Target date funds? Ever heard of them? They are basically funds that are set up as either ETF’s or mutual funds. Not much of a difference between the two, the fees are obviously more important in mutual funds. Anyway, so these funds generally have a date attached to them that they target to. For example, being almost 30, I can expect to retire in 2040 so in Canada I could invest in the TZV Ishares fund. The advantage of course is that in theory I could be investing a significant amount of my savings in this fund as it is diversified but also the fund’s asset allocations will change over time to take on more risk in the earlier years and as retirement approaches, this fund would take less risk and become more geared towards fixed income securities.
In theory, it is great and I honestly was looking into investing in this type of security. That was until I read the fine print. You see, this fund (and many others like this one) actually invests in other ETF’s. So for example, if you have a portion of your investment in US securities, they would take a portion of the cash to invest in an ETF that tracks the S&P500. The major problem here is that you have an additional layer of fees. You are investing in a fund that invests in more funds and thus you are paying two level of fees. If these investments were complicated and difficult to manage it might be worth the trouble. But given that there are only so many investment asset classes, the rebalancing could be done easily by myself and I would be saving 0,20-0,30% on my investment. Sounds small? Think about how much it adds up to over decades and decades. I think it would be very easy to re-allocate anyway. You select the 5-6 asset classes and how you will invest in them (which ETF’s for example). Then, you can simply determine the % you should have in each one and each time you buy new funds, you buy the one that are undervalued on. It’s not perfect but I would expect this to overperform the target date funds significantly over a few decades.
If you read this article for example, you can see how they make it seem so difficult to manage these funds ourselves when actually these target date funds are barely changing their investments and allocations making it very easy to replicate.
But I’d be interested to know if you have looked into other target date funds and if they are all built in this way. I would imagine that mutual funds built this way would be even more of a “bad investment” as the fees will add up even more quickly.