ETFs Target Retirement


ETFs Target Retirement

Target-date funds are now available in low-cost exchange-traded flavors.

Like peanut butter and jelly, target-date exchange-traded funds should be an irresistible combination. These funds aim to marry the low costs of investing in ETFs with the set-it-and-forget-it ease of funds that shift to a more conservative mix of stocks and bonds as they approach their target dates.

ETF providers are often quick to tout their "innovations," but the TDAX Independence funds are truly novel. They are the first ETFs to use a set formula, known as a guide path, to change their stock-and-bond allocations over time. They are also the first ETFs to hold individual stocks and bonds in the same portfolio. Four of the five TDAX funds have target dates set at ten-year intervals from 2010 (symbol TDD) to (TDV). For example, the 2040 fund currently has 97% of its assets in stocks. By 2040, it is expected to have just 10% in stocks. The fifth ETF (TDX), a conservative fund with a heavy weighting toward bonds, is aimed at investors who are at or near their target date.

Compared with most target-date mutual funds, TDAX ETFs are cheap. They charge annual expenses of 0.65%; the average target-date fund charges 1.27%. But the TDAX fees are considerably higher than the annual fees of 0.20% or 0.21% that VanguardÕs target funds charge. They are comparable to those of T. Rowe Price's target-date funds, which charge from 0.60% to 0.74%.

Putting cost aside, however, the TDAX ETFs are far more transparent than target-date mutual funds. "You can't really hide anything in these ETFs because we disclose the daily holdings," says Anthony Dudzinski, chief executive of XShares Advisors, which teamed with broker TD Ameritrade to develop the TDAX ETFs. With target-date mutual funds, it's impossible to know their current holdings. That's because the funds report holdings only quarterly and, in any case, invest in other mutual funds, adding another layer of mystery.

Don't be surprised if TDAX ETFs or other target-date ETFs eventually wind up on the investment menu of your retirement plan. In October, the U.S. Department of Labor issued rules that make it easier for employer-sponsored retirement plans to offer target-date funds.