In a year marked by exciting ETF launches targeting companies with high free cash flow, small-cap value factors, and even complex options income strategies, BlackRock (NYSE:BLK) iShares took a noticeably different approach.
Earlier in October, the firm unveiled its new suite of 10 LifePath ETFs. That's right, the plain Jane target date mutual funds sitting in your 401(k) are now available in ETF form.
That being said, the new LifePath ETFs have some interesting twists that separate them from the usual target-date funds. Here's what to expect under the hood.
Analysis & overview
The LifePath lineup currently comprises a total of 10 ETFs, nine of which are staggered out in five-year increments, along with a 10th fund intended for those already retired.
- iShares LifePath Target (NYSE:TGT) Date 2025 ETF (ITDA): 0.09%
- iShares LifePath Target Date 2030 ETF (ITDB): 0.09%
- iShares LifePath Target Date 2035 ETF (ITDC): 0.10%
- iShares LifePath Target Date 2040 ETF (ITDD): 0.11%
- iShares LifePath Target Date 2045 ETF (ITDE): 0.11%
- iShares LifePath Target Date 2050 ETF (ITDF): 0.11%
- iShares LifePath Target Date 2055 ETF (ITDG): 0.11%
- iShares LifePath Target Date 2060 ETF (ITDH): 0.11%
- iShares LifePath Target Date 2065 ETF (ITDI): 0.11%
- iShares LifePath Retirement ETF (IRTR): 0.08%
Each one utilizes an "ETF of ETFs" structure, wrapping numerous other iShares ETFs to achieve the intended asset allocation mix.
As a target-date fund, these ETFs will strategically adjust their holdings on a glide path to become more and more conservative over time. As the target date draws near, this usually involves decreasing equities allocations and increasing fixed-income allocations.
For example, the latest-dated one of the bunch, ITDI is currently 98.50% equities with the remainder in fixed income and cash equivalents. In contrast, IRTR, which is intended for retirees as of today is split around 40% in equities and 60% in fixed income.
Breakdown of the ETFs
For our analysis, we will look at ITDD, which is intended for those looking to retire around 2040. This ETF currently wraps a total of 13 other iShares ETFs, which include the following as of November 22:
- iShares Russell 1000 ETF (IWB): 43.95%
- iShares Core MSCI International Developed ETF (IDEV): 20.02%
- iShares Core MSCI Emerging Markets (NYSE:IEMG): 7.91%
- iShares MBS ETF (MBB): 5.70%
- iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB): 4.50%
- iShares Core U.S. REIT ETF (USRT): 3.62%
- iShares US Treasury Bond ETF (GOVT): 3.45%
- iShares 10-20 Year Treasury Bond ETF (TLH): 3.25%
- iShares Russell 2000 ETF (IWM): 1.1.85%
- iShares Global Infrastructure ETF (IGF): 1.83%
- iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB): 1.66%
- iShares 0-5 Year TIPS Bond ETF (STIP): 1.10%
- iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB): 1.06%
All these underlying ETFs are passively managed given that they track benchmark indexes, but ITDD itself is actively managed according to BlackRock. That is, the firm will be able to adjust these proportions as needed, or even change the underlying exposures.
What Makes These ETFs Different
What really separates ITDD from your average 2040 target-date mutual fund is its rather complicated asset allocation strategy.
Consider the Vanguard Target Retirement 2040 Fund (VFORX). This mutual fund has just four underlying holdings, consisting of a Vanguard U.S. total market equity fund, an international equity fund, a domestic aggregate bond fund, and an international bond fund.
In contrast, ITDD "slices and dices" its allocation much more. For instance, on the equity side, ITDD holds IWB, IDEV, and IEMG which provide broad-market global equity exposure, but it also adds separate allocations for REITs and infrastructure equities. Similarly, ITDD's fixed income is split between both issuers (government versus corporate) and maturities (in terms of years).
An investor managing all 13 of the aforementioned ETFs found in ITDD would likely have a hard time rebalancing the portfolio. However, BlackRock is able to do it seamlessly, with the ETF structure also helping to mitigate capital gains distributions.
In this case, it appears that the firm is willing to sacrifice simplicity for greater flexibility. Only time will tell how well this works out.
This content was originally published by our partners at ETF Central.