ETF Trends
ETF Trends

In an attempt to make saving toward college more financially attractive, 529 college-savings plans are beginning to incorporate exchange traded fund options to provide added diversification and to hedge against market volatility.

For instance, Nebraska now includes four ETFs in three of its 529 plans, one of New York’s plans has six ETFs and Nevada’s Upromise 529 is almost exclusively comprised of ETFs, reports Annamaria Andriotis for SmartMoney. [State Street Launches 529 Plan with ETFs]

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 as long as the money is used for college expenses. Currently, mutual funds make up the lion share of the college-savings 529 industry.

“529s are looking more like investors’ broader portfolios,” Laura Lutton, head of 529-plan research at Morningstar, said in the article.

The college-savings plans have undergone changes over the last couple of years as investors became more cautious in the wake of the financial crisis.

Nevertheless, the wider range of mutual fund products included have not held up. For instance, 529 plans on average lost about 1% last year, whereas the S&P 500 gained 2%. In contrast, the Arkansas iShares 529 plan returned 3.3% in 2011 and has returned an average of almost 1% since 2007, compared to the 3% industry loss.

The 529 plan investment managers are adding ETFs in an attempt to make quick and easy changes to portfolio allocations at a fraction of the cost. ETF products can be traded throughout the trading day while mutual funds can only be reconstituted at the end of the day. Additionally, 529 plans with ETFs have an average expense of 0.61%, compared to the industry average of 1.12%.

“We’re trying to help performance [and]it appears that ETFs can respond faster to market conditions,” Deborah Goodkin, managing director of college-savings plans at the First National Bank of Omaha, said in the article.

For more information on ETFs in 529s, visit our 529 savings plan 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.