ETF 101 News:

Target date mutual funds that help individuals invest for retirement have been a popular theme in the asset management industry, and ETFs have embraced the trend.

These ETFs target the desired retirement date. The portfolio is designed to become more conservative toward the end of the predetermined investment time period through asset allocation.

When target date and life-cycle mutual funds first hit the investment scene, the portfolio would typically invest in other mutual funds. The new life-cycle ETFs do the same, only they invest in other ETFs. Some life-cycle ETFs also invest in stocks and bonds in combination with other ETFs to create the right allocation.

The correct allocation will depend upon the desired retirement or target date, which will be determined before investing. The date is usually part of the name of the fund. At the beginning of the funds inception, the ETF will invest in stocks, with bonds or fixed income given a small allocation. As the predetermined date approaches, or the fund matures, the amount invested in stocks is adjusted to less, and the assets are shifted into bonds or a more conservative allocation. [The ETF Cycle Has Brought Life-Cycle Funds ]

Trades are made to keep the asset allocation parallel to the set date. [Target-Date ETFs: Are They on Target? ]

These funds are intended to be a buy-and-hold retirement investment. They can be used for other expenses such as college or other large expenditures, but are mostly used for retirement. [The Age Factor in ETF Investing ]

The ease of use of these funds appeals to investors who like to purchase their investment and forget about it until they need it. Professionals suggest that the most important factor to look at is the asset allocation strategy and how aggressive the fund starts out, to how passive it becomes at the end date.

Target-date ETFs include:

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.