Cerulli finds opportunity for strategic beta in target date funds

Jun 16th, 2017 | By | Category: ETF and Index News

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Over a third (38%) of asset managers predict that the use of strategic beta strategies is the most likely feature of next-generation US target-date products, according to a survey by global research and consulting firm Cerulli Associates.

Cerulli finds opportunity for strategic beta in target date funds

iShares and Guggenheim offer a range of target date bond ETFs.

Strategic beta strategies seek to deliver enhanced risk-adjusted returns relative to conventional market-cap-weighted passive allocations and include elements of both passive and active investing. These strategies are active in their objective of outperforming broad market indices, but also passive in their systematic and rules-based implementation.

Target-date funds are long-term investment products, meant to be held throughout multiple market cycles. iShares and Guggenheim offer a range of target date bond ETFs. Cerulli notes that asset managers incorporating strategic beta into their target-date series could find success by positioning their products as cost-effective strategies capable of reducing volatility and sequencing risk for retirement investors when markets decline.

Dan Cook, analyst at Cerulli, commented: “In a target-date market dominated by low-cost, passive providers, strategic beta strategies are a way for active managers to compete with pure passive on cost while retaining some of the value-add tenets associated with active management. For the larger target-date providers, strategic beta series can also serve as another option in their target-date product suite, giving plan sponsors the choice between passive, active, and strategic beta.”

While advancements in target-date product development, such as strategic beta or hybrid offerings, have the potential to improve participant outcomes, Cerulli believes they are likely add another layer of complexity to the due diligence process at the plan level. For this reason, asset managers entering the defined contribution market with new target-date products must clearly explain the benefits of these products and provide plan fiduciaries with all relevant details necessary to support thorough due diligence.

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