Life-Cycle ETFs

One of the financial products that many people look at when considering setting up a retirement account is a life-cycle ETF. This is a special type of balanced mutual fund, often referred to as asset allocation, and is for all intents and purposes set to ‘auto-pilot.’ The account self adjusts over the course of its life-cycle by automatically adjusting the portfolio from a high risk position to a low risk position as the investor gets closer to retirement age. Sometimes life-cycle ETFs are called ‘age-based funds.’

Retirement Date Life-Cycle ETFs
There are actually two different types of life-cycle ETFs, Retirement Date and Asset Allocation funds. The first is set up with a focus on the prospective retirement date of the investor while the other is set up so that the techniques of allocation change of the fund’s life. In naming a retirement date fund, the target date is usually part of the name. For instance, If you are 35 in 2011 and you set the target date for your 65th year, the fund would be an ETF target date 2046. While target date ETFs are normally established with retirement date in mind, some people set them up for a target date when their children are expected to reach college age, or for weddings or even buying a home. Again, it is the target date that drives this type of fund.

Asset Allocation Life-Cycle ETFs
The premise of asset allocation life-cycle ETFs is that where the assets are allocated is much more important than the actual investments selected. When a person is young there is room for riskier investments in the portfolio because there is also time to recoup any losses that might accrue. On the other hand, as an investor nears the age of retirement, every penny in that fund makes a difference. Therefore, over time the investments in the fund get progressively less risky.

Proponents and Opponents of Life-Cycle ETFs
While not one of the most controversial investment products, life-cycle ETFs have both proponents and opponents. Some critics say that putting these funds on auto-pilot is highly suspect with just one fund, while proponents feel that the convenience is a definite plus. It appears as though this is a great retirement product for investors who don’t want to take an active role in their investment funds while those who want to have a say in the types of products in their ETFs may not find this type of fund suitable.

Benefits of Life-Cycle ETFs
Even though life-cycle ETFs have their pros and cons, there are a number of benefits which even opponents can’t fail to recognize. Perhaps the greatest benefit of all is the convenience of a one-stop shop investment product. Automatic deductions can be set up from your bank and the fund works on autopilot so that little time or effort is needed on the part of the investor. Also, life-cycle ETFs are cost effective in comparison to other types of mutual funds. And finally, this is a great investment product for a long-term approach to investing.

While life-cycle ETFs might not be a sound investment for someone who is quickly approaching retirement, they may be a good choice for those who have decades left to watch their funds grow. As they are more cost effective than mutual funds and less risky than playing the stock market, many people find that this is a sound investment. If you are looking for something that actually runs on its own with very little involvement on your part, life-cycle ETFs should definitely be considered.

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