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Portfolio > ETFs

Why ETFs Can’t Crack the Retirement Market

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ETFs might be the fund industry’s wonder kids on the block, but they have yet to find any significant traction in the 401(k) retirement plan market.  

As proof, Deutsche Asset and Wealth Management just liquidated five target-date retirement ETFs in May:

  • Deutsche X-trackers In-Target Date ETF (TDX)
  • Deutsche X-trackers 2010 Target Date ETF (TDD)
  • Deutsche X-trackers 2020 Target Date ETF (TDH)
  • Deutsche X-trackers 2030 Target Date ETF (TDN)
  • Deutsche X-trackers 2040 Target Date ETF (TDV)

Curiously, more than half of all 401(k) contributions this year will be funneled into target-date funds, and assets in these funds are projected to top $2 trillion by 2019, according to Cerulli Associates. Put another way, target-date funds are booming.

Yet, while the mutual fund industry is vacuuming assets with its target-date funds, ETF providers are scaling back. Why?

Deutsche’s choice of words about its target-date ETF liquidations speaks volumes.  

“After carefully evaluating multiple factors, including shareholder feedback, length of time on the market, asset levels and competitive positioning, Deutsche AWM determined it would be in the best interest of each fund and its shareholders to close and liquidate the Funds identified above. These funds represent approximately 0.9% of Deutsche Xtrackers assets in the Americas. Deutsche AWM believes these changes better position the business for future growth.”

In other words, Deutsche doesn’t see much future growth in the retirement-plan market for ETFs. If it did, it wouldn’t be liquidating its own target-date ETFs.

It’s a tremendous paradox how the marriage of the hottest fund category (target-date funds) along with the hottest investment product (ETFs) has failed miserably.

What went wrong?

Deustche’s actions speak volumes about the ETF industry’s lack of focus and commitment to 401(k)’s and the overall retirement plan market.

Instead of making a concerted effort to make sure ETFs are widely available choices to retirement savers, ETF providers, en masse, continue to make negligent decisions. As a group, these providers seem to be so distracted with launching cool new ETFs (product development), that product distribution has taken a backseat. And therein lies the problem.

No matter how bleak the outlook for ETFs in retirement plans may look right now, there is a silver lining. With or without the support of fund providers, ETFs will nudge their way into 401(k) plans. In the end, this great idea will overcome poor execution.     


Ron DeLegge is the founder and chief portfolio strategist at ETFguide. Join his next monthly Portfolio Workshop for financial advisors. Attendance is free.


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