With the launch of the first-ever life cycle exchange traded funds, TDAX Funds Inc. plans to muscle in on the fast-growing life cycle mutual fund market.
TDAX Funds, which made its debut last week, was born out of a joint venture between TD Ameritrade Holding Corp. of Omaha, Neb., and XShares Advisors LLC of New York.
The new fund group is based in New York.
Its five TDAX Independence ETFs seek to replicate the performance of life cycle indexes created by Zacks Investment Research Inc. of Chicago.
Those indexes begin with a higher weighting in stocks and then gradually shift toward bonds as they approach a preset “target date.”
The funds offer a convenient — and with an expense ratio of 0.65%, inexpensive — way to buy into a strategy that is already popular with investors, said Bill Vulpis, a managing director at TD Ameritrade and the president of that firm's advisory service, Amerivest.
Year-to-date though the end of August, life cycle, or target date, funds experienced net inflows of $37.4 billion, according to Financial Research Corp. of Boston.
The five TDAX ETFs represent an improvement over life cycle mutual funds because unlike most life cycle mutual funds, the new ETFs are based on an index, meaning investors know exactly what they are investing in, Mr. Vulpis said.
The TDAX Independence ETFs are also cheaper than many life cycle funds, he said, though that isn't always the case, according to Greg Carlson, an analyst with Morningstar Inc. of Chicago.
The Vanguard Group Inc. of Malvern, Pa., charges just 0.21% for its life cycle funds, all of which invest in the company's index funds, he said.
That seems like a much better deal, said financial adviser Jim King of Balasa Dinverno & Foltz LLC in Itasca, Ill., especially when you consider that, because ETFs trade like stocks, investors must pay a commission anytime they want to buy or sell ETF shares.
Most 401(k) retirement plans that carry ETFs require that they be bought and sold through a brokerage window.
“ETFs are great, but for the smaller investor, transaction fees eat into returns,” Mr. King said.
Cost, however, isn't the only reason that the new TDAX ETFs could be a tough sell.
The indexes upon which they are built also seem to have some serious issues, said Rick Miller, chief executive of Sensible Financial Planning and Management LLC of Cambridge, Mass. Mainly, they get too conservative too quickly, he said.
The TDAX Independence 2020 ETF shifts its allocation from 67% equities to just 10% equities as the fund approaches its target date.
“I think the allocations get pretty bond-heavy pretty quickly,” Mr. Miller said.
That is an issue for many life cycle mutual funds, said Andrew Clark, a Denver-based senior analyst with Lipper Inc. of New York.
In its review of such funds, Lipper found that the best-performing life cycle funds are those that don't take such a conservative approach, he said.
The focus of the TDAX ETFs as they near their target date is the preservation of wealth, argued Jim Frawley, a spokesman for TD Ameritrade.
Americans, however, are living longer, meaning that the accumulation phase of investing shouldn't end for most investors at retirement, Mr. Miller said.
Mr. Frawley agrees. He said that is why, after going down to a 10% stake in equities, the fund gradually increases its risk exposure to match that of the Lipper Conservative Funds Index, which has 33% equity exposure.
But if that is the case, Mr. Miller asked, why go down to 10% at all? He calls the strategy needlessly confusing.
Nevertheless, Mr. Clark said, life cycle ETFs can give mutual funds a run for their money.
While they may be more expensive than Vanguard's life cycle funds, he said, they are still relatively cheap when compared with the majority of life cycle funds. And while commissions can eat into an investor's return, the bite they take out of that return diminishes as the investment gets larger, he said.
“Yes, you should be leery if you're just putting a few dollars in,” Mr. Clark said.
“However, if you're putting in $1,000 or more at a time, then it may not be so bad for you.”
David Hoffman can be reached at [email protected].
