One-stop “target-date” funds are attractive to investors who want to own a mix of stocks and bonds that fit their investment goals without having to buy large amounts of different assets. These take out a lot of the guesswork for those just starting out, work well as core holdings, and allow savers to add more daring or personally appealing positions to the mix. But some retail investors, put off by the fees, are avoiding target-date assets and building their own versions instead.
So let’s see how to do it and weigh whether it’s worth the effort.
First, what exactly are these investments?
Target date funds are professionally managed portfolios of stocks and bonds that shake up the asset mix as investors accelerate toward a set end date, typically a retirement date. The savings tool is extremely popular and costs an average of 0.68% per year, according to Morningstar.
In the UK market, Vanguard’s LifeStrategy Fund Line is the market leader, managing around £30bn ($40bn) for UK investors at an annual cost of 0.22% (i.e. $2.20 on investment). BlackRock’s popular MyMap series performs similarly at just 0.17%. The Fund includes several passive fund components and the basic investment mix varies depending on risk. And the more adventurous the fund, the more weighted it will be in stocks and the less weighted in bonds.
Vanguard’s portfolio is a unique basket of index funds. The five funds within this range have different equity weights: 20%, 40%, 60%, 80%, and 100%. The 100% equity strategy has 10 funds and the 80% equity fund has 14 funds. The rest is held in bond funds. Individual costs range from 0.06% for a simple stock tracker to 0.23% for an emerging market (EM) index. Fixed income exposure consists of corporate, government, and index-linked bond fund trackers.
BlackRock’s MyMap series does a similar job, but uses its own iShares line of tracker funds as a component. There are 5 options ranging from 25% of the stock to all of the stock. Some of its funds offer investors exposure to alternative assets such as commodities and real estate.
So how can we recreate them?
If you want to buy a broad basket of global stocks, the cheapest way is the L&G Global Equity ETF GBP, which charges just 0.1% in fees. This ETF tracks the Solactive Core Developed Markets Large-Cap and Mid-Cap Index.
You can also invest a little more (0.12%) in the SPDR® MSCI World ETF. It tracks the MSCI World Index, which consists of approximately 1,500 companies across 23 developed markets. Emerging stocks are generally more expensive to track because they trade less frequently and are less liquid. Therefore, investors tend to pay a little more when purchasing.
But that doesn’t mean you can’t buy it at a reasonable price. HSBC MSCI Emerg Mkts ETF GBP has a fee of just 0.15% that tracks an index that includes approximately 1,400 large-cap and mid-cap emerging stocks. Alternatively, investors could spend the same amount buying a basket of emerging market stocks, excluding Chinese stocks, which currently make up about 30% of the index. Amundi MSCI Emerging Mkt Ex China ETFAcc EMXC has a commission of 0.15%.
The cheapest way for UK investors to get access to stocks close to home is through the Amundi UK Equity All Cap ETF, which charges just 0.04%. It is one of the cheapest ETFs of all types available to UK investors and tracks the Morningstar UK Index rather than the FTSE 100. And that’s especially attractive now that interest rates are falling, potentially driving some of the country’s high levels of debt. Medium-sized company. After all, the FTSE 100 contains the 100 most powerful listed companies in the UK, while the Morningstar Index contains more than 300 companies, both large and modest. has been.
To save exposure to the US flagship S&P 500, UK investors can skip the popular ETF tracker and opt for Lyxor Core US Equity (DR) ETF – Dist GBP instead. Masu. The fee is only 0.04% and it tracks the Morningstar US Index, which has about 700 stocks.
Or you might choose the Invesco MSCI USA ETF and the Invesco S&P 500 ETF GBP. Both fees are only 0.05%. These are the two cheapest ways to gain exposure to either the S&P 500 or MSCI USA index.
What opportunities are there here?
OK, let’s agree. LifeStrategy costs more than the sum of its parts. That said, investors also benefit from the fact that Vanguard always actively maintains an up-to-date view of which markets are most attractive. We also regularly ‘rebalance’ the fund so that it is not heavily biased towards (or against) any particular region or sector. That might reduce some of the risks people face.
For example, LifeStrategy currently has a market share of around a quarter in the UK, compared to just 4% for popular global stock trackers. A third of that is invested in U.S. stocks, which pales in comparison to the 69% share in global indexes.
And while supporting cheap UK stocks may ultimately be the right decision, it has come at a huge cost to investors over the past decade as US tech giants soar. On the other hand, individual investors who build their own portfolios can determine which markets perform best.
On the other hand, when individual investors trade alone, transaction costs increase, which may hinder performance. However, given that it is possible to cut fees by roughly half, investors who are comfortable building and holding their own passive portfolios can earn savings that add up over a long investment period. Masu.
