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Comparing Passive Target Date Funds

We’ve talked a fair amount about Passive vs Active TDFs, which refers to the type of underlying vehicles the TDF utilizes. (Note: There’s also Blend TDF which use a mix of active as passive vehicles). While these passive TDFs each follow their own glidepath, the holdings themselves are not necessarily homogeneous. In the following we’ll compare the underlying exposures of the top passive TDFs.

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By Clayton Fresk on June 1, 2020



We’ve talked a fair amount about Passive vs Active TDFs, which refers to the type of underlying vehicles the TDF utilizes.  (Note: There’s also Blend TDF which use a mix of active as passive vehicles). While these passive TDFs each follow their own glidepath, the holdings themselves are not necessarily homogeneous. In the following we’ll compare the underlying exposures of the top passive TDFs.

 

For this analysis, we’ll limit the group of passive TDFs to the top 5 in terms of overall AUM, which include:

 

 

Overall Equity:

 

Glidepaths are also another frequent topic at TargetQ Views. For comparison purposes, we’ve altered the glidepath view a bit to isolate major vintages (2060-2020) and the equity level at each. For this analysis, the equity allocation only includes US and INTL exposure (and not REITs), which we’ll touch on later. We’ll also note that in late 2019, Blackrock merged its 2020 fund into the Income fund. For comparative purposes, we’ll include the Blackrock Income fund in the 2020 analysis.

 


Chart Source: Stadion

 

You can see that in the vintages farther from retirement, the exposure is similar across issuers at +/- 90%. But as you move along the glidepath the differences begin to show, such as Fidelity having higher exposure in the 2040 vintage and Blackrock having lower exposure in the 2030/2020 vintages.  These differences should not come as a surprise since each have distinct glidepaths.

 

Equity Index Exposure:

 

Now we’ll delve into the differences in the actual underlying exposure, starting with equity.  The first difference of note is that the underlying vehicles can track benchmarks from different index providers, which can inherently cause discrepancies in exposures at the TDF level. Also, these issuers use different ‘splits’ of funds; for example, some use US Total Market exposure while some use a split of Large Cap and Small/Mid Cap. Here is a table showing which exposures are utilized at the US, INTL, and REIT (if applicable) levels and the index provider:

 


Grid Source: Stadion

 

While there is some agreement at tine INTL level with most using MSCI exposure, the US side has more variation of index providers and splits.

 

US Exposure:

 

The next comparison point is the amount of US vs INTL Equity exposure is used.

 


Chart Source: Stadion

 

While most of the issuers/vintages agree with a 60% US / 40% INTL split across the glidepath, there are a couple differences:

  • TIAA-CREF uses a 70% US / 30% INTL split, which has them with a bit higher home country bias
  • Blackrock does not maintain the same split across the glidepath, with the 2020/Income split inching towards 65% / 35%.

Small/Mid Exposure:

 

The next comparison is the amount of Small/Mid cap vs Large Cap exposure within US Equity. For this point of analysis, we used a style breakdown in order to get an apples-to-apples analysis between those using Total Market exposure vs a split of Large and Small/Mid cap vehicles.

 


Chart Source: Stadion

 

Again, there is mostly a consensus at about a 77% Large Cap / 23% Small Cap split.  But again, there are a couple discrepancies:

  • SSgA has a higher allocation to Small/Mid, which lowers as they move along the glidepath
  • Blackrock skews towards a higher small cap allocation as they move along the glidepath

Emerging Markets exposure:

 

Moving onto the International Equity allocation, next we’ll isolate the Emerging Markets exposure within said exposure. For this analysis point, we’ll use the Regional exposure breakdown in order to get an apples-to-apples analysis between those using Total Market exposure vs a split of Developed and Emerging Market vehicles.

 


Chart Source: Stadion

 

While varied, there is a bit more uniformity here, with emerging markets exposure hovering around the +/- 20% level for these issuers.

 

Real Estate:

 

While not included in the equity analysis above, we’ll quickly touch on the fact that 2 of these 5 issuers utilize real estate exposure.  Blackrock uses it across the glidepath, while SSgA does not begin allocating to real estate until the 2030 vintage.

 

Fixed Income:

 

While there is similarity, but also many differences on the equity side, the fixed income side of the equation is a bit more varied.  First, we’ll start with what exposures are utilized.  We’ll separate out TIPS (Inflation-Protected) separately. These issuers (like many others in the industry) most often begin splicing in TIPS exposure further along the glidepath. So, while technically a fixed income exposure, it is almost treated as a separate asset class for those nearing retirement. On this table, we’ll note at what vintage the issuer begins using TIPS, while the other exposures are just notated whether used or not

 


Grid Source: Stadion

 

What these issuers agree with is the use of broad-based (Aggregate) exposure, but from there the use of other fixed income exposure varies.  These exposures aren’t necessarily used across the glidepath but could be mixed in closer to retirement (when the absolute allocation to fixed income is higher), which we’ll touch on again shortly.

 

Duration:

 

From this mix of exposures, we can measure the effect on the overall duration of the fixed income exposure. While there are other factors we can measure (spread, quality, etc.), duration seems to be most commonly understood and allows for an easy side-by-side comparison. Again, this excludes TIPS exposure from the fixed income analysis.

 


Chart Source: Stadion

 

While a common duration is +/- 6 years, there are some outliers

  • SSgA only uses long term bond exposure until the 2040 vintage, and hence the duration of the 2060 and 2050 vintages is much higher at about 20 years and moves lower along the glidepath.
  • Fidelity also uses long term exposure (mixed with broad) in the vintages farther from retirement, and hence has elevated duration in said vintages.

Conclusion:

 

We believe these differences do not make one issuer better or worse than any of the others.  In our opinion, it’s just more important to realize that even passive TDFs can have nuanced differences outside of just higher or lower overall equity exposure. It’s just another point of reference to consider when comparing TDF options. And again, this is only looking at the Passive side of the TDF universe.  Issuers that have Active series following the same glidepath may have different exposures as part of the active mandate (whether through different funds splits or differing exposure within the active underlying fund itself).

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Author: Clayton Fresk

Clayton 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.

Glide PathTarget Date FundsTDFs
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Written By:

Clayton Fresk

Clayton 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.


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