As investor interest cools, target date fund (TDF) exchange-traded funds (ETFs) are one after another heading for delisting, and there is growing talk that they could also be excluded from "eligible products," which can be held up to 100% in retirement pension accounts. If this move materializes, investors who have held TDF ETFs will likely need to adjust their portfolios.
A TDF ETF is a product that automatically adjusts the allocation between stocks and bonds when an investor sets a target retirement date, the so-called "vintage." It starts with a higher proportion of risky assets like stocks and increases the proportion of safe assets like bonds as the retirement date approaches. The numbers 2030, 2040, 2050, and so on in the product name indicate the retirement date; the larger the number, the higher the initial stock weight.
According to the Korea Exchange on the 21st, Hanwha Asset Management's "PLUS TDF2050 Active" ETF was delisted on the 18th. This follows the delisting of "PLUS TDF2040 Active" ETF on the 21st of last month and "PLUS TDF2030 Active" ETF on Jul. 16, meaning three products have been removed from the market in succession.
While more TDF ETFs are being removed from the market, the Ministry of Employment and Labor and the Financial Supervisory Service have recently been reviewing a plan to exclude ETF products from eligible TDFs. They say TDF ETFs could hinder long-term investing due to frequent trading.
An official at the Financial Supervisory Service noted, "Originally, TDFs are designed to be managed until the target retirement date (vintage) to secure the expected rate of return, but because ETFs can be traded in real time, investors almost never hold them to the end."
There are also concerns that TDF ETFs can circumvent the cap on risky assets (up to 70%) in retirement pensions. Under current rules, defined contribution (DC) and individual retirement pension (IRP) plans must invest at least 30% of assets in safe assets such as deposits or bonds. However, TDF ETFs listed in Korea have been classified as "eligible TDFs," that is, as safe assets, allowing investors to bypass this rule and use them to increase stock exposure.
A representative product is the "TIGER TDF2045" ETF. In its early management stage, it allocates about 80% to U.S. Standard & Poor's (S&P) 500 stocks, which are popular with Korean investors. If an investor fills the entire risky asset limit (70%) in a retirement pension account with the S&P 500 and uses this product to fill the remaining safe asset limit (30%), the account can hold up to 93% in S&P 500 stocks overall.
Up to now, outflows have centered on low-vintage products. Because they have a lower stock weight and a higher bond weight from the start, their performance tends to lag during stock market upswings. In fact, Hanwha Asset Management's TDF series was delisted in the order of 2030, 2040, then 2050. That's because the principal under trust fell below 5 billion won, the threshold for maintaining a listing.
Looking at Samsung Asset Management's "KODEX TDF Active" ETF, which has the largest net assets, over the past six months (Mar. 17–Sep. 17), the gain on the 2030 vintage product was 4.99%, 2040 was 7.75%, and 2050 was 9.44%. The higher the proportion of safe assets in low-vintage products, the lower the relative gains.
Trading value shows the same pattern. During the same period, the trading value of the "KODEX TDF2050 Active" ETF was 244 billion won, 6 to 7 times higher than the 2030 (36.1 billion won) and 2040 (42.1 billion won) products. The tilt toward high vintages also appeared in TDF ETF series from other managers, including KB Asset Management, Kiwoom Asset Management, and Korea Investment Management.
A person at a small and mid-sized asset management firm said, "TDF ETFs are mainly used in retirement pension accounts to maximize investment revenue," adding, "Investors who are very focused on returns and have an aggressive risk profile tend to prefer high-vintage products with a high stock weight."
An official at a large firm explained, "The fact that many investors have set their retirement date to 2050–2060 also influences the preference for high vintages."
However, if discussions to exclude TDF ETFs from "eligible products," which can be held up to 100% in retirement pension accounts, become reality, high-vintage products could also face headwinds.
The asset management industry has recently expressed discomfort with the regulators' discussions. A person in the asset management industry said, "TDF ETFs, unlike TDFs, are not even subject to the default option (pre-designated management scheme), and they are products that investors themselves chose to boost revenue within the safe asset limit," adding, "Forcing a ban on this does not align with market logic."
Another person in the asset management industry worried, "A TDF ETF reduces risky assets and increases the proportion of safe assets as the retirement year approaches, so judging it as risky by looking only at its initial stock allocation shows a poor understanding of the product concept," adding, "Existing investors will also have to endure the inconvenience of having to redeem while adjusting their portfolios."
In response, an official at the Financial Supervisory Service explained, "The core of the discussion is to run eligible TDFs as general funds, not ETFs that are frequently traded, to encourage long-term investment," adding, "Even if TDF ETFs are classified as risky assets going forward, we will not force existing investors to redeem the products they hold."