Will one small step for an exchange-traded fund indexer become one giant leap for target-date fund investors?
That’s the hope of veteran index creator Ron Surz, who wants to be first to fill a void left by the departure of fund behemoth BlackRock from the target-date fund ETF market.
BlackRock, of course, is the world’s largest asset manager, and even it seemingly failed to get enough of a foothold in the trillion-dollar target-date market dominated by Fidelity, Vanguard and T. Rowe Price.
The nine iShares ETFs BlackRock is closing in mid-October amounted to less than $300 million in assets under management.
The target-date market, expected to grow to $4 trillion, or half of all retirement assets, in just a few years, is an asset gathering machine mainly by virtue of its status as a Department of Labor-approved qualified default investment alternative, or QDIA.
But investors have by and large have chosen the mutual fund route and eschewed the ETF path in seeking a fund that automatically reallocates to more conservative portfolio holdings as the investors age.
For that reason, BlackRock’s business decision to shut down its nine target-date iShares ETFs cedes the ETF target-date market to the Deutsche Bank’s five X-Tracker target-date ETFs.
“BlackRock’s target-date fund investors will have to find another ETF or mutual fund alternative or build their own customized target-date allocation,” DeLegge says. “Actions speak louder than words, and my interpretation of this news is that BlackRock isn’t committed to ETFs inside 401(k) plans. It’s too bad for them, because there’s $4.3 trillion in 401(k) plans waiting to be snapped up by hungry ETF providers. Someone will get it.”
Surz, a pension consultant, has long been a critic of target-date portfolio management, whose equity-heavy holdings he views as guaranteeing a portfolio disaster for unwitting retirees the next time a market crash occurs.
His latest SmartFunds product, distributed to RIAs through Hand Benefit & Trust of Houston, goes live Tuesday, and aims to create an investable, ETF-like fund at a lower expense ratio (.34%) than the soon-to-be defunct iShares funds (.44%, although .30% with a temporary fee waiver).
In a comment to a ThinkAdvisor article reporting BlackRock’s decision, Surz had this to say:
“Blackrock’s termination of their target-date ETFs creates a benchmark void. The S&P iShares were the only investable TDFs. According to the CFA Institute, one of the criterion for a good benchmark is investability. If you can’t actually buy a benchmark it’s just hypothetical—not real.”
Reached by phone, DeLegge, who reported on the BlackRock move two weeks ago, describes Surz as “the mad scientist in the financial lab,” adding:
“I think he’s got a unique take on target-date investing. He’s extremely well-versed and fluent when it comes to retirement matters, retirement funding, income funding, things pertaining to longevity and retirment planning. For him, the question is is he going to be able to find a financial services company to buy into his methodology,” DeLegge says.
The ETF expert thinks a bigger player than Hand Benefit & Trust is needed to “make an impression” on the vast retirement marketplace.
“If I had to predict which financial services company would make the biggest, boldest impress on [that] marketplace, I’d say Schwab,” he says. “They’ve got the platform and the ETF product. Look at the ETF providers’ most don’t have a platform.”
And those companies with branded ETFs that do have platforms — DeLegge names Fidelity and Vanguard — are less aggressive than Schwab in building a market presence, he says.
“But it’s still taken them a while to get their menu in order,” he says of Schwab.
Surz’s new target-date index fund follows his patented “glide path” that helped his Smart Funds investors endure the 2008 market crash with a loss of just 10%, compared with losses of more than 30% for T. Rowe Price, Vanguard and Fidelity target-date investors during the market plunge’s five worst months.
Surz tells ThinkAdvisor his fund is financially engineered based on “two Nobel-prize-winning breakthroughs with loss avoidance and liability-driven investing.”
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