Vanguard Target Date Funds (video)

– Posted in: Index Funds — overwhelming evidence

Not all target-date investments are index funds, but costs are important and this makes Vanguard Target Date Funds stand out from the competition. Furthermore, this is a fund of funds and Vanguard does not add an additional layer of costs to manage the integrated collection. Some do, so check details of whatever you consider. Costs matter.

*** Sorry, the video has recently been removed by Vanguard. ***

This video was made May 31, 2013 at The Vanguard Group and published on their YouTube Channel with the title, The Vanguard Target Date Difference.

Summary of video: Vanguard Target Retirement Funds


Three key points make Vanguard’s Target Date Funds stand out from the competition:

  • a very basic, fundamental structure
  • comprised of index funds in this fund-of-funds, without any additional management fee
  • glide path continues through retirement date

The low costs are a standard to compare other products against:

  • Vanguard average expense ratio: 0.20%
  • Industry average expense ratio: 1.12%

Transcript of Vanguard Target Date Funds


Paul:                Hi, there, and welcome to Target Date Now. I’m Paul Manion. On today’s episode, I want to address a question we got from a viewer asking about how Vanguard target date investments stand out from the competition.

As you may know, target date investments offer a diversified portfolio that will automatically rebalance to become more conservative as an investors gets closer to retirement. That’s the short story.

The long story is that not all target date investments are the same, and here at Vanguard, we manage our target date investments according to some very specific principles. To explain what makes our investments unique, I’m pleased to be joined by John Ameriks of Vanguard’s Investment Counseling & Research Group. Welcome back, John.

John:                It’s nice to be here again, Paul. Thanks.

How do Vanguard target date investments compare with their competition?

Paul:                What do you think, John? What differentiates our target date investments from the rest of the pack?

John:                I’d say it really comes down to three things. One of those is that we’re using a very basic, fundamental structure for the funds. Makes them a little easier to understand for people. The other thing is the focus on indexing in the portfolios.

I would also say one of the things I talked about the last time I was here, that we’re investing the funds through retirement. Our glide path involves a through approach rather than a to approach.

Why use index funds in Vanguard’s target retirement funds?

Paul:                Okay, so those three key things. Let’s talk about the underlying funds for a moment. Why use index funds?

John:                There are a lot of benefits with index funds. Of course, the big one and what Vanguard’s all about is cost. An indexing fund because of the way that it’s managed, its ability to track a benchmark and buy and hold, tends to have lower cost than other types of funds. I’d also say that that approach has some benefits in terms of the risks. The manager has a very clear benchmark. It’s very predictable in terms of what they need to invest and when, and so it does keep things a little more certain for the investors in terms of what their exposures are.

Then lastly, I’d say, indexes are by their very nature very broadly diversified. These market cap indexes have exposure in all segments of the market and that, we think, is a really good thing from an investment point of view as well.

Paul:                Talk to me a little bit about why it’s important to be broadly diversified.

John:                It really is a way to manage risk in a way that we think is sensible. It keeps you invested in all areas of the market so that you don’t zig when you’re supposed to zag or not have exposure to something that’s going to help or have too much exposure to something that’s going to hurt, so it’s very important. It’s important across all markets, so diversification from an asset class standpoint is key, and it really is why the target date funds are structured the way that they are.

In their design, they’re diversified across the big asset classes, but then because we’re using index funds within each of the asset classes, you’re also getting diversification within. You’ll get some large cap. You’ll get some small cap. Some growth, some value.

In the international space, where we have an equity exposure in the target date funds, you’re going to get exposure to both the emerging economies as well as the European markets and even South America and other countries around the globe so that you have exposure to all places.

Paul:                That certainly sounds like broad diversification.

This diversification, it’s reflected in the glide path of the target date investments, correct?

John:                Absolutely, and the glide path is the changing allocation across the big asset classes, the mix of stocks and bonds and how the funds are allocated over time as people get closer to retirement, so that’s really key. We always think that asset allocation is the first consideration for an investors, and it’s one of the major values of a target date fund is controlling asset allocation, maintaining that diversification over time.

Why is it important for the glide path to continue through retirement?

Paul:                Okay. You mentioned that Vanguard target date investments are designed to invest through retirement. Don’t other target date investments do that?

John:                Not all of them, and so it’s really important to understand the distinction between to versus through. Vanguard’s target date funds, like all other target date funds, come with a target date, so that’s 2010 or 2015 or 2020, but the glide path that we’re using, that mix, that allocation mix, continues to change after that date. It becomes a little more conservative.

There are other target date funds where that stops happening. We think it’s important to continue to manage those assets and manage that exposure through retirement because people may be invested in retirement for 20 or more years, still a long term proposition, and diversification is still very important. Management of the glide path is still very important.

Does the use of index funds translate to low costs for Vanguard target date funds?

Paul:                Another thing we talked about was cost, specifically when you talked about index funds. Do the relative low costs of index funds translate to low costs for our target date investments?

John:                Absolutely. As you know, at Vanguard, we focus on cost all the time. The average expense ratio at Vanguard is around 20 basis points. That compares to an industry average of about 112 basis points, so substantial focus on costs, and some of it is attributable to the indexed approach as we’ve discussed.

When it comes down to our target date funds, in general, you’re looking at expense ratio charges that are at 20 basis points or less, so a really important cost savings there, especially relative to that industry average that I mentioned.

Paul:                Absolutely because 20 or less is lower than 112, right?

John:                A lot less, and I would say that over long periods of time, which is exactly what we think we’re going to see for many target rate retirement fund investors, that’s really important. Saving that 90 basis points or so every year, year after year, really adds up once you get to retirement.

Paul:                To sum up, our target date options invest in several underlying funds, which are index funds. They are a low cost, diversified investment option and are designed for every investing stage.

John:                You got it, Paul. That’s a great summary. I hope people can really take that away with them today.

Paul:                John, thanks as always for your insight into what makes these investments tick.

John:                Happy to be here as usual.

Just as a reminder to our viewers, this episode came about, the whole reason that John is here is because we got a question about what makes our funds unique, so don’t forget, folks, if you’ve got a question about target date investments, let us know on our website at vanguard.com/targetdatenow. We’ll try to address it in a future episode.

Meanwhile, thanks for watching. I’m Paul Manion, and I’ll see you next time.

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Footnotes and Credits for video: Vanguard Target Date Funds

The video on this page is the best I’ve seen on this topic. It was produced by The Vanguard Group and they own the copyright. They have given me permission to embed this via YouTube on this educational website.

The Vanguard Group is the largest provider of mutual funds in the world. Of high interest: Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds. Founder and former chairman John C. Bogle is credited with the creation of the first index fund available to individual investors, the popularization of index funds generally, and driving costs down across the mutual fund industry. [Ref: Wikipedia]

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