Pick A Retirement Date With These ETF’s

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May 26, 2009 11:38am NYSE:TZI NYSE:TZV

target-date1The exchange-traded fund industry has enjoyed explosive growth in recent years due to the significant advantages of these investment vehicles over traditional mutual funds and individual securities.

Perhaps most notably, ETFs offer investors a cost-efficient mechanism to gain access to a diversified basket of securities. ETFs allow investors to create a well-diversified investment portfolio by holding only a handful of assets.

A relatively new ETF innovation, however, takes this efficiency to the extreme – offering access to a complete portfolio through a single ETF. 


Under the Hood

Target retirement date ETFs are the ultimate in a passive, buy-and-hold inve… strategy. An investor simply selects the fund that corresponds to his or her intended retirement date (e.g., 2035 fund) and allows the ETF managers to do the rest. I should note that this concept is not altogether new – anyone with a 401(k) knows of numerous mutual funds operating under the same premise – but is a relatively new concept in the ETF industry.

Obviously, an investment portfolio appropriate for a 25-year old professional will not be appropriate for that same investor 30 years later as he approaches retirement. A young investor would likely be heavily exposed to equities, while an investor in his 50s would likely devote a much larger portion of his assets to fixed income investments.

As such, target retirement date ETFs are not static, but rather adjust to a more conservative asset allocation as the relevant retirement date approaches.

Let’s take a look at two iShares Target Retirement Date ETFs to understand how these funds change over time:

S&P Target Date 2040 Index Fund (TZV): This ETF seeks to represent investment opportunity generally available in target date funds through an asset allocation that targets a retirement horizon around 2040. As of spring 2009 (i.e., 30+ years before the anticipated retirement date), TZV’s asset allocation was as follows:

64.8% domestic equities
19.5% international equities
15.7% domestic fixed income

S&P Target Date 2020 Index Fund (TZI): This ETF seeks to represent investment opportunity generally available in target date funds through an asset allocation that targets a retirement horizon around 2020. As of spring 2009 (i.e., 10+ years before the anticipated retirement date), TZI’s asset allocation was as follows:

45.1% domestic equities
12.5% international equities
41.6% domestic fixed income
0.7% domestic real estate

Full Story:  http://seekingalpha.com/article/139536-under-the-hood-of-target-retirement-date-etfs


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