It goes like this: You put your money in a target-date or life cycle fund, forget about it, and the fund manager re-balances your portfolio over time, moving your assets from stocks to bonds as you approach your retirement. As of today, may retirees are trying to recoup losses of 25% or more because their funds were treating them like 30-year-olds, reports Mina Kimes for CNN Money.

So what went wrong? Managers were betting that if they were in equities, they’d perform better – and they got nailed, along with everyone else. The problem is, they were nailing people in their sixties and seventies, says one analyst. One expert said that the typical target-date mutual fund was overly aggressive.

The performance of many funds in this genre were so dismal that it has caught the eye of Washington, and the Securities and Exchange Commission (SEC) and the Department of Labor were notified in February to investigate target-date funds. In response to allegations that they took too many risks, fund managers argue that retirees are likely to live for another 20 or 25 years after they stop working, which explains the equity stake.

The fact is that managers should have been prepared for investors to withdraw money at this stage, especially at this age, in case of an economic slowdown. Another shot at defense is that 2008 was a once-in-a-lifetime event that left no asset unscathed, save Treasuries. Investors beware: No investment is an excuse for autopilot and make sure the asset allocation fits your own idea of what’s sensible for someone your age.

What this really is is a lesson in looking under the hood to make sure that the allocation you’re seeking is what you’re actually getting. While these ETFs do what they should, it’s up to you to do a little homework and make sure it works for you. If you’re looking at target-date ETFs, this is very simple to do. Mutual funds only have to disclose their holdings once a quarter – with an ETF, you can check right now and know if the allocation is correct for your goals.

• iShares S&P Target Date 2015 Index Fund (TZE): down 0.52% year-to-date; currently it has 51.8% in domestic fixed income; 36.8% in domestic equities

Last October, the provider opted to close its four ETFs focused on unusual segments of the market, including homeland security, Wal-Mart suppliers and so-called “sin” industries: tobacco, alcohol and gaming. They appear to be undeterred, and have filed with the Securities and Exchange Commission (SEC) for a line of target-date ETFs, says Heather Bell for Index Universe.

While FocusShares wouldn’t be a first-mover in the target-date area for ETFs, it’s still a relatively new space for the funds. Right now, there are two target-date ETF providers: iShares and XShares.

The six new funds would be:

• Progressive Principal Protection 2015 Target Date Index
• Progressive Principal Protection 2020 Target Date Index
• Progressive Principal Protection 2025 Target Date Index
• Progressive Principal Protection 2030 Target Date Index
• Progressive Principal Protection 2035 Target Date Index
• Progressive Principal Protection 2040 Target Date Index

They’ll track indexes from Mergent Inc.’s Indxis subsidiary. The underlying indexes will consist of U.S. Government STRIPS and equities, with weights varying according to the target date of each fund. Target-date ETFs adjust to be more conservative in their allocation as their date approaches.

Another financial industry player is gearing up to enter the ETF market place, too: Charles Schwab & Co. The company filed with the SEC for a fund that would track the Dow Jones U.S. Total Stock Market Index, which covers all publicly traded U.S. stocks with pricing information, Heather Bell for Index Universe reports.

Schwab has more than $1 trillion in client assets and about $24 billion in market capitalization.

1. ETFs will grab more than their fair share of assets.

In 2008, investors have left the market in droves. If they stayed in, they often turned to safe haven investments like gold and Treasury bonds. This rush to those investments sent gold prices soaring to record highs in the first half of the year, while driving Treasury yields to record lows in the second half.

But investors also took their money out of the markets, and it’s been waiting on the sidelines in anticipation of an uptrend. When the trends emerge again, we predict that ETFs are going to get more than their fair share and that mutual funds will continue to lose assets. They’re below the $10 trillion mark right now, and we think they’re going to have a hard time making a comeback. Some funds are talking about raising fees; others will be hitting investors with big capital gains distributions. Investors aren’t bound to find that very appealing.

Meanwhile, we think ETF assets are going to double. Investors are tired of getting burned, they’re tired of secrecy, of paying too much for lackluster performance and they’re looking for control over their money. ETFs give them the transparency, control and cost-effectiveness they’re seeking.

2. Hedge funds implode, and ETFs will explode.

As investors get back into the markets, we predict that there will be more launches from providers to give these investors more options. As of the end of November 2008, there were a combined 843 ETFs and ETNs in existence. We think that number is easily going to top 1,000 by the end of the year.

Hedge funds, meanwhile, will implode in the aftermath of the Bernard Madoff scandal. We’ll see hundreds of them close because of lost investor trust. A good portion of those investors are going to turn to ETFs.

3. All eyes will be on 401(k)s.

The market has already witnessed the growth of target-date funds and funds of funds. PowerShares in May launched the first “fund of fund” ETFs. Both iShares and XShares offer a line of target-date ETFs that self-adjust as the retirement date nears.

While there are 401(k)s that feature ETFs, including ING Direct’s Sharebuilder, WisdomTree, Invest n’ Retire and iShares, they’re hardly a staple. ETFs are dying for a share of this market, and target-date funds could help them get in.

At the end of 2007, $3 trillion in assets was held in 401(k)s; $1.7 trillion of that was in mutual funds. The mutual fund market share of the 401(k) market has ballooned from 9% in 1990 to about 57% at the end of 2007, the Investment Company Institute (ICI) says.

4. Mutual funds players will realize ETFs are where it’s at.

Pacific Investment Management Co. (PIMCO) has already filed a prospectus for its first ETF, a 1-3 Year Treasury Index Fund. When they made their announcement, many in the industry wondered if this was the beginning of an all-out acceptance of ETFs by the mutual fund industry. Until recently, the typical thinking seemed to be that ETFs were nothing more than a fad, but it’s rapidly proving to be otherwise. We think it’s the beginning of a beautiful friendship.

5. Commodity ETFs will climb.

Our prediction is that this love affair with low prices is going to be short-lived.

Even Jim Rogers, says not to count out commodities, now or ever. That’s because the credit crisis is creating an inability for farmers to get loans, which means they can’t grow. This will lead to supply shortages, after which high prices ultimately will follow. Food demand is expected to increase, as populations in emerging markets boom and many of those areas adopt a more western diet. Staple commodities, such as corn, soybeans, wheat and sugar could very well continue to see historic levels of demand.

Meanwhile, one positive side effect to the high prices is that people may finally get serious about alternative energy, thanks to skyrocketing costs of oil and Obama’s push for a greener lifestyle. Unfortunately, many feel that this break in oil prices will be short-lived, and demand will resume again at some point, driving the price back up.

6. In recovery, small-caps and value will see action.

Those areas of the markets that were the most beaten-up in the downturn stand to outperform in a recovery.  These little companies got badly beaten down in the recession, and they’re going to come back stronger than ever, thanks to their nimbleness. They’re likely not as bogged down by in-house red-tape and bureaucracy, leaving them in a position to react more quickly to market changes. The value side of the market should reveal good bargains when the turnaround begins, too.

7. Investors will wise up about fees.

In fact, investors already are. Many people have seen their portfolios savaged in this market, and we’ve seen people take an interest in their investments like never before. They’re starting to ask questions about where that money is going, they want to know what they own, and they want to know what it’s costing them. These are great things to ask, because it’s going to put the pressure on fund companies and 401(k) providers to not only deliver fair pricing, but to explain that pricing in plain English.

A fee-disclosure rule is expected to go into effect on Jan. 1, which could wind up assisting in the effort to get ETFs into 401(k) plans. The Department of Labor’s rule states that plan fiduciaries have to disclose fees and performance numbers in plain English so that consumers can make an easy comparison of their options.

8. ETF provider competition will heat up.

This year, we saw a number of ETFs liquidate. As the industry grows, we could be seeing more of this. It’s not necessarily a bad thing – after all, not every single fund that is launched can be a success. It isn’t a death knell. The ETF industry is like any other – some products will be successes, others will fall flat. The reasons are numerous: poor product concept, poor timing, poor marketing or just plain bad luck.

9. ETFs will surpass $1 trillion in assets.

This will be thanks to a market recovery, new and interesting launches and an overall investor shunning of mutual funds. As of November 2008, there was $487 billion in both ETFs and ETNs. ETFs have managed to experience net inflows, even in the market downturn. Just imagine how they’ll perform during a boom cycle.

10. Emerging markets bounce back.

Some of these countries had the unfortunate side effect of being dragged down along with the United States, such as China and India, but they’re strong, well-positioned countries in their own right. They’re rich with growing populations, intellectual capital, a growing middle class and growing urban centers. These factors will serve them well when the global economic recovery begins.

Some actively-managed exchange traded funds (ETFs) and target-date funds have not been immune to the market turbulence and have felt the same wrath as other securities in this crazy market.

These investment tools have become a primary investment vehicle for retirement savings, expecting to reach $276 billion and $1.1 trillion in assets, by 2009 and 2013, respectively.  A main characteristic of these funds is that they are managed by firms that use proprietary funds.  In fact, 85% of all target-date assets are held by Fidelity, T. Rowe Price, Vanguard, and Principal, all providers that use only proprietary funds as underlying investments, states Mariana Lehmann of Ignites.

Although the manner in which these funds are managed appears to be monotone, change seems to be in their near future.  Russell Investments is banking on its overall approach to building portfolios to influence the deferred contribution market by offering a “full-service” to advisors and plan sponsors.

Ridgeworth Investments has decided to liquidate its Life Vision Target-Date fund on Feb. 27, 2009, and focus its efforts on participating in the target-date fund marketplace by its funds multi-manager target-date fund providers.   Lastly, Target-date funds which offer best-of-breed funds are starting to evolve and slowly eat away at the target-date funds using proprietary underlying funds.

Among target-date ETFs in the marketplace now are:

• TDX Independence In-Target (TDX)
• TDX Independence 2010 (TDD)
• iShares S&P Moderate Allocation Fund (AOM)
• iShares S&P Growth Allocation Fund (AOR)
• iShares S&P Aggressive Allocation Fund (AOA)

The TDX funds are not structured as funds of funds like other target-date products on the market, and are instead based on proprietary indexes from Zacks Investment Research. The iShares target-date funds aren’t structured as funds of funds, either, although some of iShares ETFs are components.

On Nov. 7, iShares announced a new strategy to be implemented in a series of “target-date” ETFs to help fund retirement or college tuition needs, reports Don Dion for Seeking Alpha. The different funds will have varying time horizons that allow the investor to plan when he or she will need the money.

Asset allocation would shift as the target date approches; thus, arranging a more conservative investment portoflio in atticipation of investor capital withdrawal.

The iShares target-date funds can be used in the savings market. It is said to be well-suited for IRA rollovers or small-sized 401(k) plans with a combination of transparency in ETFs and the benefits of target funds, which may ease mistakes because of poor asset allocation and not making portfolio changes over time.

A similar family of products provided by TD Ameritrade (AMTD), the TDX Independence funds, are composed of individual equities and bonds, whereas iShares created a set of funds derived from iShares ETFs. This may prove to be more conservative for investors over the long term than that of the invidivual equity approach by TD Ameritrade. A couple of current TDX funds include:

• TDX Independence 2010 ETF (TDD): down 12.8% year-to-date

• TDX Independence 2020 ETF (TDH): down 27.8% year-to-date

A recent story we did on the subject noted that one in particular, the TDX Independence 2010 (TDD), was demonstrating “acceptable” performance although it was down year-to-date.

How is this so? In short, the fund is basically doing what it’s supposed to do.

Target-date funds are a unique balance of fund in that they automatically adjust their allocation of equities and bonds. The closer you get toward your retirement date, the higher the ratio of bonds in your portfolio, earning their name of a retirement plan on autopilot.

These funds aren’t really meant to appeal to the investor who actively trades and uses trend-following as a strategy. When you buy a target-date ETF, you’ve essentially committed yourself to the buy-and-hold strategy.

TDD is designed for investors who plan to retire around 2010. 8% of the fund’s assets are allocated to international equities, 24% to domestic equities and 68% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2010.

Investors with an exit strategy like our own – selling a fund when it’s 8% off the high or below its 200-day moving average – aren’t going to be interested in these ETFs. Being down in double digits year-to-date for the trend-following type is definitely not “acceptable.”

Buy-and-hold investors, though, have to accept both the ups and downs of what a long-term strategy like this will give you.

In markets like this, buy-and-holders are feeling pain just as everyone else is – that’s the bad news. These funds aren’t immune from the market declines.

However, going forward, this fund is fairly priced and if you’re looking to make a long-term buy-and-hold allocation, now might be a good time. But investors need to first ask what kind of investor they are; ETFs are not one size fits all. Will this work for you? What are your goals? What is your overall strategy, time horizon and risk profile? Answering these questions first will help you determine what kinds of funds will be the best fit for your portfolio.

Year-to-date, TDD is down 11.8% against the broader S&P 500, which is down 30.1%.

The closer you get toward your retirement date, the higher the ratio of bonds in your portfolio, earning their name of a retirement plan on autopilot. Simon Maierhofer for ETF Guide reports that XShares and TD Ameritrade teamed up and created five TDAX Independence Funds, which he explores in light of the recent market turmoil. Do they follow their objectives?

Combined, they boast $150 million in assets.

• TDX Independence In-Target (TDX): The most conservative fund; 3% of the fund’s assets are allocated to international equities, 8% to domestic equities and 89% to fixed income.

• TDX Independence 2010 (TDD): This fund is designed for investors who plan to retire around 2010. 8% of the fund’s assets are allocated to international equities, 24% to domestic equities and 68% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2010.

• TDX Independence 2020 (TDH): This fund is designed for investors who plan to retire around 2020. 17% of the fund’s assets are allocated to international equities, 49% to domestic equities and 34% to fixed income. After 2020, 11% is allocated to equities.

• TDX Independence 2030 (TDN): This fund is designed for investors who plan to retire around 2030. 22% of the fund’s assets are allocated to international equities, 65% to domestic equities and 13% to fixed income. After 2030, 11% toward equities is adjusted.

• TDX Independence 2040 (TDV): 24% of the fund’s assets are allocated to international equities, 72% to domestic equities and 4% to fixed income. The allocation to equities is adjusted downward to 11% in the year 2040.

The In-Target ETF has certainly provided a place to have parked your money. TDX is down 4.6% year-to-date. The 2010 portfolio is down about 15.3%, which given the general market conditions is acceptable. The 2020 portfolio dropped by 25.5%, the 2030 and 2040 portfolios have lost about 32.3% and 34.2%, respectively.

It’s up to investors to ultimately decide if that performance works for them, and whether these kinds of funds are a fit in their portfolios.