An Unlikely ETF Revival

September 10, 2018

The downside to target-risk ETFs, however, is that there's no "glide path": It's up to the investor to decide when and how to move from one risk allocation to another, and it must happen all at once. Therefore, the shift from one target-risk ETF to another can sometimes lead to bumpy, "stair-step" style portfolio transitions, as well as trading commissions and other costs.

Using ETFs Inside Mutual Funds

As the fee wars spread to every corner of the investment industry, issuers of target-date funds have increasingly turned to low-cost ETFs as portfolio constituents.

Invesco, BlackRock, Charles Schwab, J.P. Morgan, Transamerica and others now use ETFs within their target-date fund complexes. In fact, many even offer all-ETF or mostly ETF target-date fund lines, and some issuers even eat their own lunch, using only their own, self-branded ETFs inside their target-date funds.

One example is Schwab's Target Date Index Fund series, a set of passive funds that use eight low-cost Schwab ETFs to build their allocations. BlackRock's LifePath Smart Beta Fund series is 99.8% ETFs, implementing mostly single-factor and multifactor iShares funds.

J.P. Morgan also made headlines recently when it announced it would use its own self-branded ETFs inside of its $75 billion SmartRetirement target-date funds, investing in third-party ETFs only when a comparable J.P. Morgan product wasn't available.

All-ETF Funds Small, But Growing

To date, the assets invested in all-ETF target-date funds remain barely a drop in the target-date fund bucket, however.

For example, just $119 million has been invested in BlackRock's LifePath Smart Beta Fund series, or just 0.05% of the total assets across the LifePath fund complex. Other LifePath target-date funds that use a blend of ETFs and other instruments have substantially higher assets invested; for example, the passive LifePath Index Fund series, which uses 8.9% ETFs, has $169 billion invested.

Meanwhile, $748 million has been invested in the all-ETF Schwab Target Index Funds, or about 4% of the assets across Schwab's complete target-date fund complex.

That said, Schwab's Target Index Fund series has also experienced explosive growth, particularly in 2018, as assets under management have grown 96% year-to-date.

‘Cost Is Critical’

There's a good reason for that asset growth. Using ETFs, especially in-house ETFs, can dramatically reduce the overall expense of a target-date fund—a boon for smaller retirement plans, which can't always secure the same kind of bulk pricing advantages that larger plans can.

"Cost is critical," said Jake Gilliam, senior multi-asset-class portfolio strategist for Charles Schwab & Co. "Our overriding goal in building the [Schwab Target Date Index Funds] was to drive cost down as low as possible. Using our own low-cost ETFs was a great way to deliver on that."

In the case of the Schwab Target Date Index Funds, each fund costs just 0.08%, compared with 0.72% to 0.85% for the average comparable target-date fund. No minimum investment is required, either.

"For smaller plans, a solution like this was simply out of reach until we provided it," added Gilliam.

Much To Overcome

Given the technological hurdles, it is unlikely the target-date ETF will stage a comeback anytime soon. Still, the use of ETFs in target-date mutual funds proves ETFs can still help reduce costs for investors, even if they aren't the star of the show.

"Through a low-cost wrapper, investors are putting more of their retirement money to work," said Rosenbluth.

Contact Lara Crigger at [email protected]

Find your next ETF

Reset All