To address investors’ hearty appetite for exchange-traded funds, Federated Investors Inc. has started offering three target maturity funds that invest mainly in ETFs.
According to industry consultants, Federated is one of the first companies to offer such products. Linda A. Duessel, a senior vice president and equity market strategist at the Pittsburgh company, said she knows of only one other company, J&W Seligman & Co. of New York, that offers them.
Both Federated, a large seller of mutual funds through banks, and Seligman say in fund literature that their products normally will invest at least 80% of their assets in ETFs. Other retirement planning funds, such as the State Farm LifePath Funds, say they invest in ETFs, but to a lesser extent.
“We feel this is a very unique situation,” Ms. Duessel said.
Exchange-traded funds have become more popular over the past several years. At the end of March, the latest date for which data is available, there were 212 exchange-traded funds, with $321.3 billion of assets, according to the Investment Company Institute, a Washington company that tracks the data. A year earlier, there were 162 such funds, with $228.7 billion of assets, the ICI said.
But the track record and substantial assets amassed by the market leaders — Barclays Global Investors, State Street Global Advisors, and Vanguard Group — make it difficult for others to break into the market. Fidelity Investments, for example, started an exchange-traded fund, the Fidelity Nasdaq Composite Index Tracking Stock, a few years ago but has not launched more.
Federated was not looking to launch a traditional exchange-traded fund, Ms. Duessel said. Instead, it wanted to respond to brokers who were clamoring for products that can help them allocate their clients’ assets over the long haul. With target maturity funds, investors can choose a fund with a maturity date close to their expected retirement date, and the fund manager does the asset rebalancing for them as that date approaches.
Over the past several years Federated has expanded its assets under management by opportunistically buying fund families from banks and other companies looking to exit the mutual fund business. It has also launched products such as the target maturity funds, bringing its mutual fund offerings to 140.
The funds launched last week — the Federated Target ETF Fund 2015, the Federated Target ETF Fund 2025, and the Federated Target ETF Fund 2035 — use a blended benchmark with an allocation to the Standard & Poor’s Composite 1,500, the Lehman Brothers Aggregate Bond Index, and the MSCI-EAFE Index.
John W. Harris, a Federated vice president and senior portfolio manager, manages the funds, which are available through financial intermediaries such as banks.
A spokeswoman for Federated said it has no plans to offer additional target maturity funds.
It is too soon to tell whether this fund-of-fund concept for exchange-traded funds will proliferate like the mutual fund of funds and hedge fund of funds have. Ms. Duessel said she suspects there will be more on the market at some point.
Geoffrey Bobroff, a mutual fund consultant with Bobroff Consulting in East Greenwich, R.I., said whether they will be more such funds on the market in the future remains to be seen, he said.
“At the end of the day, we have to look back in two to three years and see which of those activities have worked and which haven’t,” Mr. Bobroff said.
Burton Greenwald, a fund consultant with BJ Greenwald & Associates in Philadelphia, concurred with that assessment.
“On the one hand, there’s no question that exchange-traded funds have enjoyed growing popularity,” and having target maturity funds that invest in these products helps Federated stand out, he said.
However, Mr. Greenwald also said it is unwise to invest in a fund that superimposes a fee on top of the relatively low fee that is a main advantage of ETFs.
Federated had $217.5 billion of assets under management at the end of March.
