Forget Target Date ETFs And Consider These Options Instead
Written by David Fabian, August 21st, 2014
Recently Blackrock announced it will be shuttering 18 ETFs, including 10 target-date funds that were designed to be used for long-term investors that are seeking an easy way to save for retirement.
It’s not likely that many investors are going to miss these ETFs as they only had approximately $310 million in total assets. No single ETF in this group totaled over $100 million as well.
The idea behind this style of ETF is to pick an approximate retirement date of which the portfolio is allocated to a specific mix of stocks, bonds, and cash. Then as you get closer to that date, the underlying assets are rebalanced to a more conservative mix that reduces equity exposure and increases fixed-income. This lowers volatility and enhances the focus on capital preservation as you transition out of the workforce and into generating a sustainable income stream from your retirement portfolio.
This style of fund has been widely popularized by 401(k)’s and other defined benefit plans that allow novice investors an easy way to stay allocated to the market without having to actively evaluate their holdings or make changes in response to their time horizon.
While I understand the goal, in practice this style of investing falls short of the typical savvy ETF investor who understands building a portfolio of assets in conjunction with their risk profile and investment objectives. It’s just too plain vanilla and hands off for the majority of market participants.
Instead of putting your money on auto-pilot, consider some of these alternative options as reliable substitutions for target date funds.
One potential multi-asset alternative that seems to be supported by investor demand are the suite of iShares ETFs that cater strictly to conservative, moderate, and aggressive investors. For example, the iShares Moderate Allocation ETF (AOM) has over $250 million invested in a portfolio of 50% stocks and 50% bonds that include both domestic and international exposure. The underlying securities are composed of other iShares ETFs that provide a balanced and diversified mix of assets.
Another interesting contender in this space is the SPDR SSGA Global Allocation ETF (GAL) that uses a similar “fund of funds” approach to build out a more international focused portfolio. This actively managed ETF can shift its holdings in response to value opportunities that the manager has identified. In addition, it includes broader exposure to REITs and overseas fixed-income assets.
While those moderate growth ETFs are certainly worth your consideration, the biggest draw for asset allocation style funds has been in the income arena. The Guggenheim Multi-Asset Income ETF (CVY) and First Trust Multi-Asset Diversified Income ETF (MDIV) are the reigning champions with $1.36 billion and $755 million in assets respectively. CVY incorporates a unique mix of dividend paying equities, preferred stocks, MLPs, closed-end funds, and REITs in its asset mix. To differentiate itself, MDIV incorporates high yield bonds in addition to these other securities as a component of its income generating portfolio.
The drawback to these multi-asset funds is that you aren’t able to actively size your allocations to stocks, bonds, and cash according to changing market conditions as you would with a portfolio of several ETF selections in each category. However, they do provide a diversified and conservative way to access a wide array of securities that may ultimately lower the volatility of a single position.
Searching for income? Download our latest special report on REITs, MLPs, and preferred stocks: The Ultimate ETF Income Guide.