Target-date exchange traded funds are continually re-balanced throughout ownership to maintain an age-appropriate level of risk. Recent Federal regulation within the financial industry has brought target-fate funds in focus and some are questioning whether investors understand the logic and risk associated with them.
"The basic idea of target-date funds is pretty simple. They settle on a year in which an investor expects to retire, then gradually trim their stock exposure as that year approaches and the investor's tolerance for risk wanes. Such funds are becoming a major way that working Americans save for retirement," Michael A. Pollack wrote for The WSJ.
Recently, asset managers have been altering key features of the funds, particularly when it comes to equity exposure. Others have added in less-traditional asset classes into the mix, such as commodities, real estate and absolute return strategies.
Many industry insiders have no problem with mixing up the strategies and utilizing the tools available. However, the problem lies with the fact that nobody knows exactly how the approach will work, and which one will work the best.
The timing of the push from Federal regulators proposing stricter disclosure rules about investment strategies is clashing with a time when many asset managers are experimenting.
The basic misunderstanding of target-date ETFs is about one-third of investors that have assets in these funds believe incorrectly that these fund promise guaranteed income at retirement. The mix of stocks and bonds does not stop changing at the target date, contrary to what some think. Depending on the fund, asset allocation simply changes but does not turn to cash.
Some advisors do not believe that tighter regulation is the answer. Disclosing asset allocation at the end of the target date is not going to aid in figuring out which fund is the best to get them to retirement.
Aside from the relatively high fees that target-date funds charge "there's only so much disclosure can do when you get at the fundamental issue of investors not being able to make the right decisions with whatever information is at their disposal," Robert Hiltonsmith, policy analyst at the progressive think tank Demos said on US News.
As with any investment, make sure you understand what you are buying and how it fits with your portfolio and goals.
Various Target-Date ETFs:
- iShares S&P Target Date 2015 Index Fund ETF (TZE)
- iShares S&P Target Date 2050 Index Fund ETF (TZY)
- DBX TDX Independence 2020 ETF (TDH)
- iShares S&P Target Date 2020 Index Fund ETF (TZG)
Tisha Guerrero contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.