Target date asset allocation strategies are growing fast. That is, unless they're packaged in an exchange-traded fund.
Next month, BlackRock Inc.'s exchange-traded funds division, iShares, is shutting down its entire lineup of target date funds.
When BlackRock leaves the target date ETF business, just one fund company providing such funds will be left.
The funds' failure is particularly glaring because ETFs are among the most successful investment products today and target date mutual funds are also seeing fast growth. Analysts have said inertia in the retirement marketplace has prevented those successes from being combined.
“The failure of target date ETFs isn't one of concept, it's one of delivery vehicle,” Paul Britt, an analyst for research firm ETF.com, said in a recent article. “Many individual retirement accounts and 401(k) retirement plans simply don't offer or can't support ETFs of any kind, whether target date or the plain-old S&P 500 funds.”
“For ETFs to really grow in retirement plans, ETFs need to be offered more commonly in retirement plans,” said Christine Hudacko, a spokeswoman for BlackRock.
The iShares target date ETF closures come even as target date funds in mutual fund formats add assets.
In all, target date funds brought in $50.8 billion in new assets in 2013, and total assets held in the funds reached more than $650 billion by the end of March, Morningstar Inc. said. Excluding market appreciation, that's a growth rate of about 10.5%.
But that growth has accrued in large part to the benefit of three fund firms — Fidelity Investments, the Vanguard Group Inc. and T. Rowe Price Group Inc. — which often act both as fund managers and record keepers, providing asset custody and platform support for retirement plans.
That gives those firms special advantage in attracting assets to their own funds, and to mutual funds in general, according to John Jacobs, a longtime ETF industry executive, who currently oversees index design at the Nasdaq OMX Group Inc.
“These platforms were all set up by mutual fund companies,” said Mr. Jacobs. “How fast do you want to eat your own lunch?”
A RARE RETREAT
The closures of the iShares fund series, which was launched in 2008, amount to a rare retreat for that brand. The firm has launched more than 300 ETFs in the U.S. since 1996 and closed just 17, according to an InvestmentNews analysis of data from Morningstar.
Last month's announcement will add 18 funds to that list.
iShares had a key role in popularizing exchange-traded funds across asset classes and — now owned by BlackRock, the world's largest money manager — it's a part of one of the most formidable machines for marketing investment products.
The target date series managed nearly $310 million when their closure was announced last month. None topped the $100 million normally thought to be the break-even point for exchange-traded funds. And they pale in comparison to BlackRock's mutual fund target date series, called LifePath, which manages nearly $13.8 billion.
The sole remaining lineup of target date ETFs — Deutsche X-trackers — manages just $122 million, according to ETF.com.
“WRONG PLACE, WRONG TIME”
When then-iShares owner Barclays Global Investors launched the funds in 2008, Noel Archard, an executive who now runs BlackRock operations in Canada, said the funds are “well-suited to IRA rollovers or small-sized 401(k) plans who want to offer their participants an option that combines certain benefits of ETFs such as transparency with the benefits of target funds.”
But the industry hadn't yet — and still hasn't — fully developed the capability or broken the inertia to allow those ETFs to thrive in retirement plans, according to J.J. Feldman, investment manager for Miracle Mile Advisors Inc., a registered investment adviser that manages ETF-driven retirement plans.
“Most people are reticent to change because it's logistically challenging and takes some time and they've been with Fidelity for 12 years, but they're at least interested in looking and seeing what this is all about,” Mr. Feldman said. “If BlackRock came back in two, three years, it might potentially have more of a chance, but right now there are hardly any 401(k)s using ETFs. It really was the wrong place and the wrong time.”
In a statement announcing its own plan to allow ETFs in 401(k) plans in February, the Charles Schwab Corp. said that adopting an ETF-driven plan reduced investment expenses or expense ratios by more than 90%, compared with a plan using actively managed mutual funds, and by more than 30% when compared with a plan using index-tracking mutual funds.