Target Retirement Date Report Card

by on March 10, 2014

The rapid development of the exchange-traded fund industry has brought to market more than 1,500 products for investors to choose from. Most, however, use only a handful of ETFs to build a well-diversified portfolio, but there is an entire line of products that takes this strategy to the extreme, offering access to a complete portfolio through a single equity ticker [see 101 ETF Lessons Every Financial Advisor Should Learn].

How Target Retirement Date ETFs WorkTarget Retirement ETFs

Target Retirement Date ETFs are “total portfolio” funds designed for retirement investors seeking an easy alternative to creating their own portfolio or using money managers. By investing in a single security, investors can gain exposure to a diverse portfolio of stocks and bonds that is customized to suit their investment objectives with ideal asset allocations.

These hands-free portfolios are designed to shift asset allocations with an investors’s changing risk profile. For example, as an investor approaches his or her retirement, a higher allocation will go to fixed income products, while a younger investor would have a heavier weighting towards equity exposure [see Visualizing Target Retirement Date ETFs].

Target Retirement ETFs Since the Market Bottom

The chart below shows the performance of iShares’ suite of target retirement funds since the market bottom in March of 2009. Please note that the following chart is based on monthly adjusted returns:




Since the market bottom in March of 2009, each of iShares’ target retirement funds have posted either double- or triple-digit returns. Not surprisingly, the long dated fund,s which have more exposure to equities, performed best; TZV and TZO posted cumulative returns of over 110% since March 2009.

Under The Hood

Ticker ETF Domestic Eqiuty International Equity Domestic Fixed Income Domestic Real Estate
TZE S&P Target Date 2015 Index Fund 33.87% 14.62% 50.07% 1.32%
TZG S&P Target Date 2020 Index Fund 39.46% 17.36% 41.54% 1.57%
TZI S&P Target Date 2025 Index Fund 44.35% 19.83% 33.96% 1.78%
TZL S&P Target Date 2030 Index Fund 48.59% 22.03% 27.35% 1.95%
TZO S&P Target Date 2035 Index Fund 52.43% 24.09% 21.32% 2.09%
TZV S&P Target Date 2040 Index Fund 55.16% 25.69% 16.92% 2.17%

Above is a breakdown of iShares’ target retirement ETF portfolios (as of March 4, 2014). The S&P Target Date 2040 Fund (TZV) has a much higher allocation to domestic and international equities, while the S&P Target Date 2015 ETF (TZE) has a larger weighting in fixed income. Logically, this makes sense since an investor with a target date of 2040 is likely much younger than someone who wishes to retire in 2015; as such, a person who has a longer time horizon over which they are able to recover value in the event of major losses can have more exposure to riskier asset classes, like stocks, which may be more volatile but could provide a more meaningful return [see Target Retirement Date ETFs: 3 Things To Consider]. 

Investors should note, however, that over time these target retirement date ETFs will evolve, shifting allocations to asset classes with risk profiles that are more in-line with investors’ objectives. So in the next 25 years, one would expect the 2040 fund to gradually shift away from equities towards bonds, eventually forming a portfolio that is very similar to how the 2015 fund looks today. 

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Disclosure: No positions at time of writing.