Understanding Why Target Date ETFs Feel The Pain

Target date exchange traded funds (ETFs) are a different animal when it comes to investing.

A recent story we did on the subject noted that one in particular, the TDX Independence 2010 (TDD), was demonstrating “acceptable” performance although it was down year-to-date.

How is this so? In short, the fund is basically doing what it’s supposed to do.

Target-date funds are a unique balance of fund in that they automatically adjust their allocation of equities and bonds. The closer you get toward your retirement date, the higher the ratio of bonds in your portfolio, earning their name of a retirement plan on autopilot.

These funds aren’t really meant to appeal to the investor who actively trades and uses trend-following as a strategy. When you buy a target-date ETF, you’ve essentially committed yourself to the buy-and-hold strategy.

TDD is designed for investors who plan to retire around 2010. 8% of the fund’s assets are allocated to international equities, 24% to domestic equities and 68% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2010.

Investors with an exit strategy like our own - selling a fund when it’s 8% off the high or below its 200-day moving average - aren’t going to be interested in these ETFs. Being down in double digits year-to-date for the trend-following type is definitely not “acceptable.”

Buy-and-hold investors, though, have to accept both the ups and downs of what a long-term strategy like this will give you.

In markets like this, buy-and-holders are feeling pain just as everyone else is - that’s the bad news. These funds aren’t immune from the market declines.

However, going forward, this fund is fairly priced and if you’re looking to make a long-term buy-and-hold allocation, now might be a good time. But investors need to first ask what kind of investor they are; ETFs are not one size fits all. Will this work for you? What are your goals? What is your overall strategy, time horizon and risk profile? Answering these questions first will help you determine what kinds of funds will be the best fit for your portfolio.

Year-to-date, TDD is down 11.8% against the broader S&P 500, which is down 30.1%.

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