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