Manager Plans Funds Of ETFs For Retirement

A New Jersey asset manager is looking to build an income-generating fund of exchange traded funds as it attempts to get ETFs into the 401(k) market.

Retirement plans, be they 401(k)s or another type of defined contribution plan, draw billions in assets every day and are a major conduit for mutual funds to pick up assets.

Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management, notes 401(k) plans don't have ETFs in them now, primarily because the firms that administer plans don't have the technology. Retirement plan administrators' systems are designed for funds that price once per day. They can't handle individual shares that trade through the day.

But an ETF inside a fund, as though it were an ordinary stock, has no such problem. In that case the intraday price movement ceases to matter.

Bond Funds

The income fund of ETFs would look at distribution rates, focusing on the ETFs that have larger gains. It also might use a combination of bond-oriented ETFs as income generators. Mahn says the firm has yet to work out the details.

He says income is a major concern for people in retirement and those saving for it. As one approaches retirement, income generation becomes more important than absolute returns, Mahn says.

Meanwhile, Hennion & Walsh has introduced other funds of ETFs under the SmartGrowth moniker.

They are passively managed and use indexes constructed of ETFs by Lipper.

Among the funds of ETFs Hennion & Walsh offers are three that have target-risk levels.

Mahn says the cost of using ETFs isn't much different from using stocks, and is competitive with funds of funds, which are common in the 401(k) market, for example, as target-date funds.

Offerings

The target-risk offerings are SmartGrowth ETF Lipper Optimal Conservative Index Fund LPCAX, SmartGrowth ETF Lipper Optimal Moderate Index Fund LPMAX and SmartGrowth ETF Lipper Optimal Growth Index Fund LPGAX. All were launched in January 2007.

A fund manager can use ETFs for exposure to asset classes that ordinary stocks don't, Mahn says.

For example, commodities exposure is more difficult to set up using ordinary shares. ETFs can track commodity indexes directly.

ETFs also allow short trades, either via shorting the ETF itself or via the ETFs built to return multiples of downside.

Using ETFs, Mahn says, is often cheaper than buying the equivalent mutual fund.

Seligman and Federated Investors also offer target-risk and target-date funds with ETFs in the portfolio. Mahn says their models differ. The Hennion & Walsh ETF is supposed to be more of a passive investment vehicle, Mahn says.