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ETF within Target-Date Funds

Target-Date Funds

Look out for ETFs Within Pre-packaged Target-Date Funds

David Dierking Apr 04, 2017



You can read on how target-date funds work to familiarize yourself with this class of mutual funds.


The Fee War in Mutual Funds and ETFs


See how cross pollination between mutual funds and ETFs works.


The Case for ETFs Within Target-Date Funds


The BlackRock LifePath Series and the Schwab Target Index Funds are two groups of target-date funds that have recently made the switch to ETFs. BlackRock made the change not only to focus on low fees, but also to offer varying degrees of active management within the products. The LifePath Index funds will use traditional index funds to provide market exposure, while the LifePath Smart Beta series will use more actively managed smart-beta ETFs to try and beat the market.

Schwab’s decision came down, primarily, to fees and simplicity. Employer-sponsored plans will be charged just 8 basis points for the new TDF funds regardless of overall plan size. This is a big advantage for smaller retirement plans, which typically didn’t receive the pricing advantages that larger plans did in the past. Individual investors, who would be charged 13 basis points, also get a low-cost alternative.

Target-date funds using ETFs also have the advantage of greater transparency. Collective investment funds have become increasingly popular among plan providers who wish to have more control over their target-date fund offerings. Those funds, however, don’t have the fiduciary requirements that traditional target-date funds do. ETF-based target-date funds likely do a better job of giving investors greater visibility into the products and also help address the recent spate of 401(k) litigation cases by providing greater transparency into their products.

Read about important questions you should ask your target-date fund provider.


The Case Against ETFs Within Target-Date Funds


Learn about the pros and cons of ETFs compared to mutual funds.

Another example would be retirement plans that use collective investment funds. Providers likely built them with their own participant base in mind and have already negotiated ultra-low fees. In these cases, target-date funds using ETFs may not pique much interest from the provider.

Check out our Retirement Fund section to read up on the different types of pre-packaged target-date funds.


Are ETF-Based Target-Date Funds Right for You?


In case if you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.


The Bottom Line


Be sure to follow our Target-date Funds section to make the right investment decision.

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