Not Every Good Investment Idea Works In An ETF

July 12, 2016

As we approach 2,000 ETFs listed in the U.S. (currently at 1,931) we have seen new funds offer a dizzyingly array of investment exposures, because all obvious pockets of the investment world have already been thoroughly covered.

From thematic ETFs that cover niche pockets of the market like drones and “Catholic values,” to a cavalcade of multifactor ETFs that have taken the term “smart beta” to a new level, there has been no shortage of ETF ideas.

And yet, even as we ask whether there are too many ETFs on the market—keep in mind there are 11,000 mutual funds—there is one ETF product that has come and gone in a relatively short period.

Target-date ETFs fell off the ETF landscape more than a year ago, when Deutsche Bank announced in April 2015 that it would be shuttering its family of five target-date ETFs, all of which had less than $50 million in assets. The last day of trading for these ETFs that targeted 10-year intervals was May 27, 2015.

In August 2014, BlackRock’s iShares unit, the biggest ETF company in the world, closed its nine target-date funds with a combined $300 million in assets at the time.

All-In-One Portfolio

These funds are an all-in-one portfolio that combine equities and fixed income in varying amounts depending on how close or far a given investor is from retirement. The concept, once considered innovative and alluring, never resonated in an ETF package, and that’s a shame. The vehicle is a great idea in or outside a 401(k).

There are hundreds of billions of dollars of assets in target-date mutual funds, a large majority of which sit in 401(k) accounts, which is the last stronghold for the mutual industry when it comes to ETFs.  

My appreciation for target-date funds has grown recently, after I added one such mutual fund to my own 401(k), and it struck me what a good idea these are for buy-and-hold investors who do not want to manage asset allocation adjustments—rebalancing, moving in and out of cash, etc. It also struck me as odd there are no target-date ETFs on the market. It’s rare to find an investment idea that is offered in a mutual fund but not in an ETF wrapper.

The concept is simple. A typical target-date fund offers stocks and bonds, and the allocation is based on when you expect to retire. That allocation changes as time goes by into a more conservative stock/bond split. For the fund I own, the allocation is 74% stocks and 26% bonds, with an expense ratio as low as 0.15%. There’s nothing else for me to do but direct savings into it.


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