United Kingdom
Argentina 
Australia 
Austria 
Brazil 
Canada 
Germany 
Ireland 
Italy 
Malaysia 
Mexico 
New Zealand 
Poland 
South Africa 
United States Balancing act: Enhancing target-date fund efficiency
Our TDF rebalancing policy seeks to provide investors with the best chance for long-term investment success. To achieve this goal, we aim to lower transaction costs, which are a drag on returns, and limit the risk from large allocation drifts between rebalancing events.
Our research shows a threshold of 200 bps is suitable across different forecast models, while a destination of 175 bps leads to lower transaction costs when compared with other destinations. For a hypothetical 60% global equity/40% global fixed income portfolio over a 10-year period, Vanguard research shows that, when compared to calendar-based rebalancing strategies, the 200/175 threshold-based rebalancing method results in:
- Greater risk control. Allocation deviations are lower and better controlled when employing the 200/175 rebalancing method, which is expected to result in 43 bps less allocation deviation per year compared with monthly rebalancing and 135 bps less compared with quarterly rebalancing.
- Reduced transaction costs. The expected transaction costs are about 13–17 bps lower relative to quarterly and monthly approaches.
- Potentially higher relative returns. The 200/175 rebalancing policy results in relative returns that are potentially 11–18 bps higher per year than calendar-based approaches.
The overall benefit to TDF investors can be substantial. As part of the analysis, the authors measured the relative benefit of rebalancing approaches using the certainty fee equivalent, which can be interpreted as the fee an investor would be willing to pay for one rebalancing method over another.
“We found that, for a TDF investor, the annual relative benefit of 200/175 rebalancing can range from 5 to 21 bps when compared to calendar-based approaches,” said Zhang. “That advantage can add up to large sums over time, enhancing an investor’s best chance of investment success. Based on our analysis, the need for daily monitoring is well worth the potential for enhanced investment outcomes over the long term.”
