stocks and bonds so the investor doesn't have to worry about rebalancing his portfolio. Life-cycle funds come in different forms and shapes, but in general they appeal to buy-and hold investors not wanting to worry about managing assets.

Do-it-yourselfers tend to customize their own portfolio staying away from pre-packaged solutions. Target-date funds have often been considered a retirement portfolio on auto pilot. This implies that you set the course and don't worry about it until you arrive at your destination.

As we are experiencing the worst bear market in decades, the question arises whether the investment auto pilot has done its job and maintained the course. TD Ameritrade in cooperation with XShares Advisors launched five target ETFs in October 2007.

The TDX Independence In-Target ETF (TDX) impressed with solid performance. According to plan, it provided peace of mind with a loss of less than 1 percent over the past 12 months. The TDX Independence 2010 ETF (TDD), with an allocation of 68 percent to fixed income softened the blow and lost only 12 percent of its value.

As expected, the more aggressive 2020, 2030 and 2040 portfolios were more exposed to the markets fury which is reflected in their respective performance number. The TDX Independence 2040 ETF (TDV) essentially matched the slide of the S&P 500 step by step.

All TDX funds adjust their allocation of equities towards 11 percent in the target year. Within five years of the target date, the index seeks to match the same risk exposure to the Lipper Conservative Funds Index.

Trusting an auto pilot always means you must relinquish control. At least with some members of the TD Ameritrade portfolio of target-date ETFs, it seems like they are staying on course.

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