Are Target Date ETFs Worth A Second Look?
By Simon Maierhofer
October 27, 2008

SAN DIEGO (ETFguide.com) - Life-cycle funds have been around for a while and until recently were only available on a mutual fund chassis. Life cycle funds might be the closest thing to a maintenance free retirement fund, some even refer to them as a retirement plan on autopilot.

Life-cycle funds, also called “age-based funds” or “target funds” are a special breed of the balanced fund. These funds are unique in that they automatically adjust the allocation of equities and bonds. The closer you get to retirement the higher the ratio of bonds in your portfolio.

In October of 2007, XShares in cooperation with TD Ameritrade launched a series of five TDX Independence funds with target dates ranging from now to 2040. Combined they account for $150 million in assets.

Even though these funds are designed to remain on autopilot, the recent market conditions validate a closer look to determine if the funds follow their respective objectives and deserve investors' trust.

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TDX Independence In-Target ETF (NYSEarca: TDX)

This fund is the most conservative of the five, designed for almost retirees. 3% of the fund’s assets are allocated to international equities, 8% to domestic equities and 89% to fixed income. The allocation to each asset class is adjusted by Zacks (the index provider) using proprietary methods. Five years after the fund’s inception date, the allocation to equities is gradually increased and seeks to match the risk exposure of the Lipper Conservative Funds Index. Thereafter, TDX aims to replicate the Lipper equity allocation (approximately 33%) on a static basis to perpetuity.

TDX Independence 2010 ETF (NYSEarca: TDD)

This fund is designed for investors who plan to retire around 2010. 8% of the fund’s assets are allocated to international equities, 24% to domestic equities and 68% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2010. Following 2010, the allocation to equities is gradually increased and beginning in 2015, the index seeks to match the same risk exposure to the Lipper Conservative Funds Index. Thereafter, TDX aims to replicate the Lipper equity allocation (approximately 33%) on a static basis to perpetuity.

TDX Independence 2020 ETF (NYSEarca: TDH)

As the name implies, this fund is designed for investors who plan to retire around 2020. 17% of the fund’s assets are allocated to international equities, 49% to domestic equities and 34% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2020. Following 2020, the allocation to equities is gradually increased and beginning in 2025, the index seeks to match the same risk exposure to the Lipper Conservative Funds Index. Thereafter, TDX aims to replicate the Lipper equity allocation (approximately 33%) on a static basis to perpetuity.

TDX Independence 2030 ETF (NYSEarca: TDN)

Again, as the name implies, this fund is designed for investors who plan to retire around 2030. 22% of the fund’s assets are allocated to international equities, 65% to domestic equities and 13% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2030. Following 2030, the allocation to equities is gradually increased and beginning in 2035, the index seeks to match the same risk exposure to the Lipper Conservative Funds Index. Thereafter, TDX aims to replicate the Lipper equity allocation (approximately 33%) on a static basis to perpetuity.

TDX Independence 2040 (NYSEarca: TDV)

You guessed right, this fund is designed for investors who plan to retire around 2040. 24% of the fund’s assets are allocated to international equities, 72% to domestic equities and 4% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2040. Following 2040, the allocation to equities is gradually increased and beginning in 2045, the index seeks to match the same risk exposure to the Lipper Conservative Funds Index. Thereafter, TDX aims to replicate the Lipper equity allocation (approximately 33%) on a static basis to perpetuity.

Target ETF summary

The target ETFs are available for an annual management fee of 0.65%. This seems to be a reasonable fee for the autopilot service provided. The On-Target ETF has certainly provided peace of mind. TDX is barely down 1% for the past year. The 2010 portfolio is down about 15% which, given the circumstances is acceptable. The 2020 portfolio dropped by 30%, the 2030 and 2040 portfolios have shed about 39%.

As a point of reference, the S&P 500 (AMEX: SPY) is down 40%, the Dow Jones (AMEX: DIA) is down 47%.

In short it can be said that the TDX Target ETFs fulfilled their job-description and delivered the performance one could expect. Whether a 30% - 40% loss is acceptable is up to you to decide.
Unfortunately there is very little information disclosed about the underlying Zacks Index and the Lipper Conservative Funds Index. The methodology and allocation behind both indexes is proprietary and unknown to the average Joe (now als known as Joe the plumber).

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Benefits of Target Date ETFs

For investors and employees wanting to stay away from hands-on financial research, target date ETFs provide a good alternative. A target date ETF is better than no retirement plan at all, or a plan started too late.

For hands-on do-it-yourselfers, there are better options out there. With over 800 ETFs and ETNs you can customize any portfolio with laser precision. Keep in mind, that in a market like this, very few people actually outperform the major bench marks, therefore an investment in knowledge will pay the best dividends.

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