SPDR® S&P 500® ETF Trust Outperforms Vanguard Target Retirement 2020 Fund
In the long term the SPDR® S&P 500® ETF Trust (SPY), which holds stocks, outperformed the Vanguard Target Retirement 2020 Fund (VTWNX), which holds stocks and bonds, by a large margin.
The following table shows that a $1,000 investment made on November 30, 2010 in SPY is now worth $6,511 while the same investment in VTWNX is worth $2,482.
Note: Monthly closing prices from Alpha Vantage are adjusted for splits and dividends.
Comments
Here is the Product Summary for the Vanguard Target Retirement 2020 Fund: "Vanguard Target Retirement Funds offer a diversified portfolio within a single fund that adjusts its underlying asset mix over time. The funds provide broad diversification while incrementally decreasing exposure to stocks and increasing exposure to bonds as each fund’s target retirement date approaches. The funds continue to adjust for approximately seven years after that date until their allocations match that of the Target Retirement Income Fund. Investors in the funds should be able to tolerate the risks that come from the volatility of the stock and bond markets. You may wish to consider this fund if you’re planning to retire between 2018 and 2022."
The problem with a target retirement fund is that as the fund's target date approaches it systemically allocates more bonds and fewer stocks regardless of the direction of the stock and bond markets. A target fund assumes that bonds are less volatile than stocks so bonds must be safer than stocks as one nears retirement. But what if interest rates are rising and bond prices are falling? What if the stock marker is in a bull phase? Ignoring the direction of these markets usually leads to undersized returns, as is the case of the above example.Related Articles
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Posted November 17, 2024