Implementing Smart Beta Strategies in Target-Date Funds

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Target-Date Funds

Implementing Smart Beta Strategies in Target-Date Funds

David Dierking Nov 07, 2017



Be sure to explore our Retirement Funds section to learn more about these funds.


What Are TDFs and Why Do They Need to Change?


There is still a need to address, however, some of the weaknesses inherent in TDFs. They focus mainly on appropriate asset allocations, and not so much on risk management or opportunities for outperformance. As market valuations get stretched and we near a ninth straight year of gains, strategies for minimizing risk should be considered.


How Smart Beta Strategies Get Incorporated Into TDFs


BlackRock provides a nice blueprint for building a target-date fund using smart beta ETFs. The BlackRock LifePath Smart Beta Retirement Fund (BLAIX) mostly passes on traditional index funds in favor of single- and multi-factor strategies. Take a look at the fund’s holdings below.

BlackRock LifePath Smart Beta Retirement Fund

In this situation, the use of smart beta products allows exposure to all of the traditional asset classes, but focuses on minimizing overall market risk. It’s essentially looking to produce market returns with below-average risk.

Make sure to check out our Target-Date Funds section to learn more about these funds.


Why Smart Beta Within TDFs Might Not Work


As is the case with any actively managed product, the biggest risk is that the fund will underperform. Active managers have long had a difficult time beating the markets over most time periods; it’s possible that smart beta funds could have similar difficulty. Contributing to that challenge is fees. Smart beta is designed to combine the benefits of both active and passive investing. Many smart beta funds have low fees, but still trail those of a market cap–weighted index fund. That difference in fees can put the smart beta fund at an immediate disadvantage.

Vanguard, in particular, is not convinced that smart beta strategies within a TDF are a good idea. John Croke, Vanguard’s head of multi-asset product management, is not a fan of the additional layer of risk that’s involved. He says, “What holds us back with adding smart beta to a target-date fund is that over time there can be severe periods of underperformance that would cause investors to abandon the strategy. And we’re not comfortable introducing an additional degree of risk and uncertainty.”


The Bottom Line


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