Exchange Traded Funds (ETFs) have become an increasingly popular investment vehicle in the industry for multiple reasons, some of which include costs and increased investment coverage (i.e. “Smart Beta” ETFs). There remains, however, a large corner of the market that has not seen ETF penetration and this is the defined contribution / 401k space.
By Clayton Fresk on November 27, 2019
Exchange Traded Funds (ETFs) have become an increasingly popular investment vehicle in the industry for multiple reasons, some of which include costs and increased investment coverage (i.e. “Smart Beta” ETFs). There remains, however, a large corner of the market that has not seen ETF penetration and this is the defined contribution / 401k space. Mutual Funds and Collective Investment Trusts (CITs), including Target Date Funds(TDFs), dominate most of the plan lineups.
Because almost all TDFs are structured as funds-of funds (i.e. investments are in other funds and not individual securities and fixed income products) it stands to reason that the underlying investments of these TDFs could indeed be ETFs. The question now is how many issuers are using ETFs in their TDFs and to what extent.
Based on our research, out of 167 TDF series*, there are currently 40 that invest in at least one ETF, or just under 25%. However, of these series only eight solely use ETFs, whereas the others mix in ETFs with other investment vehicles. Additionally, of these eight, three use proprietary ETFs as either all or the majority of the holdings, whereas the others are open architecture. The three that use proprietary ETFs include:
Another view of ETFs within TDFs is the breadth of tickers used and amount of Assets Under Management (AUM) held. As of 6/30:
- There were 182 different ETFs being held within TDFs out of over 2400 in the market, so only about 7.5% of the tickers are being utilized.
- In terms of size, the AUM in TDFs overall is just shy of $2.1 Trillion. However, ETFs only make up $22.6 billion of this AUM, or just under 1% of assets.
Here are a few more interesting stats:
- Four ETFs have over $1 Billion dollars of their AUM within TDFs
- Nine ETFs have over 20% of their AUM invested within TDFs
- Two ETFs are represented in at least 10 different TDF series
- About 65% are in Equity with 35% in Fixed Income names, which aligns with the overall TDF AUM split
Where does that leave us today? With many more issuers entering the ETF market based on differing factors (e.g. the advent of Active ETFs and Smart Beta ETFs, access, costs, etc.), there could be an increased opportunity for ETFs to replace both index and active mutual fund allocations within TDF, whether in a proprietary or open architecture manner. Additionally, as there is more demand for passive and active/passive TDFs–as well as multi-manager vs proprietary TDFs–the market could see an increase in ETFs allocations by TDF issuers.
*Including mutual fund, CIT, or insurance structures
Author: Clayton FreskClayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.
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