BlackRock iShares Launches First Target Date ETFs

Previously you could only get a target date fund in the form of a mutual fund. Now they're available as ETFs.

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The enormous asset manager BlackRock has launched the industry's first lineup of target date ETFs.

I've noted elsewhere why ETFs are usually preferable to mutual funds for a number of reasons and are gradually replacing mutual funds. Millions of Americans also lack access to employer-sponsored retirement plans like a 401(k). So this new suite of iShares target date ETFs provide an easy, affordable solution.

Anne Ackerley, Head of Retirement at BlackRock, commented that “This product innovation will make saving for retirement even more accessible at a time when Americans are less confident about their retirement readiness than ever before.” According to a study from BlackRock themselves, 40% feel off-track to retire. The iShares® LifePath® Target Date ETF Suite can instill a renewed retirement confidence in those who don't know where to begin.

I've long maintained that target date funds are unfairly maligned. The knee-jerk criticism of many pundits and novices are that target date funds are too conservative because they put young investors in broadly diversified asset classes and namely total bond market funds. The flawed logic in “100% stocks while young” aside, we know empirically that most investors overestimate their tolerance for risk, only realizing so when they panic sell during a severe market crash.

Vanguard found that their TDF investors tend to outperform even their DIY index investors over the long term because TDF's remove the behavioral aspects like tinkering, biases, and performance chasing

Some even claim they're doing a public service by getting friends out of target date funds in their retirement plans, which I think is a pretty ridiculous stance, primarily because in doing so they introduce unnecessary complexity and the need for future management for the precise type of investor who very likely doesn't want and isn't prepared for either. To add insult to injury, these moves out of target date funds usually invariably result in less diversification for the portfolio.

iShares is already a powerhouse of an ETF provider, and their asset allocation ETFs like AOR, AOK, etc. provide single fund solutions for well-diversified, multi-asset portfolios. This new suite of LifePath® Target Date ETFs goes one step further in providing funds that automatically adjust asset allocation and rebalance as time passes, all inside an ETF wrapper.

This marks an important milestone in the innovation of financial products, as previously this sort of offering was only available in the mutual fund structure. Notably, these funds are also very affordable with an average expense ratio of about 0.10%, or 10 basis points.

Target date funds take more risk early and adjust to a more conservative allocation over time. When the target retirement date is reached, the fund will transition into the iShares Target Retirement ETF for retirement income.

The LifePath suite will use underlying iShares ETFs inside. ITDE, the iShares® LifePath® Target Date 2045 ETF, for example, looks like this in 2023:

50% U.S. Large Cap Stocks
24% Int'l ex-US Developed Markets Stocks
9% Emerging Markets Stocks
5% Long-Term U.S. Corporate Bonds
4% U.S. REITs
3% Municipal Bonds
2% U.S. Small Cap Stocks
1% Long-Term U.S. Treasury Bonds
1% Intermediate U.S. Treasury Bonds
1% Short-Term U.S. Corporate Bonds

This comes out to about 89% stocks and 11% bonds, which is actually more aggressive than I would have expected. The bonds are even mostly long-term bonds, which is uncharacteristic of most target date funds. In the interest of full disclosure, these probably aren't the exact assets and allocations I would use, and you could definitely simplify the exposure and cut down on the number of underlying funds, but I can't deny the diversification, utility, accessibility, and affordability of these products.

These target date ETFs are also a perfect complement to an existing 401(k) for savers who are able to also contribute to an IRA but who don't want to manage their investments themselves. And because they're an ETF, they provide more tax efficiency for placement in taxable space as well. Since they're just fund-of-funds products, U.S. investors would also get pass-through foreign tax credits on the underlying international holdings.

There are currently a total of 10 ETFs in the lineup and they're staggered by 5 years, beginning with 2025.

What do you think of this new lineup? Let me know in the comments.

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Disclosure: None.

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