What is an ETF? — Part 19: 529 Savings Plans

July 19th at 7:00am by Tom Lydon

Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 17: 401(k) Plans]

ETFs are not solely limited to your brokerage investment accounts. Investors saving toward a college education may also begin investing in 529 savings plans that include ETF products.

With the cost of going to college rising, it is important to begin saving toward your child’s education now.

The 529 savings plans are a tax-advantage method for saving toward future college expenses. Investors can establish a college savings fund that pays for a beneficiary’s room, board, mandatory fees, books, computer and tuition. Investments in the savings plan are not subject to federal tax and penalty free as long as the money is used for college expenses. Currently, mutual funds make up the lion share of the college-savings 529 industry. [ETFs Gaining Traction with 529 Plan Providers]

Recently, several states, including Nebraska, Nevada and New York, have begun offering ETFs in their 529 plans as a cheap alternative to clunky mutual funds – mutual fund products come with average annual expense ratios of over 1%, whereas ETFs have an industry average expense of about 0.55%.

ETF providers are breaking into the scene. For instance, iShares came out with its 529 Custom Portfolios Plan and State Street Global Advisors also launched the SSgA Upromise 529 plan.

iShares offers thour types of plans based on the amount of time you have until your child goes to child, the risk profile or desired asset allocation, around your own customized portfolio and on the preservation of your initial principal. The funds provide exposure to emerging market equities, fixed income assets, foreign equities, REITs and U.S. equities.

The SSgA 529 plans also come in four options based on the specific college date, risk assessment, the opportunity to build your own custom portfolio with the listed ETFs available and a low-risk portfolio.

However, it should be noted that due to re-balance restrictions, the ETFs within the plans may not be traded frequently – participants may only shift money across investments once per year.

For past stories in this series, visit our “What is an ETF?” category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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