I’ll admit to not being the biggest fan of what are referred to as target date funds, which allocate assets across stocks, bonds and possibly other assets, in line with an expected retirement year. But that deserves an explanation, since this article, as noted by its title, is predisposed to assuming target date funds are a good investment.
As with any investment decision, it is highly personal. Even if someone works with a professional investment manager or financial planner, the decision about what to do strategically is ultimately up to the person whose money is being invested. A target date fund automatically adjusts what it invests in as the investor ages, selecting riskier, growth-oriented investments earlier and moving towards less volatile investments as the target date approaches. While target date mutual funds and ETFs, both of which are represented in the discussion below, are a way to skip a lot of the details and ongoing oversight of one’s retirement investment portfolio, they should never be used as an excuse to “just let the market and time take care of it.
Now, let’s get into the target fund decision factors that you should consider when approaching these innovative investments. I don’t have to be a huge fan of them to see why others would be. And clearly they have stood the test of time.
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Why Choose Target Date Funds?
Some might dismiss target date funds as a lazy form of investing. Others will counter that investing is difficult enough without having to do so expecting one’s emotions to stay intact between now and the time the money starts to be used in retirement. The main advantage of investing in target funds is not about an individual person’s investment approach. Because that’s a highly personal decision, and one I only make for my own family.
But what target date funds do that is potentially very helpful is to provide something that many, dare I say most, investors tend to do a poor job at: structuring their investment portfolio. I did that (portfolio construction) for a living for decades. And now, in the years since I sold my advisory practice to semi-retire, I spend my time speaking less directly to investors than when I had a client base, but to a wider audience, I hope that those who chose this simplified, structured approach to investing did not take their eye off the ball.
Target date funds make investing easier by taking away the ongoing decision-making about how to allocate assets. However, that doesn’t make them less risky. Because the markets are still involved, and target date funds have one inherent issue that all investors should be very aware of: they automatically favor bonds the closer one gets to retirement age.
That was fine for about 40 years. But then in 2020, bonds suffered as interest rates rose. That crushed the entire concept of owning more bonds and a lower stock allocation. That said, stocks have inherent risks as well. I’ll discuss some additional thoughts on this at the end of this article.
Criteria Used For Selecting These Top Target Date Funds
Given the wide range of retirement target dates, my analysis below is for funds that aim for a retirement in the year 2040, or thereabouts. So effectively I am neutralizing the target date itself and focusing on the specific companies’ offering in that 2040 segment of this part of the fund business. The idea is that if someone is reading this who is retiring earlier or later, they would likely focus on a different year’s fund, but the issuer is really what I am pointing toward here. They are essentially the money manager being hired to outsource the investment process over a very long time period.
So with little difference between target date funds, other than the fact that the closer one is to retirement, the more bonds and cash they will have in the target date portfolio, I think it comes down to fund selection with the target date issuer. As such, companies with robust fund menus and some funds that are different from the standard types stand out to me.
3 Best Target Date Funds To Buy (H2)
Data source: Fund websites
1. JPMorgan SmartRetirement Blend 2040 R6 (JOBYX)
JPMorgan needs no introduction. But while it is known for its long banking history, dating back to its eponymous founder, it has become one of the largest asset management companies. And despite its size, it has produced some relatively innovative funds.
Fund Overview
- Inception year: 2012
- Number of holdings: 16
- Turnover ratio: 22%
Why JOBYX Is A Top Choice
The fund makes this short list because over time, the ability of an issuer to blend in some of their more unique funds with the broader target date fund portfolio could be a difference maker. Its current mix includes non-traditional asset classes such as high yield bonds and emerging market debt. Top holdings include Equity Index Fund, BetaBuilders International Equity ETF and Core
2. iShares Life Path Target Date 2040 ETF (ITDD)
Blackrock’s iShares unit is the 800-pound gorilla of the ETF industry, so it makes sense that they would use their muscle to establish themselves in the target date world. This is the only ETF on the list, as most target date funds are still in mutual fund form. That explains the recent inception date for ITDD and the limited assets under management. Still, since these funds simply allocate to other funds, liquidity should not be a major concern.
Fund Overview
- Inception year: 2023
- Number of holdings:15
- Turnover ratio: 2%
Why ITDT Is A Top Choice
Again, the availability of distinguished funds, and that implied flexibility is what stands out here. And this is an ETF of other ETFs, so the iShares unit is ideally suited for target date investing. Currently, ITDT includes a global infrastructure ETF, a REIT ETF and a TIPS bond ETF. That’s a good indication of what this ETF giant will be capable of as they expand their target date footprint. Top holdings include iShares Russell 1000 ETF, iShares Core MSCI International Developed Markets ETF and iShares Emerging Markets ETF.
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3. T. Rowe Price Target 2040 (TRHRX)
To a large degree in investing, you get what you pay for. So for those who want the widest selection of funds, and active management to boot, T. Rowe Price is a consideration.
Fund Overview
- Inception year: 2013
- Number of holdings: 25
- Turnover ratio: 37%
Why TRHRX Is A Top Choice
With 25 different mutual funds inside of it, and stretching to include asset classes like commodities (“real assets” as they refer to them in this fund) as well as different types of small-cap stock and non-U.S. stock funds, this one fits more of the classic target date fund mold, but with a very diverse selection of sub-funds). Top holdings include T. Rowe Price Value, T.Rowe Price Growth Stock and T. Rowe Price U.S. Large-Cap Core.
Bottom Line
Many target date funds are alike. They tend to gravitate toward a mix of 80% or so in stocks, diversified via funds typically run by the target date issuer, making these a form of “fund of funds.” However, like the hedge fund version of that structure, there is not much hedging done here, since typically the funds are designed to automate investing for people not retiring any time soon. That’s why it is so important for investors in these funds to closely monitor and be proactive as they near retirement.
In other words, it would be a shame to build up all that wealth over time, only to give a big chunk of it back because the stock market, bond market or both implode shortly before your target date fund reaches its destination date. In addition, retirement is a fluid concept these days compared to the old days of working for a company for decades and getting a pension. Target date funds are essentially one form of self-directed pension, except that the company’s money is not being used to pay you out. Your money is!
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