What Are the Lifecycle Indices from Zacks?

The Zacks Lifecycle Indices are a series of indexes created by Zacks Investment Research, Inc. that serve as a benchmark for the lifecycle allocation of various target-date funds, with a unique index for each target date.

Knowledge of Zacks Lifecycle Indices

Zacks Lifecycle Indices provide comparative benchmarks for lifecycle or target-date funds, which have gained popularity among investors saving for retirement, particularly those who lack the knowledge or desire to actively participate in the administration of their investments. The asset allocation, or glide path, progressively becomes more conservative as the target date approaches.

In 2007, Zacks, a provider of securities and tailored investment research, introduced its lifecycle indexes. It identifies equities and bonds with risk/return profiles consistent with general market benchmarks by employing a set of exclusive selection criteria. At introduction, the five Zacks indices were composed of various combinations of U.S. stocks, internationally developed market equities, and U.S. bonds for funds with target dates of “at retirement” as well as 2010, 2020, 2030, and 2040.

For example, The Zacks 2040 Life Expectancy Index

The Zacks 2040 Lifecycle Index (symbol: TDAXFO) is designed for investors anticipating retirement in 2040. According to Zack’s website, the objective of the index is to select a diversified group of equities, bonds, and complementary securities that have the potential to outperform general market benchmarks on a risk-adjusted basis.1 Multi-factor selection rules are used in the index constituent selection methodology to find the best mix of domestic, international, and fixed-income securities in the overall allocation and the securities with the highest risk/return potential. The strategy is intended to improve investment applications and investability. The index is rebalanced annually or as needed to ensure expeditious stock selections.

Purpose of Zacks Lifecycle Indices

Zacks developed the lifecycle indexes to provide greater insight into target date funds’ risk and return characteristics (TDFs). One of the primary purposes of the series was to inform shareholders of these funds about the elevated level of equity exposure—and thus the risk of principal loss—at the target date.

The majority of target date funds define their objective as “to or through” the likely retirement age of a fund shareholder, investing either “through” or “to” that date. As Zacks explained in its launch, most TDF glide paths target actuarial life expectancies. In other words, most of these funds presume that the investor will remain invested and require a combination of growth and capital preservation during retirement. They maintain a portion of their allocation in higher-risk equities. Zacks believed that this arrangement created an intolerable risk for investors with short-term capital requirements, such as financing a college education or paying for medical expenses, where the loss of a substantial amount of principal was unacceptably high.

On the other hand, a TDF investing “to” a target date would permanently transition to a conservative, capital preservation-based allocation at retirement, consisting primarily of bonds and cash, to generate income while protecting the principal. To avoid outliving their retirement funds, critics of these TDFs contend that retirees who plan to stay in retirement for at least 20 to 30 years need the capital appreciation that comes with equity exposure.

The various transition trajectories that each target date fund provider pursues are another factor to take into account. At retirement in 2030, the Fidelity Freedom 2030 Fund is projected to hold 53% stocks, 40% bonds, and 7% cash, a more aggressive allocation than the T. Rowe Price Target 2030 Fund, which would have 42.5% stocks and 57.5% bonds.

Conclusion

• Zacks Lifecycle Indices are benchmarks for measuring the relative performance of target-date mutual funds.
• Target-date funds are collective investments that begin with riskier investments and become progressively more conservative as retirement approaches.
• As a result, there are several Zacks Lifecycle Indexes, each with a date corresponding with the maturity date of target-date mutual funds, typically in 10-year increments.