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Target-Date Funds: Why Investors Should Have a Fund Full of Funds

By U.S. News & World Report

Mutual funds and exchange-traded funds have long been popular as cost-effective one-stop shops for diversifying a portfolio without having to buy a broad array of stocks or bonds.

The strategy has evolved one step further, and investors can tap into instant diversification through a fund that owns other funds. These funds of funds can also offer greater liquidity than their underlying holdings. Typical examples include mutual funds that hold other mutual funds or ETFs, and ETFs that own other ETFs. Target-date funds are often funds of funds.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

Funds buy other funds for the same reasons investors buy them. In addition to quick diversification and good liquidity, funds can be less costly than buying the individual underlying assets because they can all be bought in one transaction rather than paying for individual trades that may have a greater bid-ask spread.

There can also be tax efficiencies, such as from the greater flexibility that ETFs have to change their portfolios without creating a taxable event. And a fund of funds can provide more diversification because it owns multiple funds with different index methodologies.

“For a lot of people, they do want the diversification,” says Christian Magoon, CEO of Amplify Investments and founder of YieldShares.

The Amplify YieldShares Prime 5 Dividend ETF (ticker: PFV) owns the five highest-ranked U.S. dividend ETFs as per the Prime 5 U.S. Dividend ETF index.

A person trying to copy that strategy on their own by buying each of these ETFs would end up getting hit with multiple trading fees throughout the year if they wanted to rebalance the portfolio to keep each fund weighted at around 20 percent apiece, Magoon says. They would also get taxed when they sold shares of ETFs that had appreciated.

A fund of funds provides automatic buy-and-sell discipline, he says.

While funds of funds provide a convenient option for investors to get diversification without having to build their own portfolio, there are some things to watch out for, says Jeff DeMaso, co-editor and director of research for the Independent Adviser for Vanguard Investors newsletter.

Investors should look to keep costs low and remember their objective, he says. For example, there are funds of funds whose aim is to offer protection against inflation by investing in funds that buy Treasury inflation-protected securities, real estate, commodities, emerging market debt and floating rate loans, DeMaso says.

[See: 8 Cheap ETFs That You Won’t Regret.]

There are also funds that do this by investing in the underlying assets, and there may not be a particular advantage in funds of funds over regular funds, he says. Just look at the fees, DeMaso adds.

Fees are the most common concern about a fund of funds, Magoon says.

Investors have to pay a fee to own the fund itself, and the fund has to pay fees to own the funds. As a result, fees on fees is a concern, but it doesn’t mean a fund of funds is never a good idea, Magoon says. Investors should look at the total fees and how they compare to the competition, he says.

Also, a fund of funds can get overbalanced. If the managers of the individual ETFs overbalance a certain asset, that concentration risk can be compounded, Magoon says.

There are some that only invest in their own companies’ funds. That can lead to questions about whether the funds they’re holding are really the best of breed. “A nonproprietary fund of funds is a good sign,” Magoon says.

And because funds of funds are so diversified, they can end up closely matching an index. The more funds they have in their portfolio, the more closely they can resemble an index, DeMaso says.

In those cases it doesn’t make sense to pay an active management fee for what ends up being simple index matching, he says.

Although the big benefit of a fund of funds is the diversification it can provide, broad diversification can make it difficult to know what is in that investment because of all the needed research, says Matt Schreiber, president of WBI Investments, whose WBI Tactical Income Shares ETF (WBII) buys investments including ETFs that invest in Treasurys and high quality corporate bonds.

For example, one fund could have 50 equally weighted holdings while another could have half its holdings in large companies, meaning it would not be as diversified, he says. Of course, the latter could end up doing much better than an index, but it could do a lot worse too, he adds. And the former could end up not performing as well a market capitalization weighted index.

[Read: How Will Robo Advisors Impact the Future of Investing?]

Investors also should think about their own financial situation as they consider a fund of funds, DeMaso says.

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Target-Date Funds: Why Investors Should Have a Fund Full of Funds originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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