Targeted-Date and Actively-Managed ETFs Expand the ETF Universe

By Nancy Zambell, Contributing Editor

Last week, we talked about the pros and cons of adding country and sector exchange traded funds to your portfolio. In this issue, I want to bring to your attention, a couple more types of ETFs that are gaining momentum.

According to a recent report from Barron’s, lifecycle ETFs, also called target-date and target-risk funds, are predicted to pull in $920 billion in new money during the next five years. These ETFs are designed with a specific time horizon for cashing out and are diversified among several asset classes, which are automatically adjusted during the holding period.

Here’s how they work: You choose an ETF with a date that matches the time period when you plan to retire (or coincides with a different long-term goal, such as education), as well as a strategy that fits your investment outlook, and then let the managers choose the investments. And the choices are many – from very conservative all the way to very aggressive.

Last fall, the first target-date ETFs, the TDAX line, were launched by XShares and TD Ameritrade. They include 5 target-date ETFs:

• TDAX Independence In-Target ETF (NYSE Arca: TDX), a conservative ETF, which holds the majority of its assets in fixed income
• TDAX Independence 2010 ETF (NYSE Arca: TDD), mostly fixed income, large domestic and a small portion of international equities
• TDAX Independence 2020 ETF (NYSE Arca: TDH), large domestic equities, fixed income and international equities, to a lesser extent
• TDAX Independence 2030 ETF (NYSE Arca: TDN), large domestic and international equities, and fixed income, to a lesser extent
• TDAX Independence 2040 ETF (NYSE Arca: TDV), large domestic and international equities, and a very small portion of fixed income

Then, in February, State Street Global Advisors filed with the Securities and Exchange Commission to launch a family of nine actively-managed target date ETFs, which will hold other ETFs.

Some Caveats:

Target-date ETFs may look like the answer to all your retirement dreams, but – like all investments – it pays to set some ground rules.

Make sure the ETF’s stated strategy and goals match yours. If you are a very conservative investor, you are not going to want the majority of your retirement invested in international equities.

If your goal and ETF are too conservative, you may not have enough put away when your retirement day arrives. And looking at the opposing view, if you invest too speculatively, you may run the same risk – too much time and not enough money.

Don’t forget about diversification. As your funds accumulate, make sure you are adequately diversified. Your asset allocation will change as the years go by, but a tangible risk is having too much of your money spread among too few investments.

Make sure you continue to monitor your ETFs to ensure maximum performance over time. There has not yet been an investment invented that you can just drop your money into and forget about. It’s imperative to make sure that the ETF is performing as you expected when you bought it, or you won’t meet your ultimate goal – a retirement on easy street.

As you can see, target-date ETFs are a foray into a relatively-new category of ETFs – actively-managed. Actively-managed ETFs have taken some time to get to the market, as the whole purpose of an ETF was originally to duplicate an index, which, by its nature, is not actively-managed. But, on Wall Street, there is a propensity to continually create new investments to gather your money, and this is the next step.

Similar to an actively-managed mutual fund, an actively-managed ETF will select investments based on the analysis of individual investments. But the reason actively-managed ETFs have been slower to materialize than one would expect is transparency.

A traditional ETF is very transparent – it pretty much invests in the same stocks that the index it tracks holds. But a problem arises when an ETF strays from just tracking the index. The Securities and Exchange Commission insists that ETFs – unlike mutual funds – provide investors with transparency equivalent to stocks.

But active managers usually like to hold their cards pretty closely, not wanting their competition to know exactly which investments and how much of them they are holding in their portfolios so that they don’t adversely affect the prices by buying them ahead of the ETF manager.

Some of the forthcoming actively-managed ETFs are just ignoring the issue, declaring that they will disclose their holdings daily. Others alleviate the problem by investing only in other ETFs, instead of individual investments.

Recently, there has been a rush to the gate to create actively-managed ETFs. Filings have been made by:

• AdvisorShares Investments LLC, a new Bethesda, Md., company founded by Noah Hamman, a former vice president at Rydex Investments, which filed for a sector allocation ETF and a country allocation ETF.

• Grail Advisors LLC of New York, filed for the Grail U.S. Value Fund.

• PowerShares Capital Management Inc. of Wheaton Ill., a subsidiary of Invesco PLC of London, filed to offer three active equity ETFs, and one active bond ETF. PowerShares has announced that it will only change the portfolios on the last business day of each week, giving itself a small window of time in which arbitrageurs won’t know exactly what is in their portfolios.

• State Street Global Advisors announced plans for an actively-manage fund-of-funds ETF.

Whether or not investors will race to get in line for actively-managed ETFs is a big question. Their cost and tax advantages over mutual funds, as well as greater trading flexibility, may propel the growth of this category. Yet, astute investors will want to eye this development with some caution and skepticism, to make sure that the ETFs are transparent to them, meet their investment strategies and are better places to invest than other available alternatives.

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm


Disclaimer & Important Information

Financially Fit is owned and published by Business Financial Publishing, LLC of Washington D.C.  Business Financial Publishing is neither a registered investment adviser nor a broker/dealer.  Readers are advised that this electronic publication is issued solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security.

The views expressed herein are based upon our analysis of the issuer's public disclosures, and assumes both their accuracy and completeness.

The opinions and statements included herein are based on sources (including the companies discussed and public sources) believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. We have not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. We encourage you to consult with independent financial advisors with respect to any investment in the securities mentioned herein. You should review a complete information package on all companies, which should include, but not be limited to, the Company's annual report, quarterly reports, press releases and all regulatory filings. All information contained in Financially Fit should be independently verified with the subject company. The foregoing discussion contains  statements which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected.

Financially Fit is intended only for residents of the United States. Financially Fit is not for residents of the United Kingdom and is not an approved publication by the Financial Services Authority in the UK.

The information contained in this newsletter is not intended to be a complete discussion of information regarding all of the current and/or intended business activities of the covered companies. Any opinions expressed in Financially Fit are statements of judgment as of the date of publication, are subject to change without further notice, and may not necessarily be reprinted in future publications or elsewhere.

Business Financial Publishing and its members, managers, writers and employees do not accept compensation from the companies discussed within Financially Fit, nor any of our individual newsletter publications (Growth Report, Rising Star Stocks, and Top Stock Insights).

====================
====================

Financially Fit  is a free email newsletter from BrokerAdviser.com (http://www.brokeradviser.com)