Case Study: Goal Investing with Target Date ETFs

Case Summary

Bill is a busy professional who is investing for the future of his growing family, to support his aging parents and to eventually retire. He has investments across several accounts and doesn’t have the time to review his portfolio holistically, let alone rebalance it on a regular basis.

Analysis

Investors need to balance the maturity and risk profile of their portfolio with their goals and various time horizons. One way to do this is with planning software or by working with an advisor. An alternative is to use a target-date fund that automatically reallocates across asset classes as time passes.

Target-date funds have traditionally fallen into the realm of the mutual fund world, however, several managers have introduced target-date ETFs over the past 2 years. The two managers with the largest variety of target date ETFs are iShares and TDX Independence.

Portfolio Recommendations

For investors with longer term goals, choose a target date ETF with a longer maturity date – say 2030 or even 2040. These funds will be more heavily weighted in equities which are the only asset class proven to protect against inflation over the long term.

The TDX Independence 2040 ETF (TDV) has an initial allocation of approximately 24% in international equities, 73% in domestic equities and 3% in fixed income. Balances then follow a glide path, from an estimated 97% equity exposure to 10% in the year 2040.

Investors with shorter term goals should go with a target date ETF with a shorter maturity.

The iShares S&P Target Date 2010 Index Fund (TZD) invests approximately 52% of its assets in Underlying Funds that invest primarily in equity securities and 48% of its assets in Underlying Funds that invest primarily in bonds.