Top-performing 2025 target-date funds lag broader indexes

Trader Talk

Target-date funds for the next generation of retirees have underperformed broader indexes over the last five years. They have also recorded significant outflows.

The top-performing 2025 target-date funds, with at least $100 million in assets under management, notched an average five-year gain of roughly 11%, Morningstar Direct data show. Over the past year, the same funds also lagged with an average gain of less than 25%.

For comparison, broader index funds such as the SPDR S&P 500 ETF Trust (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) had five-year gains of 18.12% and 17.15%, respectively. Over the past year, the funds had returns of 42.3% and 37.7%.

In bonds, the iShares Core U.S. Aggregate Bond ETF (AGG), meanwhile, had a one-year loss of 0.55% and a five-year gain of 3%.

In addition to their overall underperformance, Morningstar strategist Jason Kephart says the industry has also experienced outflows as a result of the coronavirus pandemic.

“As the economy has rebounded this year, the flows have come back a lot,” Kephart says. “That was definitely a temporary thing. We did see contributions to target-date funds really crater in 2020.”

To be sure, target-date funds with the biggest gains recorded net outflows of more than $2.4 billion over the past five years and more than $9 billion over the past year, data show.

“The big trend we continue to see is that fees are really driving a lot of that selection,” Kephart says. “We saw the number of excessive-fee lawsuits was pretty high last year. It was up like five times for 2019. When it comes to target-date funds and plan sponsors … they are just very, very fee sensitive.”

The average expense ratio among these leaders was around 52 basis points. That is only slightly higher than the 0.45% investors paid on average for fund investing in 2019, according to Morningstar’s most recent fee survey.

When it comes to target-date funds and long-term performance, advisors should emphasize with clients the role sector funds can play in a diversified portfolio, Kephart says.

“The big, main thing would be the focus on the portfolio as a whole, and how things all fit together,” he says. “That’s kind of the key.”

Scroll through to see the 20 target date funds for 2025 with the biggest five-year returns, and at least $100 million in AUM, through June 25, 2021. Net expense ratios, loads, investment minimums and manager names, as well as YTD, one-, three-, five- and 15-year returns and month-end share class flows are also listed. The data show each fund’s primary share class. Leveraged, institutional and funds with investment minimums over $100,000 have been excluded. All data is from Morningstar Direct.

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