Burning TDF, TDF ETF Also Catching Fire

[Asia Economy Reporter Hwang Junho] As interest in Target Date Funds (TDF) grows, asset management companies are intensifying competition to attract funds. This month, KB Asset Management opened the door to a fee reduction race. The management fees for the ‘KB On Gukmin’ TDF series were reduced by 10% from the previous rates. After the reduction, the total fees range from 0.36% to 0.61% per year.

While following the TDF management method, TDF ETFs, which have lower fees and are easier to buy and sell, have also been launched one after another. Samsung, Kiwoom, and Hanwha Asset Management simultaneously listed 10 types of TDF ETFs on the 30th of last month. Since TDFs are fund-of-funds that include equity and bond funds and adjust asset allocation, redemptions take about 10 business days. However, TDF ETFs can be traded instantly on the stock market like ETFs, making transactions immediate. There are also no fees charged by fund distributors (such as securities firms), reducing costs.

According to fund rating agency FnGuide on the 8th, the domestic TDF assets under management reached 9.6665 trillion KRW. This is an increase of 1 trillion KRW over about six months from 8.6748 trillion KRW at the end of last year. Considering that the assets under management increased by 3.641 trillion KRW last year compared to the previous year, it is expected that the TDF market will easily surpass 10 trillion KRW this year. TDFs are a type of fund named after retirement years such as ‘2020’ or ‘2055’. The smaller the number, which is attached in 5-year increments, the higher the proportion invested in safe assets.

Although interest has increased significantly this year, returns have fallen short of expectations. Due to the sharp declines in the stock and bond markets caused by inflation and interest rate hikes, TDFs have also suffered, recording negative returns over the past six months regardless of the retirement date.

However, as defined contribution (DC) retirement pensions and individual retirement pensions (IRP) continue to grow, interest in pension assets has increased, leading to the expansion of TDFs. Lee Dong-eun, head of Samsung Asset Management’s Pension WM Marketing Team 3, explained, "Demand for TDFs has greatly increased due to the low returns of principal-guaranteed products and changing perceptions about retirement." He added, "The proportion of TDF investments is growing especially among younger generations who have gained a better understanding of investment products through movements like the Donghak Ant Movement."

With the introduction of the default option system for retirement pensions on the 12th, the base for TDFs is expected to expand further. Jo Yong-ho, team leader of KB Asset Management’s Pension WM Headquarters, said, "In the U.S., 87% of DC participants in 401(k) plans manage their pension assets through TDFs." He added, "Since TDFs are the core product of the default option, demand is expected to increase further." He also noted, "Managing volatility through global diversification and achieving steady long-term performance is currently the most effective investment method in the market."

TDF

TDF stands for Target Date Fund, which is an asset allocation fund that adjusts the portfolio according to the subscriber’s life cycle. For example, when the subscriber is young, the fund increases the equity proportion to actively grow assets, while as the retirement date approaches, it increases the bond proportion to enhance stability.