By Clayton Fresk, Stadion Money Management

Exchange Traded Funds (ETFs) have become an increasingly popular investment vehicle in the industry for multiple reasons, some of which include costs and increased investment coverage (i.e. “Smart Beta” ETFs). There remains, however, a large corner of the market that has not seen ETF penetration and this is the defined contribution / 401k space.

Because almost all TDFs are structured as funds-of funds (i.e. investments are in other funds and not individual securities and fixed income products) it stands to reason that the underlying investments of these TDFs could indeed be ETFs. The question now is how many issuers are using ETFs in their TDFs and to what extent.

Based on our research, out of 167 TDF series*, there are currently 40 that invest in at least one ETF, or just under 25%. However, of these series only eight solely use ETFs, whereas the other mix in ETFs with other vehicles.  Additionally, of these eight, three use proprietary ETFs as either all or the majority of the holdings, whereas the others are open architecture.  The three that use proprietary ETFs include:

  • Schwab Target Index
  • Blackrock Lifepath Smart Beta
  • Goldman Sachs Target Date

Another view of ETFs within TDFs is the breadth of tickers used and amount of Assets Under Management (AUM) held. As of 6/30:

  • There were 182 different ETFs being held within TDFs out of over 2400 in the market, so only about 7.5% of the tickers are being utilized.
  • In terms of size, the AUM in TDFs overall is just shy of $2.1 Trillion. However, ETFs only make up $22.6 billion of this AUM, or just under 1% of assets.

Here are a few more interesting stats:

  • Four ETFs have over $1 Billion dollars of their AUM within TDFs
  • Nine ETFs have over 20% of their AUM invested within TDFs
  • Two ETFs are represented in at least 10 different TDF series
  • About 65% are in Equity with 35% in Fixed Income names, which aligns with the overall TDF AUM split

Where does that leave us today? With many more issuers entering the ETF market based on differing factors (e.g. the advent of Active ETFs and Smart Beta ETFs, access, costs, etc.), there could be an increased opportunity for ETFs to replace both index and active mutual fund allocations within TDF, whether in a proprietary or open architecture manner. Additionally, as there is more demand for passive and active/passive TDFs–as well as multi-manager vs proprietary TDFs–the market could see an increase in ETFs allocations by TDF issuers.

*Including mutual fund, CIT, or insurance structures

Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.

This piece was originally published at targetqviews.com.

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