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Are Target Retirement Date Funds Attractive?

Steve LeCompte | | Posted in: Bonds, Equity Premium, Strategic Allocation

Guide Asset Allocation and Portfolios Fixed and lazy portfolios

Key Insight

Vanguard Target Retirement 2020-2050 funds were generally not preferable to a monthly rebalanced 60% SPY/40% LQD mix on return, volatility and reward-to-risk metrics (inceptions Oct 2003 or Jun 2006 through Sep 2026; monthly total returns; seven funds).

Do target retirement date funds, offering glidepaths that shift asset allocations away from equities and toward bonds as target dates approach, safely generate attractive returns? To investigate, we consider seven such mutual funds offered by Vanguard, as follows:

We consider as benchmarks SPDR S&P 500 ETF Trust (SPY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and both 80-20 and 60-40 monthly rebalanced SPY-LQD combinations. We look at monthly and annual return statistics, including compound annual growth rate (CAGR) and maximum drawdown (MaxDD). Using monthly total returns for SPY, LQD, three target retirement date funds since October 2003 and four target retirement date funds since June 2006 (limited by Vanguard inception dates), all through September 2026, we find that:

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