There are Lifecycle Funds. Then There are Lifecycle ETFs

Do you like lifecycle funds? Do you use them in your portfolio?

I am not a big fan of lifecycle funds as I only use one in my entire investments, including both regular and retirement accounts. The reason is the lack of flexibility of such funds. However, lifecycle funds are getting popular among investors who opt to choose a fund of funds to simplify their investments. Among the benefits of lifecycle funds, also known as target-date funds, the most talked about are:

1. Automatic asset allocation: Asset allocation is adjusted based on the time span of the target date of the fund;
2. Automatic diversification: Since it’s a fund of funds, the lifecycle fund has exposures in a wide range of asset classes.

With these features, lifecycle funds become an ideal choice retirement accounts since these funds require the minimum amount of management (however, one size doesn’t always fit all). If you like lifecycle funds, then you may find lifecycle ETFs evenly attractive, if not more.

Early this month, XShares Advisors teamed up with Amerivest Investment Management, a subsidiary of TD Ameritrade, to offer the industry’s first batch lifecycle ETFs. Currently, five funds are available for investors:

• TDAX Independence 2010 ETF (TDD)
• TDAX Independence 2020 ETF (TDH)
• TDAX Independence 2030 ETF (TDN)
• TDAX Independence 2040 ETF (TDV)
• TDAX Independence In-Target ETF (TDX)

All the funds have an expense ratio (ER) of 0.65% and they track respective lifecycle indices developed by Zacks Investment Research (here’s an article on Forbes on Zacks lifecycle indices). Since these funds are very new, no detailed data can’t be found on Morningstar and the funds’ website doesn’t have detailed information such as the fund’s asset allocation either, only a sketchy description on how the fund (TDV) invests:

At inception, TDV has an aggressive allocation to risk-based securities, such as domestic and international equities. Balances move automatically down the risk glide path to arrive at a conservative allocation in the year 2040. As an aggressive fund, the initial allocation will be 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. In the five years after the target date, TDV gradually increases its risk exposure to match that of the Lipper Conservative Funds Index. TDV then replicates the Lipper equity allocation (currently 33%) on a static basis, to perpetuity.

As more and more people are using lifecycle mutual funds, the offering of lifecycle ETFs is likely to pick up steam because lifecycle ETFs enjoy the advantages of both worlds: asset allocation and diversification of lifecycle funds and low cost and flexible pricing of ETFs.

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