About 8 months ago, Blackrock (NYSE:BLK) announced it would be shutting down its line of target date ETFs. Now, Deutsche Asset & Wealth Management has declared it is pulling the plug on the last lineup of target date ETFs available to U.S. investors.
I say – good riddance.
These funds certainly have a well-intentioned approach of selecting a mix of stocks, bonds, and cash that automatically adjust to a more conservative asset allocation as you approach retirement. Younger investors are expected to select a more aggressive mix of stocks with a longer time horizon. Conversely, those nearing retirement may appreciate a higher allocation to cash and bonds to reduce volatility and enhance capital preservation.
These funds are still wildly popular options as open ended mutual funds in 401(k) plans. Mostly because they advertise that they are doing all the work for you without having to worry about the messy details of your investment mix. They handle the security selection, asset allocation shifts, rebalancing, and other considerations. There is over $10 billion alone in the T. Rowe Price Retirement 2015 (TRRGX). You can’t argue with that level of commitment.
Nevertheless, it appears that ETF investors may be a more discerning group when it comes to controlling their asset allocation decisions. Putting your portfolio on autopilot just doesn’t fit the mold of a savvy ETF investor who wants to take a more hands on approach to understanding what they own and why they own it.
My general consideration for this trend is that once you have broken out of the bounds of your 401(k), where there are restrictive investment options, you want to broaden your reach. This may include lowering your fees, streamlining your portfolio, or selecting individual holdings with the ability to size your allocations in line with your goals or risk tolerance. The ability to hone in on domestic versus foreign exposure or sectors of the bond market that meet your needs is critical to building a successful retirement strategy.
There is no “one size fits all” approach to saving and investing for retirement. Just because you “should” be more aggressive or conservative at a certain stage of your life doesn’t mean that you have to be. I know many millennials who are scared to death to invest in stocks and many retirees who fear bonds with a passion. That doesn’t mean they are wrong or misinformed, it just means they are taking a different approach and their outlook may change over time as well.
One of the greatest benefits of ETFs is their flexibility. In my opinion, this is why target date funds failed in the ETF marketplace. They were just too restrictive and boring for retail investors or advisors to adopt.
So what are your options if you are looking for an alternative to target date funds?
Blackrock has a group of four multi-asset funds that have shown themselves to be worthy competitors. They essentially hone in on a mix of stocks and bonds based on a risk tolerance spectrum from conservative to aggressive. The iShares Core Growth Allocation (NYSE:AOR) is the most popular, with $486 million in total assets and charges an expense ratio of just 0.24%. This ETF is designed with a 60% stocks and 40% bonds asset allocation that includes both domestic and foreign exposure.
Ultimately, it may be a better alternative to construct a balanced portfolio of 5-10 ETFs with properties that suit your experience and style. This may include several different layers of domestic stocks, international exposure, fixed-income sectors, and other facets of the global marketplace. The key to a successful outcome will depend on your ability to diversify across a number of different asset classes to reduce volatility or enhance qualities (such as income) to meet your goals.
Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.