XShares, the firm behind the struggling HealthShares ETF family, has undergone a rapid two-day expansion of its product line. First, on Friday, it launched the Adelante Shares Real Estate exchange-traded funds; then, on Monday, it launched the first-ever family of lifecycle ETFs, the TDAX Independence ETFs, in partnership with TD Ameritrade. With seven Adelante ETFs and five TDAX funds, the two launches grow XShares' lineup of ETFs from 19 to 31.
The TDAX funds are notable for a number of "firsts," and they have attracted quite a bit of buzz in the industry. Not only are they the first ETFs ever to be based on lifecycle or target date indexes, they also are the first ETFs to combine stocks and bonds in the same portfolio, says Jeff Feldman, founder and chairman of XShares. They do not represent funds of funds or ETFs, but a portfolio of stocks and fixed-income securities. Four of the five funds have target dates set at 10-year intervals for the years 2010 (TDD), 2020 (TDH), 2030 (TDN) and 2040 (TDV). The fifth fund is the "in target" fund (TDX), which means its target date is set at inception.
The TDAX Independence ETFs track the Zacks Lifecycle Indexes from Zacks Investment Research. Lifecycle and target date funds are typically associated with retirement, but the TDAX funds are designed for any sort of savings with a targeted end date, according to XShares and Zacks. That could include saving for other life events like a house, a wedding or college.
"We're trying to make the point that this is about retirement and more," says Zacks Investment Research President Michael Case Smith. "The industry is focused on retirement, but we feel that lifecycle investing and target date investing can be used for a lot more goals than just retirement."
While the indexes and the funds based on them are very aggressive further away from the target date, with as much as a 97% allocation in equities for the 2040 fund at inception, they become far more conservative as the target date approaches, dropping down to an allocation in international and domestic equities of 11% for the "in target" fund.
"As target dates near, people care more about return of capital than return on capital, regardless of what computer models say," says Smith.
He says that the indexes underlying the TDAX ETFs track with the industry average allocation for lifecycle funds of roughly 30% in international and domestic equities five years before the target date, but then reduce their equity exposure in the interests of preserving capital for the five years leading up to the target date. Smith says most lifecycle funds keep the allocation in equities at about 30% to 35% in perpetuity.
The Zacks indexes, however, gradually increase the level of risk along their glide paths in the five-year period after the target date and migrate to a risk/return profile that mimics the Lipper Conservative Funds Index, under the assumption that the remaining money will be in the funds in perpetuity, Smith says. The allocation in stocks will likely migrate back toward 30%.
A quick comparison with the Fidelity Freedom Lifecycle Funds shows an allocation of nearly 30% in stocks for the fund with the 2000 target date and an allocation of nearly 50% in stocks for the 2005 target date fund ... more aggressive than the TDAX funds. Meanwhile, the 2040 fund has an allocation to stocks of less than 85%, slightly less aggressive than the TDAX fund. The Vanguard approach is mixed: Its Target Retirement 2045 Fund has an 88% allocation to stocks, about on par with Fidelity, while its 2005 target-date fund has a relatively aggressive 42% of its total assets in stocks.
Lifecycle funds are one of the fastest-growing areas of the fund industry, with more than $400 billion already invested in them, Feldman says. Much of the growth, he adds, is due to the Pension Protection Act of 2006, which includes lifecycle funds among the acceptable default options for pensions and 401(k)s. Although the TDAX Independence ETFs are being marketed more for "life events" than for strictly retirement purposes, the main industry for lifecycle funds remains the retirement market. And while there are a few firms like Invest n Retire that provide access to ETFs through retirement savings plans, ETFs are not widely available in most plans of that nature. It is a problem Feldman acknowledges.
"We're working on it, and we believe we're probably a year away from [providing the funds in retirement plans]," he says.
What the funds may have going for them is relatively low expenses. Feldman points out that many lifecycle funds have a load of 1% or more on top of their regular fees, while the TDAX ETFs have an expense ratio of just 0.65%. However, there are quite a few no-load lifecycle funds, some of which have expense ratios that beat those of the TDAX ETFs. The no-load Fidelity target-date funds have an expense ratio range of 0.57% to 0.82%, while Vanguard's target-date funds carry an expense ratio of just 0.21%.
But the TDAX funds are entirely unique products that are first movers in the ETF industry. The fact that they can trade with the ease of stocks rather than ordinary mutual funds will likely hold a great deal of appeal for investors. That the portfolios are based on independent, unified indexes rather than being funds of funds is another point of differentiation that could draw investor dollars. And for investors looking to use them for purposes other than retirement, the fact that they are not available through retirement plans should be of little consequence.
Written by Heather Bell