Tag Archives: mutual funds

Summary Fidelity has at least two target date funds for the same date. FFFEX offers investors a high expense ratio and a complicated batch of underlying holdings. FXIFX offers investors almost everything they could ask for in a target date fund. The ratio of domestic equity to international equity allocation is great. The fund is moving into inflation-protected bonds slightly sooner than I would, but the underlying fund is a good choice. Fidelity has multiple options for target date funds. A reader recently suggested I check out the Fidelity Freedom® Index 2030 Fund (MUTF: FXIFX ). The suggestion came after I looked into the Fidelity Freedom® 2030 Fund (MUTF: FFFEX ). The only difference in the names of the two funds is that one uses the word “Index”, but the difference between the funds is notable. Expense Ratios FXIFX has an expense ratio of only .16% on the net level and .24% on the gross level. The net expense ratio is very competitive with target date funds for Vanguard. Investors can replicate the portfolio with a lower expense ratio by manually managing their portfolio to the same allocations, but the difference in expense ratios between FXIFX and using individual allocations to the underlying funds is very reasonable for investors that don’t want to manage the portfolio themselves on a consistent basis. On the other hand, FFFEX had an expense ratio of .74% and appeared stuffed with actively managed funds that should be substantially more profitable for the sponsor. The annoying thing, in my opinion, is that some investors will find that their employer offers FFFEX but does not offer FXIFX. That is unfortunate because I think the lower expense ratio fund will win out over the longer term. I don’t believe the actively managed portfolios will be able to beat their passive counterparts by enough to overcome the difference in expense ratios. Allocations The allocations for FXIFX are quite solid. Take a look at the holdings below: The first thing to notice is that this list is fairly short. I like to see simple allocations in target date funds. A few underlying funds with low expense ratios and fairly passive strategies make for great holdings. Ideally those holdings should be rebalanced fairly frequently for a target date fund to take advantage of movements in the market price of the underlying holdings. Domestic to International The domestic allocation is about 2.25 times the international equity allocation. I like that allocation strategy. Some funds would go slightly heavier on the international equity allocation, but I find a ratio of 2.5 to 1 ratio is pretty much perfect and even going as heavy as 2.2 to 1 would be reasonable. This fund falls within that desirable range. There is plenty of international exposure to benefit from the diversification without betting heavily on international funds outperforming domestic equity. Inflation-Protected Bond Funds I see a good reason for including inflation protected bonds, but I wouldn’t mind seeing this remain fairly low for another five years since this fund is aiming for 2030. At less than 1%, this isn’t a meaningful allocation yet. The underlying allocation is the Fidelity® Series Inflation-Protected Bond Index Fund (MUTF: FFIPX ) which has an expense ratio of only .05%. I like the expense ratio; I’m just not big on inflation-protected bonds in the current macroeconomic environment for anyone that is still working. For a retiree, it is certainly understandable to keep a chunk of their portfolio in these securities for dealing with living expenses over the next 12 to 24 months. Personally, I prefer paying for most living expenses with interest income from corporate bonds (currently too weak) or dividend income from established champions. How About Some REITs? I’d love to see a small allocation to domestic equity REITs in the portfolio. Perhaps I’m biased as a REIT analyst, but I like domestic equity REITs as an allocation for a mutual fund that I would expect to only be held in tax advantaged accounts. The biggest drawback over the long term to investing in equity REITs is the potential for paying high levels of personal income taxes on the dividends. If the allocation is going to be within a tax advantaged account, then the income should bypass that difficulty. Of course, I don’t provide tax advice. Future Allocations The following chart shows the planned allocation over the next few decades: This is a great allocation strategy for a target date fund. The investor planning on a very long retirement will probably want to supplement this portfolio with some dividend growth investing to have a growing stream of income from high quality companies. In my view, investors shouldn’t plan to just hold the target date fund and assume that they are done investing. This is not the start and the end of retirement planning, but it is one reasonable piece to include inside the portfolio. Conclusion FXIFX is delivering on the most important metrics I want to see in a target date fund. It offers a low expense ratio, a simple allocation, and a very intelligent ratio of domestic equity to international equity. The only weaknesses I see are extremely minor issues compared to everything Fidelity got right in this fund. For any investors trying to pick between FXIFX and FFFEX, I see a clear winner. FXIFX looks like it should be able to win out over a very long time horizon.