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Target-Date Funds Finally Get Competition

The double bear market of this decade and resulting 38% decline may sour many on the stock market. Still, people need to save money and give it a chance to grow over the long term.

iShares has just launched four ETFs -- ETFs of ETFs, actually -- that might address the disinterested investor better than target date funds do.

  • iShares S&P Aggressive Allocation Fund (AOA)
  • iShares S&P Growth Allocation Fund (AOR)
  • iShares S&P Moderate Allocation Fund (AOM)
  • iShares S&P Conservative Allocation Fund (AOK)

All four risk models, created by S&P, use a fixed allocation that allows investors to look under the hood to see what each fund holds and then pick the most appropriate mix.

As with any concept, there are pluses and minuses. On the plus side is transparency, having someone else do the work of rebalancing and removing human emotion and thought from the equation. The funds, for better or worse, will manage themselves. Investors can set and forget, provided they choose the correct allocation, which may not be easy to do.

The funds will provide exposure to broad markets, but that exposure is far from perfect. All four use the same iShares funds, in different percentages, to create target weightings. For equities, the four funds use five ETFs in different weights: iShares S&P 500 Index Fund (IVV), iShares S&P Mid Cap 400 Index Fund (IJH), iShares S&P Small Cap 600 Index Fund (IJS), iShares MSCI EAFE Index Fund (EFA) and iShares MSCI Emerging Markets Fund (EEM). A sixth equity fund, depending on how you characterize REITs, is the iShares Cohen & Steers Realty Majors Fund (ICF).

Those funds would seem to cover a lot of bases, but there are also gaps including the inability to make sector or country decisions. Then again, someone who has become less interested in active participation may be willing to give that up. There are a couple of asset classes that are missing altogether: commodities and foreign bonds. Depending on how the next 10 or 20 years play out, those could prove to be costly omissions.

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