Sturdy Target-Date Funds for Those Nearing Retirement
These funds should stand you in relatively good stead in tough times.
The bear market has provided a harsh reminder to target-date fund investors that broad diversification doesn't guarantee that they won't experience painful losses. Over the past 12 months, domestic stocks have been hit hard, foreign stocks have on average plunged even further (in part due to the rise of the U.S. dollar), and virtually all bonds outside of Treasuries have lost money--and convertible and high-yield bonds have been pounded. As a result, the nine Morningstar target-date fund categories other than retirement income have declined between 25% and 39%. True, investors in a lot of target-date funds have many years to make up ground before they retire and go from accumulating assets to withdrawing them. But those who hope to retire soon are in a more difficult position; they may have to work longer or learn to live with less in their golden years.
Thus, we think it's a good time to highlight shorter-dated target-date funds that have held up relatively well in this brutal environment, for those hoping to avoid sharp losses if conditions worsen in the coming years. We used Morningstar's Premium Fund Screener to produce a list of such funds. First, we screened for funds in Morningstar's target-date 2000-2010, target-date 2011-2015, and target-date 2016-2020 categories, excluding 2000 and 2005 funds because they're designed for investors who are already retired and, thus, their more-conservative portfolios have a built-in advantage over 2010 target-date offerings in rough waters. Next, we looked for funds that have landed in their category's top quartile over the trailing 12 months yet stash at least 20% of their assets in U.S. stocks (to ensure that the funds have some appreciation potential in good times and aren't simply ultraconservative offerings). Finally, we excluded funds that had expense ratios above their category average or charged more than 1% (a reasonable maximum for funds that invest substantially in bonds and cash) and screened for funds that required no more than $10,000 for the initial investment.
Our search yielded 11 target-date funds from seven different fund shops. We weren't surprised to see Vanguard Target Retirement 2010 (VTENX), Vanguard Target Retirement 2015 (VTXVX), and Vanguard Target Retirement 2020 (VTWNX) make the list. Their equity weightings hover around the middle of their categories, but their equity portfolios are composed of index funds--which have fared relatively well amid the turmoil due to liquid holdings at the top of their portfolios--and their fixed-income sleeves are dominated by Vanguard Total Bond Market (VBMFX), which tracks the high-yield-free Barclays Capital U.S. Aggregate Bond Index. What's more, the funds boast rock-bottom costs. True, the 2020 fund has lost 28% for the 12 months ended Feb. 13, 2009, and the 2015 and 2010 funds have lost 25% and 22%, respectively. But those funds' declines best their typical category rivals by several percentage points each.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.