The Problem With Target Date ETFs and Lifecycle Funds

 |  Includes: TDD, TDH, TDN, TDV, TDX
by: IndexUniverse

They're finally here: the first target date ETFs. Eagerly anticipated and a critical piece of the XShares platform plan, target date funds have already hit the rest of the fund market in force. But it's not all cookies and cream.

If you open the hood, the TD Waterhouse funds actually look like a solid offering. Great job from Heather Bell in her recent article, by the way, in breaking down how these funds and comparables in the fund industry look. The problem with these funds in general, however, is that they're all over the map. Some of them are solid index offerings with reasonable-looking balances of equity to fixed-income exposure. Others are loaded dumping grounds for underperforming active funds combined in perplexing asset class combinations.

I've long strongly felt that this was the direction that more of the vast middle of the mutual fund market needs to head. Most investors are completely clueless about investing and mutual funds. In one classic example, I believe it was George Daniels at Global Index Advisors (who put together the Dow Jones target date index portfolios) who told me that with some plans they were seeing the most popular election (say, five funds from conservative, meant for those about to retire, to aggressive for the 25-year-old go-getters) being an equal allocation across the funds, which of course is completely useless.

So I favor these things in a big way—to the extent that I think they should be the default election in most 401(k) plans, as huge numbers of people put money in and just do nothing—but I also think that there needs to be some order put into this house.

What is a reasonable asset allocation? Are there sensible index (or at least low-fee) options in the plan? How are funds selected for inclusion in these portfolios? Unfortunately none of these questions have easy answers. And for the people sophisticated enough to ask them, these sorts of funds probably paint with too broad of strokes anyway.

The best we can do is try to promote good target date benchmarks and try to get that information out to the investing public... and to continue the fight to turn the 401(k) plan into something other than another 25 years of bloated mediocrity.

Written by Jim Wiandt