The Trouble with Target-Date ETFs

Unfortunately, both fund sponsors force investors to read the prospectus in order to find out how their funds’ assets are allocated. TD provides a generic graph showing the allocations from 33 years prior to target date to 20 years after, while iShares does not.

Asset allocations for both ETF groups are similar for the 2040 ETFs. TD has 96% of ETF assets invested in equities, which includes an international equity allocation of about 22%, and the remaining 4% in fixed income. The allocations gradually shift to 10% equity/90% fixed income at the target date. After the target date, the equity allocations rise again so that five years later, the ETFs have a 32% equity allocation, which stays constant for the next 15 years.
The iShares 2040 ETF has about 86.5% in equity, which includes 23.5% international equity, and 11.2% in fixed income. The ETF for investors in retirement holds about 31% in equity and 67.5% in fixed income, with the remainder in real estate and cash.

For investors firmly sold on the ETF format, these funds seem adequate, and they certainly charge lower annual fees than some target-date mutual funds. Still, it’s difficult to see why they are superior unless intraday trading is an absolute must. Those who don’t have self-directed retirement plans can’t hold them in a tax-exempt account, something even the tax efficiency of ETFs can’t overcome. In short, while target-date ETFs may appeal to a small group of investors, they don’t appear ready to achieve the success that other ETFs, or target-date mutual funds, already have.    

S&P Senior Financial Writer Vaughan Scully can be reached at [email protected]. Send him your ideas for ETF story topics.