In this episode of the Bogleheads® on Investing podcast, host Jon Luskin, CFP®, sits down with Jay Jacobs, US Head of Equity ETFs at BlackRock, to answer community-submitted questions about how to invest simply and effectively for retirement.
Jay oversees more than 300 iShares ETFs spanning US equity, international, outcome, and digital asset strategies, and brings deep institutional expertise to the Bogleheads community’s most pressing investing questions. Jon and Jay explore the powerful tax-efficiency advantages of ETF structures over mutual funds, particularly for investors using all-in-one and target-date products in taxable brokerage accounts. The conversation covers how ETFs use in-kind creation/redemption mechanisms to minimize capital gains distributions, a significant edge over traditional mutual funds.
The episode dives into the research and methodology behind glide path design, including how demographic shifts (people working and living longer), inflation expectations, and capital markets assumptions all influence how the stock/bond mix evolves over an investor’s lifetime. Jay explains the rationale behind the LifePath funds’ 40% stock/60% bond terminal allocation, why a market-weight approach to international exposure makes sense for long-term investors, and more.
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Jon Luskin, CFP®, a long-time Boglehead and financial planner, hosts this episode of the podcast. The Bogleheads® are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads® have held national conferences in major cities across the country. In addition, local Chapters and foreign Chapters meet regularly, and new Chapters form periodically. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
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Show Notes
2026 Bogleheads conference registration
Jon Luskin’s talk on all-in-one funds at the Bogleheads Conference
Previous Bogleheads episode with Bill Bengen on safe withdrawal rates
Transcript
00:00:00 Jon Luskin
Before the episode, a quick announcement: Registration for the 2026 Bogleheads® Conference is now open. As with every year, we have a phenomenal lineup of speakers this year, including tax planning expert Jeff Levine, financial columnist Jean Chatzky, retirement researcher Bill Bengen, and financial blogger Ben Carlson. To register, go to boglecenter.net/2026conference.
Coming up on the 93rd Bogleheads® on Investing Podcast:
00:00:29 Jay Jacobs
Many people might retire at 70 and live to be 100 and need 30 years out of their portfolio. In an individual year, inflation of 3% maybe doesn’t seem like a big deal, but compound that over 30 years, that’s a very big deal for your portfolio. If you don’t have exposure to something that can keep up with inflation, you could really start to see an erosion of your portfolio value in real terms.
It could be a bet that plays out horribly if you see a major sell-off and you have to start taking drawdowns of your savings at a very inopportune time in retirement. It’s much more useful for investors to be thinking about.
00:01:03 Jon Luskin
BlackRock’s U.S. head of equity ETFs, Jay Jacobs, answers questions from the Bogleheads® community on how to invest simply, how to design the right stock-bond glide path for retirement, tax and trading considerations, international stock exposure, and more.
Hello everyone, I’m Jon Luskin, board member for the John C. Bogle Center for Financial Literacy and host for this episode. After the interview, I’ll share my key takeaways and some helpful context, so be sure to stick around. And if you’re usually listening on audio, know that you’ll get more out of the version on YouTube where we’re showing helpful visuals throughout, including charts from BlackRock to help clarify the concepts. As always, if you find this helpful, be sure to like, comment, and subscribe on your platform of choice. It really helps us reach more investors. And now, on to the episode.
Jay Jacobs, welcome to the Bogleheads® on Investing Podcast. Tell us about yourself.
00:01:58 Jay Jacobs
It’s a pleasure to be here. I am the U.S. head of equity ETFs at BlackRock, so I oversee over 300 iShares ETFs that focus on everything from U.S. equity exposures, international outcome strategies, even digital asset strategies as well. So I am thrilled to be here.
00:02:14 Jon Luskin
Well, let’s jump into some of the questions we got from our audience. Let’s talk about some of the tax deferral benefits of ETFs. If someone were to make a simple three-fund portfolio, like a Bogleheads® portfolio, they’re going to have some capital gains with rebalancing. Alternatively, if they’ve got an all-in-one fund that has similar asset class exposure, maybe less so. How come? How does that work?
00:02:39 Jay Jacobs
That’s exactly right. So I think the benefit of these all-in-one funds is, one, it’s sort of the easy button for allocating in a globally diversified portfolio. It can change that allocation over time with different inputs, whether you’re aging and your risk tolerance is changing, or capital markets expectations are changing, or even the research behind these funds is changing.
But the third piece that you hit on, I think, is a critical piece as well, which is the tax efficiency of rebalancing. So in a short period of time, someone might just want to rebalance quarterly or annually to get back to their intended weights between stocks and bonds. That means often selling winners, buying losers, and that can incur capital gains because you’re selling a position that went up to fund your buying of the position that went down.
Or if you’re really over longer periods of time shifting your asset allocation to align with a changing risk tolerance, going from 30 years old to 60 years old, you’re going to have a different allocation. That can also trigger capital gains. So when you do this within an ETF, though, the ETF can try to avoid some of those capital gains or mitigate some of those capital gains. And this really comes down to fundamentally how ETFs are managed.
So if we take a little bit of a step back, ETFs have a mechanism that is an in-kind creation of redemption, meaning that when new people want to come into a fund, an authorized participant can deliver shares of the underlyings that the ETF is intending to receive and in exchange give new shares of the ETF to that authorized participant to deliver to the end investors. Similarly, if someone wants to take money out of the fund, the process works in reverse.
The AP is going to receive the underlyings in exchange for delivering shares of the ETF back to the ETF issuer. That mechanism can be used to also help mitigate capital gains. If a fund is looking to reduce its equity exposure because equities have rallied while bonds have, say, stayed flat, it can deliver some of those underlying equities to an authorized participant and receive shares of the underlying bonds or bond ETFs in exchange. This is not a taxable transaction because you’re not selling a security for cash. You’re doing an in-kind transaction, which is not taxable.
And so therefore, the ETF has this mechanism built into it that can help change the portfolio without necessarily incurring a capital gain. This is very different from mutual funds and very different from an end investor who might be trying to do the same transaction on their own.
00:04:57 Jon Luskin
Going back to that tax deferral mechanism, so certainly with iShares, we’ve got the allocation ETFs, a fixed static stock-bond mix, and we’ve got target date ETFs that change over time. And certainly with that target date ETF or target date fund, you’re likely looking at selling more stocks over time, buying bonds that can incur capital gains. And it sounds like we’re not necessarily going to see this when that target date fund is inside an ETF wrapper.
Now, I know Vanguard, they had a problem with their target date funds making a capital gain distribution quite some time ago. That made a lot of investors upset. So generally now the guidance is, hey, hold these in a tax-advantaged account. Thoughts on a target date ETF in a tax-advantaged or taxable account?
00:05:43 Jay Jacobs
So you certainly could own it in a tax-advantaged account. You’re still going to get some benefits from that, right? So set capital gains aside, these funds are still going to be distributing dividends, they’re going to be distributing income from the fixed income positions they own. So if you own that within a tax-advantaged account, you would still get the benefit of not having to pay current taxes on the income received.
However, the ETF structure does have these mechanisms to be more tax efficient. So all else equal, if you were looking to own a target date fund in a brokerage account that does not have tax advantages to it, and you were looking at a mutual fund strategy or an ETF strategy, the ETF strategy will just have more tools available to it to try to reduce capital gains.
So I just think it’s important for investors to understand that because, frankly, we see a lot of people who want to have kind of like a 401(k) type of retirement exposure, but live outside of a 401(k). Maybe they’re in the gig economy, maybe they’re an entrepreneur, own a small business, maybe they just work for a company that doesn’t offer a 401(k) option. Maybe they’ve already maxed out their 401(k), but they just want to keep investing in target date funds through their taxable brokerage because they like them so much.
So if this is the case and you want to own this through a taxable brokerage account, I think the ETFs are more likely to have a more favorable tax position over the long term than a mutual fund.
00:07:01 Jon Luskin
So with something like a Vanguard target date fund, we’re going to see normal capital gain distributions, less so with something inside an ETF wrapper. But there was one time where there was a capital gain distribution, both short and long, from one of these ETF share classes. What causes that to happen?
00:07:18 Jay Jacobs
Trying to mitigate taxes is never perfect. There are certain events that can drive capital gains even within an ETF. So like I said, ETFs have a lot of tools available to them to try to mitigate capital gains, but it’s not going to be perfect.
Specifically, if you have a higher turnover event or if it’s a much smaller fund, it can be challenging to use some of those mechanisms I was talking about, like a custom in-kind basket. So overall, the trajectory of ETFs is much more tax efficient than other structures.
For example, one capital gain distribution over more than 10 years in asset allocation funds is still very efficient. Compare that to target date mutual funds. In 2023, we saw 85% of target date mutual funds pay a capital gain distribution. So perfection might be an overpromised result here, but certainly an enhancement in tax efficiency is something people could expect from ETFs.
00:08:08 Jon Luskin
Here’s a question from username tarantula13 from Bogleheads® Reddit. They ask about the tax efficiency of IXUS with a higher ratio of qualified dividends compared to a comparable total international stock fund. What makes the iShares IXUS, or moreover, if that’s held inside that allocation ETF, have that higher percentage of qualified dividends?
00:08:36 Jay Jacobs
So I think you need to look at the difference between how the U.S. market operates and how international markets operate. So in the U.S., as I was mentioning, you can do these custom in-kind baskets. Partly that’s because shares of U.S. companies are in-kindable. You can deliver them to an authorized participant in exchange for other shares. That’s not something that’s necessarily available in every international market. One of the outlets that ETFs can use for U.S. securities doesn’t necessarily apply to every other country.
The other piece of it is most U.S.-based ETFs or mutual funds or other structures can benefit from qualified dividends where if you hold a company for enough time and its dividends meet certain requirements, that can be taxed at a long-term capital gains rate instead of an ordinary income tax rate. So that’s a benefit to many U.S. dividend payers. Again, that might not necessarily apply to all international stocks.
And the final piece is that there can be withholding taxes between when a company in a certain country pays a dividend and that dividend ultimately makes its way back to a U.S.-based shareholder. This has to do with tax treaties between the United States and other countries. Sometimes those withholding taxes can be significant. Sometimes they can be relatively immaterial or can even be refunded. But what often happens is if you do pay a withholding tax on a dividend that you received from another country, that can often be applied as a foreign tax credit against your other income that you’ve received.
00:09:58 Jon Luskin
Looking at two different total international low-cost, broadly diversified funds, what could account for one having a higher amount of qualified dividend income and a higher foreign tax credit than the other?
00:10:10 Jay Jacobs
It could be the underlying exposures themselves, which countries is the fund investing in. It could also be how long it’s been investing in those securities. So if there’s been higher, if something is a higher turnover strategy or maybe even a newer strategy where it’s accumulating a lot of newer shares, that could tip the balance towards a lower amount of qualified dividends versus a different strategy.
00:10:30 Jon Luskin
This question is from Kevin Dawson from Bogleheads® Facebook. And he asks about what is the decision process that goes into designing a glide path, moving from stocks to bonds as you approach that retirement date?
00:10:45 Jay Jacobs
So a huge part of what goes into that research is simply just what stage of life is someone in and what’s an appropriate amount of risk that they can take at that age. Of course, if you look at a further dated target date fund, that’s going to have a higher equity exposure. Someone who’s closer to retirement, it’s going to be more heavy in fixed income. So that’s probably the biggest component as you think about asset allocation.
The rationale behind that is if you think about someone who’s young, they have a lot of human capital, a lot of potential earnings they can make over the next several decades. You could think about that almost as sort of like bond income over the course of someone’s life that they’re going to receive these regular paychecks, hopefully spend less than they receive, get to save, get to invest. But that’s a relatively steady piece of their total portfolio, whereas the financial capital is going to be smaller in that younger person’s total portfolio, so they can take more risk on it. So think about kind of like steadier, longer-term income versus more risk in their financial capital bucket.
Over time, as you get closer to retirement, the net present value of the future earnings you’re going to have is going to shrink. You only have so many more years to work, but you’ve built up your financial capital. And so what you want to do is actually change that mix. You want to take less risk on your financial capital as you approach retirement. So maybe that’s a little nuance, but the way that we think about it at BlackRock, particularly our LifePath team that develops these glidepath strategies, is you could think about the stage of someone’s life in three different stages.
You have your growth stage where you really are thinking about accumulating more assets and you want to take on more risk in your financial capital and grow it. The next stage is really about protection when you’re getting nearer to retirement. This is where investors don’t want to get the timing wrong here, where you just happen to retire in 2008 as the bottom fell out of the market and be caught with a significantly lower amount of financial capital just as you need it most. So it’s much more about protecting against drawdowns and frankly, protecting against inflation. And then finally, the third stage is the spending stage. That’s where you enjoy the fruits of your savings over the course of your career and you get to spend that in retirement. And that’s going to look a little bit different as well.
So the asset allocation over your lifetime is probably the biggest component. However, we take a bit more of an active approach within LifePath at BlackRock, which is there are other components that do influence the asset allocation over time. One component is just capital markets expectations. So if the yield on bonds goes to zero, that’s a good indication the capital market expectations for bonds are probably not going to look great over the long term. If you have really frothy valuations, that might change how we think about capital markets expectations and equities. But that’s certainly an input.
Inflation is certainly an input. So one of the changes that’s happened recently within LifePath is taking a further consideration for inflation in that protect stage. So as you’re trying to protect assets, it’s not just about a sell-off, it’s what happens if inflation surges right as you’re reaching retirement. Obviously, we’ve seen inflation be a bit structurally higher over the last couple of years. That means the asset allocation might favor something like TIPS or commodities or real estate or infrastructure, things that have built-in inflation protection into it.
But then, finally, demographic shifts happen as well. Demographics can move slowly, but they do move and over the course of someone’s lifetime, this does matter. So one of the things that the LifePath team has been observing is people are working longer. 65 used to be this magical age. I think as people get healthier, have longer careers, 70, 75 might be the new 65. But then on top of that, people are also living longer. So how do you think about retirement where maybe it’s starting later, but extending further than we’ve ever seen? That results in something like maybe more equities makes sense because if you’re going to live further in retirement, you need to have a growth component that can both participate in the economic growth of a country, but also help combat some of the inflation that just strictly owning fixed income wouldn’t be enough to mitigate.
00:14:42 Jon Luskin
So let’s talk more about the shape of that glidepath as we move from stocks to bonds, as we approach that retirement date. Kevin wants to know what sort of research or historical data drives the design of how aggressively or conservatively you change from stocks to bonds in the iShares line of ETFs?
00:15:03 Jay Jacobs
The demographic shifts that we’re observing, constantly reevaluating, are people retiring at the same age? Are they living to the same amount? How does the shape of retirement look different?
It comes to capital markets expectations. What do we think is going to happen with asset classes over the long run? Are asset classes changing or different features like inflation protection going to be more important, as well as kind of the more traditional shift from human capital into financial capital?
So that’s the kind of research that we’re constantly reunderwriting to make sure that the glidepath that someone said in 2026 for retirement in 2055 still makes sense.
00:15:39 Jon Luskin
I’m curious, in making those assumptions about, hey, here are these demographic changes, or hey, here comes inflation, let’s make this change to the portfolio, how do you assess whether that’s the right decision to make in hindsight? Do you go back and say, hey, we made this change, we were right here, we made this other change, we were right here? What does that process look like?
00:15:58 Jay Jacobs
I think one of the benefits of looking at this through the LifePath lens is this is the definition of long-term investing. You’re looking over the course of someone’s entire career. And I think it can be very challenging to try to look at these things in the short term and try to be really tactical about some of these moves.
But when you look at structural shifts like, are people living longer? You tend to have a fairly high amount of confidence in those changes. It’s just it takes a while for those shifts to have an impact on a portfolio.
Inflation expectations, this isn’t something that necessarily is being looked at quarter by quarter. This is really, are there structural changes to inflation expectations? Like, are we seeing higher government debt and higher government spending? Are we seeing productivity or GDP growth changing? These are all important long-term inputs.
So we have a lot of confidence that looking at this over the long term is an important factor in determining how this glidepath should evolve over time. It’s not going to be the most tactical machine, but it’s going to be one that we have high confidence in over the course of someone’s career.
00:17:02 Jon Luskin
I’m curious, what are some of the changes? And this is a follow-up question, so shout out to sycamore from the forums for asking this one. What are some changes that you have made to the glidepath over time? And what are some changes that you might be anticipating making in the future?
00:17:16 Jay Jacobs
So two of them I mentioned. One of them I think is really important, which is around the importance of inflation protection in a portfolio, particularly during that protection stage. So protection is really about mitigating risks right ahead of retirement. Those risks could be a significant drawdown. That risk could be a significant spike in inflation, both of which would reduce the real amount of savings that you have heading into retirement.
So obviously, one, to protect against a drawdown, you change your asset allocation mix, de-risk in equities, tilt more towards fixed income. But the inflation piece, that’s not going to necessarily be solved by tilting more towards fixed income. So it’s really about what does that inflation protection sleeve look like? Some of the recent research from our LifePath team was really looking at the role that TIPS can play, the role of real estate, the role of commodities, and the role of infrastructure is all really serving as inflation protection type of strategies in that protection stage of one’s career.
Another piece that we’ve been looking at is really about the demographic shifts. So it is very real that people are working longer, living longer in retirement as well. And maybe some of the assumptions that made sense 20 or 30 years ago around what a retirement portfolio should look like is shifting. And so I think that’s where we might consider looking further at equities playing a role in a retirement portfolio than what would have been conventional wisdom just a couple of decades ago.
00:18:40 Jon Luskin
Let’s talk about the terminal mix of your line of ETFs. It settles on a 40% stock, 60% bond portfolio. Why that mix for retiree spending?
00:18:50 Jay Jacobs
It’s important to realize that these two different asset classes are playing different roles in a portfolio. So the 60% can really be, one, playing the role of a stabilizer. So in retirement, you want to reduce some of the volatility of your portfolio, try to protect assets. Number one rule usually is protect your savings. The second piece is that it can generate income. These are fixed income allocations that are going to be paying regular coupons to fund your lifestyle in retirement.
But I think the nature of your question is probably a little more interested in the 40% that’s allocated to equities. And a lot of this comes down to what do you need your total portfolio to deliver in retirement? If people are living longer than before, if inflation has stickier properties than before, having an allocation to equities can be a really important piece of this puzzle. So many people might retire at 70 and live to be 100 and need 30 years out of their portfolio.
In an individual year, inflation of 3% maybe doesn’t seem like a big deal, but compound that over 30 years, that’s a very big deal for your portfolio. And if you don’t have exposure to something that can keep up with inflation, you could really start to see an erosion of your portfolio value in real terms. So I think inflation is a really big piece of this and really protecting against outliving your assets in retirement.
Many people see equities as kind of risky compared to fixed income. But I think the role that they’re playing in this portfolio is actually about mitigating certain risks that you might have in retirement, such as outliving your assets due to inflation.
00:20:14 Jon Luskin
Think about how the 60/40 is a pretty common benchmark for retiree investing. Why not end the glidepath in a 60/40 instead?
00:20:23 Jay Jacobs
I think we would see 60/40 more as that moderate portfolio that’s heading towards retirement rather than the end state for retirement. Many people look at retirement as like a 20/80 portfolio. Some are even in a 0/100 portfolio and really leaning into fixed income. So the 40 here is, again, really about protecting against inflation, protecting against outliving one’s assets.
A 60/40 portfolio we would view as more appropriate for, say, the decade leading up to retirement, where people still want to grow their assets, they’re still making contributions to their retirement, but they are starting to de-risk and really lean into having a significant position in fixed income going forward.
I would just compare that to a Target Date 2055 fund like ITDG. That’s a 98% allocation to equities. So there’s certainly a barbell at either side where you could really just focus on equities and the growth component early on in someone’s career versus a steady state in retirement being more of that 40/60 balance.
00:21:20 Jon Luskin
All right. Let’s geek out on the international exposure of these all-in-one funds. We have a question from Bogleheads® Facebook asks about how much international exposure there is in these funds and why is having international exposure important as someone approaches retirement?
00:21:40 Jay Jacobs
So I looked at ITDG as an example. This is one of the funds that’s very, very heavyweighted into equities. I think it’s about 98% equities right now because it’s a 2055 Target Date fund. And it’s about 58% US equity exposure currently versus about 36% international exposure.
And this roughly lines up with market weight. If you look at the MSCI ACWI or some global equity benchmark, I think a lot of investors should use market weight as a starting point, especially if you’re focused on index-based investing. This is the lay of the land for the market. If you don’t agree with those allocations, that’s where maybe you want to get active and get more tactical, where you want to increase your exposure to international or increase your exposure to the United States.
One of the reasons why we tend to see people have a home country bias is, one, they don’t want to deal with currency risk, at least in the near term. But if you’re investing over decades, currency risk is one of those things that usually kind of nets out over time. So it’s maybe less applicable to a retirement portfolio.
Also, home country bias is often because this is where people have more familiarity. But again, for retirement, you’re thinking about 30 years. You’re not trying to stock pick here. This is about getting your market beta, about getting equity premium and compounding that over 30 plus years until you march towards retirement. I see that as a bit less relevant as well.
So the starting point for a lot of these LifePath funds is going to be very similar to market weight, maybe a little bit of adjustments as we think about capital markets expectations and inflation and some other inputs.
00:23:10 Jon Luskin
So certainly, if we’re investing close to that global capitalization weighting, we’re going to have a meaningful amount of international exposure. Why is that important if we’re going to be living in the US?
00:23:22 Jay Jacobs
At a minimum, it’s diversification, but also it increases the opportunity size. It’s hard to look through a crystal ball and say exactly what’s going to happen 30 years from now. The US has certainly enjoyed a tremendous amount of performance over the last decade plus versus international stocks. But even just last year, we saw that got flipped on its head as we had a declining dollar, as we saw some geopolitical strife. So again, over the course of someone’s career where you’re saving over decades, this is less about trying to very specifically predict a specific region over another. It’s about compounding that equity risk premium that can be so beneficial over the long term to build your net worth.
00:24:00 Jon Luskin
Let’s talk a little bit more about hedging. Now, I know in certain target date funds, for example, they have an international bond component and that is hedged while the international equity allocation is not. What’s the approach with the all-in-one ETFs for you guys?
00:24:16 Jay Jacobs
For our funds that are very long dated, it’s really not about the fixed income piece, right? This is about equities. Hedging can make sense for some investors, particularly if you’re looking over a shorter term time horizon and currency is just adding volatility to a portfolio that’s generally not really compensated in any way. So that’s where hedging could make sense, but especially on the equity side, this is really not relevant. We look at currencies as something that’s largely going to be mean reverting over the long term. This is about focusing on equity market equity risk premium over the long term.
00:24:46 Jon Luskin
So we’ve got US bonds. We also have international bonds. Now, the international equities aren’t hedged. What about the international bonds?
00:24:56 Jay Jacobs
So if we look at IRTR, which is the retirement portfolio, once you’ve reached that retirement age and are really more focused on that 40/60 allocation to get income and retire with, the bond exposure in that portfolio is predominantly US Treasury exposure, US corporate bond exposure, and the international exposure is really just coming through an emerging market bond allocation.
Emerging market bonds can really provide some diversification. They can also provide higher income. Those are US dollar bonds, though. So we’re not hedging the emerging market bonds in their local currency, which can be really expensive. It’s focused on the US dollar bonds instead.
00:25:31 Jon Luskin
Are there foreign developed market bonds in the portfolio? And if so, are those hedged?
00:25:35 Jay Jacobs
Not in the portfolio currently.
00:25:36 Jon Luskin
Wow, that’s interesting. All right. We’ve got a couple of questions here. One from Manavins from YouTube and Weathering from the forums. And they’re asking about how valuations impact your decision process in designing these all-in-one funds.
00:25:50 Jay Jacobs
So with the LifePath theme, they are looking at what are the capital markets assumptions over the long term. So I think valuations certainly come into play. If you saw really frothy valuations, that could impact reducing equity market exposure, for example. But I would caution capital markets assumptions. They’re not just about valuations. It’s also looking at the growth aspect.
And so one of the topics that comes up a lot with investors today is US markets maybe look expensive, particularly US tech stocks look expensive. But that’s really only looking at one piece of the puzzle, which is what are the, what’s the PE ratio? What’s the valuation of these stocks? You have to look at the growth rates. In fact, when we looked at some of the AI-related companies last year and the whole discourse around AI companies was how expensive the valuations are, their valuations actually came down last year because their earnings grew faster than their prices did, a basket of AI companies in the S&P 500.
So when you see that kind of dynamic play out, it’s just a really important reminder that if valuations are high, it can very much be justified if earnings growth is going to play a big role in driving those stocks forward.
00:26:55 Jon Luskin
Here’s a fun question from Bogleheads YouTube. SLELLO55 says, “I don’t like target date funds. Why not just buy the S&P 500 or total market and just hold it forever?” What are your thoughts on that?
00:27:08 Jay Jacobs
I think the problem is that is looking at a very static asset allocation over the course of someone’s entire life. It doesn’t make sense for someone in retirement to have 100% equity market risk. That could be a bet that plays out well. It could be a bet that plays out horribly if you see a major sell-off and you have to start taking drawdowns from your savings at a very inopportune time in retirement.
It’s much more useful for investors to be thinking about how their asset allocation mix is going to change over the long run. Now, to be clear, people could do this themselves. You could identify different funds that are investing in US stocks, international stocks, or global stocks, wrapping it all together, plus the fixed income component or other asset classes.
But this is going to require a lot more hands-on management over time to adjust your asset allocations, both for regular rebalancing, but as well as to shift those asset allocations over time as you progress through your career. But you can do that, or you can have the easy button, which is allocating to a target date fund that’s going to do all of that for you.
And as we were discussing, also can have some tax benefits if you’re in a taxable brokerage account, where these rebalanced trades and asset allocation shifts over time can have their tax consequences mitigated by the efficiency of the ETF structure.
00:28:22 Jon Luskin
Let’s jump to fees. This is going to be a really important point for the Bogleheads® community. We’re very conscious of fees when investing. steveosteveo from the forums asks about why the fees are different on some of the all-in-one funds compared to the underlying components.
00:28:39 Jay Jacobs
So the funds are playing a different role in portfolios. The underlying components may have different scale. They could be very large funds like IVV, the S&P 500, hundreds of billions of dollars in it versus a retirement fund, which perhaps is smaller. But the way that we look at this is really how can we deliver tremendous value to investors and also look at the total potential size and scale of this market.
The retirement market target date funds in the retirement space is a $5 trillion market. So we’re still very early in the idea of target date ETFs being a component of how someone thinks about saving for retirement. But it’s a really large-scale space, which I think that means there’s a lot of opportunity for more people to use these tools to help fund their retirement if they don’t have access to 401(k) target date funds or they want to supplement their 401(k) target date funds in a taxable brokerage.
00:29:28 Jon Luskin
This is actually a question I got when doing a talk on all-in-one funds. Why is this fee different compared to if I were to just buy these things separately and invest myself? Why is there a higher fee compared to just the percent and the expense ratio of the various funds in question that you’re using when designing a portfolio yourself?
00:29:51 Jay Jacobs
I think there’s two layers of value in a target date fund. One layer is the value of getting these exposures, which you could do on your own by buying the individual ETFs. You want it to just allocate to a US equity fund and a bond fund.
The other layer of value that’s being provided is that asset allocation, the shifting asset allocation, the rebalanced trades over time, the research that goes into informing what the appropriate asset allocations are. That’s a whole other component to these funds that has a lot of IP, a lot of people researching it, trading infrastructure behind it that maybe is not as visible, but is very much behind the scenes in the management of these funds.
So I would think about you could buy the individual components if you just want exposure. But if you want that IP in terms of how to manage that exposure over time, that’s a second layer of value in these ETFs.
00:30:39 Jon Luskin
It sounds like we’ve got to pay the manager to rebalance this thing for us is what I’m getting.
00:30:44 Jay Jacobs
There’s a trading component, but there is a very real research component to this as well. These are the target date, the LifePath target date funds are actively managed funds. And so the white papers that are being produced, the analysis of demographics and inflation and capital markets expectations, there’s real people doing that work every day to get these products to be as useful for people’s retirement as possible.
00:31:05 Jon Luskin
So some of these ETFs are relatively newer. So they have less trading volume. And since we’re talking about an ETF, that means you might be looking at paying a little bit of a bid-ask spread. Any guidance or thoughts on the bid-ask spread on some of these newer products and what investors can do to be a successful investor in light of that?
00:31:25 Jay Jacobs
It’s a great point. This is one of the key differences between allocating to a target date mutual fund through a 401(k) platform. You’re not going to see a bid-ask spread on that. You will see it on an ETF.
Over the course of someone’s retirement and they’re not trading in this ETF very often, I would suggest this is a very small component of total fees, but fees do matter.
An important piece of this is really the market ecosystem around these ETFs. BlackRock has over 450 ETFs in the United States. We’re working with a variety of different market makers to ensure there’s liquidity and tight bid-ask spreads across a variety of different market conditions to ensure that that cost to investors is as minimal as possible.
But a couple of suggestions for investors. One is these are not intended to be trading tools. These are long-term buy and hold target date ETFs, as implied in the name. So trading fees should be a very small component of the total cost.
The other piece, though, is it’s always good practice to use limit orders when placing an order in an ETF, particularly if it’s a newer ETF. That just ensures you have certainty of price of execution. So if there is something that were to happen in the market or if you’re placing a particularly large trade, it gives you more confidence in the price of execution.
The underlyings of a target date ETF are very large liquid iShares ETFs.
00:32:41 Jon Luskin
Right, super liquid. Oh yeah.
00:32:42 Jay Jacobs
And so our expectation for target date funds is this is retirement, right? You’re taking a little bit out of your portfolio every couple of weeks, allocating to this over time, setting money aside. Less likely to be these very large trades.
But if someone is switching from one solution to this solution, it could be a large trade. That’s where it can be helpful to have access to the primary markets. And so that’s really working with your broker to be able to facilitate that trade.
00:33:05 Jon Luskin
Yeah, I work with a lot of do-it-yourselfers. So they’re going to be firing their portfolio manager and they’re like, “Hey, what do I do with all this stuff?” So they are making a lot of big one-time switches, as was the case with this gentleman that I worked with.
This question comes from gcc-O2 from Bogleheads Reddit, asks about who’s the target audience for these products.
00:33:22 Jay Jacobs
The target audience for these target date funds are really people who want to have that target date 401(k) experience, but in a traditional brokerage account. So I think there’s a couple of different people that would fit this mold. One is people who already maximize their contributions to their 401(k), but want to continue to invest in that style through a traditional brokerage account. So they can really have their brokerage mirror their 401(k) exposures.
The second piece is there’s a lot of people out there that don’t have access to 401(k)s. Maybe they’re self-employed. They work for a startup. They’re in the gig economy. Maybe they just started at a company and there’s a certain amount of time until they can participate in the 401(k). But they still really want that type of target date exposure in the meantime. And so for that type of investor, investing through a brokerage account into a target date ETF is a really important solution for them.
Others, maybe this is just an easy button for investing. Many people just know they want to retire someday, but they don’t know how to do it. They get sort of overwhelmed by the plethora of decisions that you could be facing as a do-it-yourself investor. And they could look at a target date fund as just a really easy way to think about investing towards a really significant life goal. And so therefore, this fund could be a really useful solution for them.
00:34:38 Jon Luskin
Jay, any final thoughts you’d like to share with our audience about using all-in-one funds to invest?
00:34:44 Jay Jacobs
First of all, I have to admire the quality of the questions coming from your audience. These were wonderful questions, really getting into the weeds of what makes for someone’s successful retirement. I think we talked about how the importance of asset allocation matters, the importance of implementation, how to trade matters. That retirement is not entirely set it and forget it, that a lot’s going to happen over the next 20, 30, 40 years before people retire. And expectations need to evolve as well. And so I think these were wonderful questions. And hopefully, I was able to help people understand that retirement is a wonderful financial goal and that target date funds can be a really useful tool to help people achieve that goal.
00:35:22 Jon Luskin
I got a lot of feedback on the format of the last interview I did with Bill Bengen. So I’m trying something new this time around. I’m giving you my thoughts after the episode. So let me know what you think. Do you want to hear what I have to say now, at the end, or interspersed throughout? I want to hear your thoughts, your comments. That’s going to help me make a better episode for you in the future.
So let’s talk about some takeaways from this episode. Firstly, for those who know anything about me, they know that I’m a huge fan of investing simply. I did a talk on using all-in-one funds to invest at last year’s Bogleheads® conference. I’ll link to that in the show notes for folks to check out.
Why am I such a huge fan of all-in-one funds? It’s because I have found that do-it-yourselfers aren’t great at maintaining their portfolio. An all-in-one fund does this for you. It’s still low cost. It’s still diversified. But now it’s set it and forget it. That’s a really important consideration if you’re going to be managing your money yourself.
That’s not to say you have to use the iShares variety. Vanguard has some great low-cost all-in-one funds. Now, certainly, there’s some tax efficiency consideration that investors need to be aware of when using those in a taxable account, for example. But there are other providers, too, that offer reasonable all-in-one funds helping you to invest successfully with little to no maintenance on your part.
Let’s get geeky here and talk about the terminal stock-bond mix for the iShares target date ETF. As touched on, that’s going to be 40% stocks, 60% bonds. I brought that up because that’s a really important consideration when choosing a target date fund or target date ETF in a taxable account. Why does that matter? Because in a taxable account, you’re going to have a big tax bill if you ever move out of this. So if you don’t like the terminal mix of a target date fund, you probably don’t want to be holding it in a taxable account. And since we’re talking about the iShares ETFs, we’re probably thinking about investing in a taxable account with these products. So that begs the question, is a terminal 40/60 mix the right mix in retirement? This is the question that I asked our guest, Jay Jacobs.
00:37:52 Jay Jacobs
I think we would see 60/40 more as that moderate portfolio that’s heading towards retirement rather than the end state for retirement. A 60/40 portfolio we would view as more appropriate for, say, the decade leading up to retirement, where people still want to grow their assets. They’re still making contributions to their retirement, but they are starting to de-risk and really lean into having a significant position in fixed income going forward.
00:38:15 Jon Luskin
And he felt it was. But of course, he’s got some bias there naturally. Now, when you look at the research on what is the right mix for retiree spending, or perhaps said differently, what stock-bond mix should I have if I want to spend the most amount of money every single year? The research says you want a moderate mix. You don’t want something that’s necessarily too conservative or necessarily too aggressive. And there’s often a range depending upon what piece of research you’re looking at on what that ideal mix is. But it’s often a range in the middle.
Such to say, a 40% stock, 60% bond portfolio as an ideal portfolio for a retiree is pretty frequent among the research on sustainable spending in retirement. This is something that we discussed with Bill Bengen on the previous episode. I’ll link to that in the show notes for folks to check out. But again, the answer is you want a moderate mix. And so, a 40% stock portfolio, while perhaps a little bit more conservative than the benchmark 60/40, can still be a reasonable choice. And that ignores the fact that we’re going to have possible tax deferral from rebalancing and the simplicity that comes with an all-in-one fund. Now, if you want to be a real geek about it, we can talk about some tax efficiency considerations here.
If a 60/40 is just as good as a 40/60, why not lean towards that 60/40 where you’re going to have a little bit more tax efficiency in terms of that growth is going to be a little more from appreciation as opposed to interest income from the bond side of your portfolio? That’s a little bit less tax efficient. But again, that assumes that we’re optimizing and there can be a lot of value in simplicity, even if it’s not the most perfect way to invest. I think one reason we might be seeing a 40/60 mix as a terminal mix here as opposed to something like a 60/40 is just going to be that behavioral component. If both portfolios are going to perform similarly in terms of what you can spend sustainably, opting for that more conservative mix can mean investors are less likely going to be panic selling during severe market drawdowns. And you’re going to find pretty similar, if not more conservative, allocations across other target date funds. For example, Vanguard’s target date fund terminates in a 30%/70% stock-bond mix. That’s even more conservative than the iShares variety.
And that’s probably in part because they’re trying to manage some behavioral risk of investors. That’s going to be especially important for Vanguard since they’ve got a mutual fund variety that’s going to be more likely to make capital gains distributions when investors do panic sell. But frankly, Vanguard investors are less likely to panic sell anyway. None of all of that is to say, “Hey, you should be using the iShares Target Date ETFs,” as none of this is investment advice. It’s just considerations for us to think about in terms of a somewhat irreversible decision from a tax perspective when deciding what to invest in, in a taxable account.
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