Target-Date Funds Are Cruise Control Of Investing

Target-date, or life cycle, funds are the cruise control of investing. After you choose which fund to invest in, the fund does all the work for you. You don’t have to think about it again until retirement.

Many target-date mutual funds are funds of funds. They hold a selection of equity funds, such as large-cap, small-cap and international funds, and a selection of fixed-income funds of multiple durations and yields.

The appeal of target-date funds is that they take care of all the asset allocation and rebalancing for you. It’s a balancing act of managing market risk, inflation risk and longevity risk.

Typically, an investor picks a target date around the time he plans to retire. When the investor is young, the fund focuses on growth and mostly holds stock funds. But as the investor gets closer to retirement, the fund’s asset allocation becomes more conservative and focuses on fixed income. The changing asset allocation is called the glide path.

Target-date funds hit the public consciousness after the Pension Protection Act of 2006. The legislation allowed 401(k) plan sponsors to make life cycle funds the default investments for participants who didn’t choose their own funds. The logic was that since investors were now in charge of their own retirement funds, sitting in cash wasn’t going to get them there.

“For the past nine years that we’ve been keeping track, there has been double-digit growth in assets, ever since Pension Protection came out,” said Janet Yang, Morningstar’s target-date fund analyst.
In 2006, of all the 401(k) plans, 57 offered target-date funds. In 2012 the number had jumped to 72, according to the Investment Company Institute.

In 2006, only 19% of 401(k) plan participants held target-date funds. Six years later it was 41%. Also, in 2006 target-date funds made up only 5% of 401(k) assets. By 2012 that had jumped to 15%.
By the end of Q2 2012, target-date mutual funds held $678 billion, said Sarah Holden, the ICI’s senior director of retirement and investor research. The majority of those assets were held in retirement accounts. Defined contribution plans held 68% of the total, and individual retirement accounts 20%. The rest was in the personal accounts of investors looking for the glide path approach.
Vanguard, Fidelity and T. Rowe Price have the largest target-date funds.

Families of target-date funds can have different philosophies, which can lead to wide dispersions in the holdings, returns and fees for funds with the same target year. Recently, fees have become a big issue, and that has helped move plan sponsors toward index-based funds.

“Each client’s needs are going to be different,” said Don Wilson, chief investment officer at BrightWorth, an Atlanta asset manager. “Some target-date funds will be too risky, while others won’t be risky enough.”

Wilson said that if the investor picks his 65th birthday as the target date, he may have 20 years of retirement ahead of him. He may need to have more equities to help his account grow and outpace inflation. The target-date fund may not be taking this into account.

The only ETF provider with target-date portfolios now is Deutsche X-trackers.

For Full story go to Investor’s Business Daily.

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Equity and Bond ETF Inflow Plays Tag With the Stock Market

With the S&P 500 index posting a 32% gain in 2013, it’s not surprising that exchange traded funds (ETFs) holding U.S. equities, especially large-capitalization stocks, received the biggest net cash inflow last year.

But with U.S. stocks falling in January, 2014 has seen ETF investors fleeing U.S. stocks and buying such categories as bonds and emerging-market stocks. Amid all this activity, equity ETFs tied to nonmarket-cap-weighted indexes have bulked up.

Despite the stock market rally in 2013, net issuance, or net cash inflow, into ETFs fell 3% to $179.87 billion as investors pulled money out of bond funds, according to the Investment Company Institute. In 2012, fixed-income ETFs posted record annual net inflow of $52.32 billion. But net inflow plunged 77% last year to $12.20 billion as fears grew that the Federal Reserve Bank will soon reverse its quantitative-easing strategy and allow interest rates to rise. Bond prices fall when interest rates rise.
When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP

When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP View Enlarged Image

“One consistent trend for a while is investors have been repositioning their portfolio for the rising rate environment,” said Michael Iachini, managing director of ETF Research at the Charles Schwab Investment Advisory. “They’ve moved out of Treasuries and are investing in short-term debt instruments from high-yield issuers.”

Equity inflow in 2013 grew 26% to $166.84 billion. Of that total, 62% of inflow, or $104.03 billion, went into ETFs holding domestic equities. The rest went into international funds. But that trend reversed in the first two months of 2014.

Broad-based U.S. equity ETFs recorded net outflow of $21.08 billion. SPDR S&P 500 ETF (SPY), which received the most inflow last year, $16.32 billion, posted net outflow of $19.00 billion in Q1 2014, according to BlackRock, which offers iShares ETFs and tracks industry statistics. More surprising was that bond ETFs saw net inflow of $17.64 billion, more than all of last year combined.

“One thing that happened in the beginning of January was that long-term interest rates came down and stabilized,” said ICI senior economist Shelly Antoniewicz. “It turned out the resolution on the debt ceiling wasn’t going to be an issue and people became more comfortable with the Fed’s policy of reducing the bond buying program.”

One of the biggest reversals in asset flow has been in emerging-market stocks. In 2013, ETPs (exchange traded products) holding emerging-market stocks posted net outflow of $10.92 billion, according to ICI. Things really picked up steam this year. In the first two months of 2014, emerging-market ETPs recorded net outflow of $12.58 billion.

For the full story go to Investor’s Business Daily.

ETFs Cross $1 Trillion Milestone

Just another $10 trillion more to go.

The ETF industry crossed the $1 trillion in assets milestone for the first time yesterday. Actually, $1.027 trillion to be exact, according to BlackRock’s Global ETF Research and Implementation Strategy Team. It took 17 years for the industry, which includes all exchange-traded products classified as ETFs or ETPs, to achieve what took the mutual fund industry 40 years. The first ETF, the SPDR, launched Jan. 29, 1993, so just edged in under 18 years.

The modern mutual fund industry, which began with the Investment Company Act of 1940, crossed the $1 trillion mark in 1980. There are currently $11.51 trillion in assets under management in the U.S. mutual funds, according to the Investment Company Institute.

According to Blackrock, in the U.S., as of December 16, there were 894 ETFs with $887.2 billion in assets under management from 28 providers on two exchanges. Year to date, 171 new ETFs have been launched in the U.S., while 49 were delisted. Another 828 ETFs are in the regulatory pipeline. The $1 trillion comes when you add in the $115.5 billion from the 185 ETPs listed in the U.S. There are currently 20 providers and they all trade on one exchange. That’s ups from 142 ETPs with assets of $88.1 billion from 17 providers a year ago.

“Cost features make ETFs and ETPs among the most ‘democratic’ of investments, as a product’s pricing is consistent regardless of the type of investor or level of assets invested,” said Deborah Fuhr, the head of Blackrock’s ETF research team. She said the growth reflected the products expansion to retail investors. Providers are expanding into more specialized areas to cater to the growing number of professional and retail investors using ETFs as advanced portfolio construction tools. “The increasing availability of these highly-specialized ETFs and ETPs across the full spectrum of equities, fixed-income and alternative investments means that investors can use these vehicles to instantly deploy capital to take advantage of new investment opportunities – with complete transparency into the underlying investments as well as low cost.

Net new asset flows this year show increased interest in equities in both developed and emerging markets, compared to a drop off in net new asset flows among fixed income and commodities. Most striking was through November, net new flows into North American equity ETFs/ETPs jumped 950% to $21 billion, compared with just $2 billion in 2009. Over the same time period, flows into emerging markets equity ETFs/ETPs totaled $29 billion, up from $27 billion last year. Flows into fixed income products fell 30% to $31.2 billion, compared with $44.8 billion last year, while flows into commodity products plunged 65% to $11.4 billion from $32.6 billion a year ago. In November, ETF trading volume accounted for 24.1% of all United States equity turnover.

For more info check out Daisy Maxey’s piece in the Wall Street Journal and IndexUniverse.com.

ETF Assets Fall in June

The combined assets of all exchange-traded funds fell sequentially in June by $10.85 billion, or 1.4%, to $772.21 billion, reports the Investment Company Institute, the trade organization for the mutual fund and ETF industries.

Over the past 12 months, ETF assets increased $181.87 billion, or 30.8%. Since June 2009 assets in domestic equity ETFs increased 24%, or $86.43 billion, to $445.2 billion and global equity ETFs assets rose $48.21 billion, or 32%, to $197.3 billion. Year-over-year, bond funds surged 57% to $129.48 billion. Hybrid funds also jumped 57% to $236 million. During June, the value of all ETF shares issued exceeded that of shares redeemed by $11.66 billion. In June 2009, ETFs experienced a net issuance of $15.61 billion.

At the end of June, the number of ETF had climbed 20% for a total of 872, with 470 in domestic equity, 276 in global equity, 120 in bonds and 6 hybrid funds.

10 ETFs Close in May

The total ETF assets at the end of May surged 35% year over year, or $201.13 billion, to a total of $783.05 billion, the Investment Company Institute (ICI) announced Tuesday. However, combined assets fell from April by $47.81 billion, or 5.8%.

An interesting tidbit in the ICI release. Amid all the hubbub of new ETF launches and the recent market correction, it appears some news fell under the radar. While the total number of ETFs grew 21%, or 148, from the year-ago month, 10 funds closed during May. Adding in new launches, the net decline for May was five funds leaving a total of 860.

The ICI breaks ETFs down into five categories, with commodity funds listed under the category Domestic (Sector/Industry). Domestic Equity (Sector/Industry) lost eight funds, while Domestic Equity (Broad-based) saw two close. Global/International Equity added three funds and bonds gained two. The category Hybrid ETFs remained constant with a total of six funds.

The ICI said that since May 2009 assets in domestic equity ETFs increased $106.84 billion to $461.06 billion and global equity ETFs assets rose $49.11 billion to $198.15 billion. Last month, bond fund assets stood at $123.61 billion and hybrid funds held $233 million. During May, the value of all ETF shares issued exceeded that of shares redeemed by $7.55 billion. In May 2009, ETFs experienced a net issuance of $13.70 billion.

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Fine Young Cannibals

So much for not selling at the bottom. October 2008, unequivocally Wall Street’s worst month of the financial crisis thus far, saw more cash pulled out of long-term mutual funds—stocks, bonds and hybrids—than any other month in history: $127.55 billion. It was twice the $63.82 billion outflow seen in September, the second worst month ever, according to the Investment Company Institute (ICI).

Of October’s total, 57%—or $72.44 billion-came out of equity funds, reports ICI. In September 2008, the month that saw the bankruptcy of Lehman Brothers and the bailouts of Freddie Mac, Fannie Mae and AIG, 88% of the outflows-that is, $56.36 billion—came out of stock funds. Although outflows began to slow in the final months of the year, the trend continued.

That’s a lot of money to be swirling around. Yet while asset values fell, and cash poured out of mutual funds like water from a broken main, ETFs experienced net cash inflows. In 2008, $245 billion poured out of equity mutual funds alone, while $140 billion net cash entered equity ETFs, according to TrimTabs Investment Research. Much of those equity fund outflows went into money market funds. Still, for every two dollars that exited equity mutual funds, equity ETFs took in more than $1.

Are ETFs really cannibalizing 50% of mutual funds’ assets? That may be doubtful, but the number could be as high as 25%, say analysts. ETFs’ distribution crosses various markets, thus making it difficult to establish a correspondence among the money flows. State Street Global Advisors, the firm with the largest ETF in the world, the SPDR S&P 500 ETF (SPY), estimates that half of all ETF assets reside with traditional institutional firms, 35% to 40% come from the retail clients of investment advisors and the rest from self-directed investors.

For the full article go to Financial Planning magazine.

Survey Finds Nearly Half of Advisors Don’t Do Monthly Reviews

Rydex Investments, the sponsor of leveraged ETFs and the CurrencyShares, exchange-traded products that track foreign currencies, released its Advisor Benchmarketing Supplemental Survey this week. Here are some highlights:

· Most of the advisors (55%) surveyed review the ETF universe and their clients’ ETF holdings monthly.

That may be the majority, but is a little more than half really most advisors? Is this a positive statistic? Well, let’s flip it around. Nearly half (45%) of all advisors DON’T review the ETF universe and their clients’ ETF holdings monthly. So, the odds are nearly 50/50 that your advisor isn’t on top of things. That’s not what I want to hear. Let’s hope your advisor isn’t one of them.

· Open-ended mutual funds and ETFs will be a primary vehicle or product focus for 2009 for investments, according to 98% and 83% of advisors respectively.

That agrees with what I’ve been saying for months. In fact, I think ETFs will surpass mutual funds in the cash inflows for 2009.

· When selecting ETFs for their clients’ portfolios, investment objective and index exposure are the most important criteria, according to 60% of advisors surveyed. The second and third most important decision making criteria are fees (45%) and benchmark tracking accuracy (35%), respectively. It’s interesting to note that more than a third of advisors (38%) do not find Morningstar rankings (or rankings from other research providers) important as decision criteria for ETF investment.

It makes sense that you have to decide what you want before you look at fees. I’m curious to know why so many advisors don’t use the Morningstar rankings.

· Most (80%) of the advisors surveyed said that they are knowledgeable on the differences between ETNs and ETFs, with almost all of them declaring themselves ‘very knowledgeable’ on the tax consequence differences between ETNs and ETFs (97%). Only about a third (30%) are knowledgeable on tracking error differences between the two.

Tracking error is the difference in return between an index fund and the index it follows. This typically results from the costs required to create and hold a portfolio of securities. Index funds should shoot for a tracking error of less than 10 basis points. Since ETNs don’t hold securities, they don’t incur any costs to create or hold a portfolio. They are merely a promise by the issuing bank to pay the return of the index. Thus, a well run ETN should have no tracking error.

· When advisors research different ETF choices, more than half (55%) use the Morningstar ETF center, 40% use the Yahoo! Finance ETF Center and about one third (34%) use ETF provider sites.

For my list of the best sites for researching ETFs check out How to Decide Which ETFs Are Best for You.

· Despite the current economic situation, ETF assets grew to more than $725 billion globally by the end of 2008, according to consulting firm Strategic Insight, and are expected to continue growing in assets over the next few years.

According to the Investment Company Institute, the trade group for the mutual fund and ETF industries, in 2008 U.S. mutual fund assets fell 20% year-over-year to $9.6 trillion, while U.S. ETF assets slid 12.7% to $531.3 billion. I will address the growth in ETF assets in another posting, but that attests to the growth of ETFs outside the U.S.