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Target-Date Funds Add Stamps to Their Passports

Morningstar research shows increased allocations to foreign markets in target-date funds.

Broad diversification has always been a key characteristic of target-date funds. Indeed, if you're investing in a target-date fund as your sole retirement investment, as many Americans do, broad diversification is likely one of the key features you're counting on. Over time, target-date series' managers have added more asset classes and sub-asset classes in an effort to increase diversification with the aim of improving the long-term risk-adjusted returns. Common additions have included commodities, global REITs, and alternative strategies.

More subtly, but equally important, the managers of these target-date series have over time significantly increased the existing allocations to non-U.S. equities relative to U.S. equities. We've observed this anecdotally over the past few years, as several of the major target-date providers announced increases in their strategic allocation to foreign stocks, in some cases moving up to 30% of the stock weighting from 20% of equities.