Earlier this year, global markets experienced heightened volatility after President Trump announced sweeping tariffs. As a direct result of this announcement, our target-date franchise underwent its first major rebalancing activity since the rollout of our refreshed policies in late 2024. We are excited to share these updates, as well as the subsequent outcomes delivered over the first quarter of 2025 and during April’s market volatility.
Our approach to target-date fund rebalancing: A summary of recent changes
As outlined in The Rebalancing Edge: Optimizing Target-Date Fund Rebalancing Through Threshold-Based Strategies, the goal of Vanguard’s target-date fund (TDF) rebalancing methodology is to provide our investors with the best long-term investment outcomes. Our approach aims to strike a balance between minimizing transaction costs, which are a drag on absolute performance and erode returns, and maintaining consistent alignment with the funds’ strategic asset allocation.
Vanguard’s enhancements to our rebalancing policy for the Target Retirement Funds and Trusts focused on two primary objectives: (1) updating the target distance in our threshold-based policy and (2) creating dynamic benchmarks that rebalance according to the same threshold-based policy of the funds.
- Updated target destination: Our research has revalidated that a threshold of 200 basis points (bps) is suitable across our vintages, but it also determined that a destination of 175 bps (relative to the previous destination of 100 bps) should result in further transaction cost savings. The smaller distance of 25 bps back to the target, compared with 100 bps, enables our portfolio managers to execute smaller trades during volatile markets, which results in real dollar savings for our investors.
- Creation of dynamic benchmarks: Previously, the funds and trusts followed a 200/100 bps threshold-based rebalancing policy despite tracking a benchmark that rebalanced to target daily. To better reflect the portfolio management process and facilitate the evaluation of the portfolio managers’ rebalancing-related performance, we have created benchmarks that follow the same rebalancing policy as our funds.
This change reflects our commitment to continually review the numerous elements of our design and implementation to ensure that we deliver the best possible experience for our investors.
Transaction costs are expected to be higher when markets are more volatile and when larger trades are executed. Since a 200/175 approach can reduce the size of transactions, the cost advantage relative to a monthly approach can be clearly observed. Compared with monthly and quarterly rebalancing, a 200/175 policy has the lowest transaction cost per rebalancing event, as well as the lowest average transaction cost.
After a smooth implementation on December 18, 2024, we are pleased to report that outcomes are in line with our expectations thus far. Of course, the true value of our rebalancing methodology becomes evident during more volatile markets that trigger rebalancing events. After the first quarter's close, when tariff announcements caused significant market volatility, our dedicated portfolio management team was ready to navigate these challenges and rebalance at more opportune times. The following case study illustrates our rebalancing philosophy at work for improved performance measurement.
Rebalancing in action: April 2025 case study
The funds’ ability to rebalance effectively in rapidly changing market conditions while maintaining tight tracking was put to the test in April. As expected, our approach held up well under pressure. The large spike in market volatility led to a significant shift in asset class exposure, which triggered two rebalances over a two-week time frame. Despite this heightened activity over the month of April, the funds’ deviation from the benchmark remained small, coming in 17 bps tighter than what would have been expected under our previous policy. April’s activity further substantiated our threshold-based policy and helped portfolio managers realign breaching vintages by notifying the team of funds near or at the threshold, enabling timely cash movements.
Aurélie Denis, one of the portfolio managers for the Target Retirement Funds, recounts the trading environment during this time: Last year’s enhancements to our rebalancing methodology and underlying fund liquidity enabled us to respond more effectively to April’s volatility by executing smaller, more frequent rebalances with advance notice resulting in tighter tracking to our dynamic benchmark.
A threshold strategy positioned for sustained success
We expect our threshold-based approach to increase the odds of long-term success for investors relative to other rebalancing options. The figure below depicts the cost savings that participants are likely to see with our updated threshold-based approach over various time periods and against competitors.* The chart shows that the estimated transaction cost of following a 200/175 policy is lower than that of monthly policies, whether using data from the past year (May 1, 2024, to April 30, 2025) or the past 10 years (May 1, 2015, to April 30, 2025).
Comparison of estimated transaction costs incurred by rebalancing at 1-year and 10-year periods, annualized
Notes: This figure is based on a global 60% equity and 40% fixed income portfolio using 10,000 simulations of daily returns and transaction costs over a 10-year period. The analysis assumes no cash flow or use of futures. U.S. equities are represented by the MSCI Broad Market Index (36%), non-U.S. equities by the MSCI ACWI ex USA Index (24%), U.S. bonds by the Bloomberg Barclays U.S. Aggregate Index (28%), and non-U.S. bonds by the Bloomberg Barclays Global Aggregate ex-USD Index (12%). Transaction costs are a function of the underlying market volatility and transaction size. Transaction costs also account for simultaneous rebalancing across all target-date vintages. Data use steady-state simulations. Trade size is the amount of trading (both buying and selling) across all underlying asset classes in the rebalancing.
Source: Vanguard.
Notably, longer periods of time magnify this impact, which is especially relevant for investments with longer time horizons such as retirement solutions. As a secondary benefit, the updates also result in a tighter, more positive range of excess returns across the Target Retirement Funds and Trusts, driven by the matched timing of rebalances across the fund/trust and benchmark. The care and rigor that is applied to rebalancing our target-date lineup has enabled our success, and we believe that our clients and investors will benefit from it for years to come. What is truly encouraging is the potential for compounding transaction cost savings to drive meaningful, long-term performance outcomes for Vanguard Target Retirement Funds and Trusts and their investors. Looking ahead, we are confident that our enhanced approach will continue to deliver value for plan participants and help us increase their chances of meeting their retirement goals.
* Transaction cost estimates are modeled as a function of market volatility and trade size.
Notes:
- For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- Investments in Target Retirement Funds and Trusts are subject to the risks of their underlying funds. The year in the fund or trust name refers to the approximate year (the target date) when an investor in the fund or trust would retire and leave the workforce. The fund/trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust/ Fund and Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.
- Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. Investment objectives, risks, charges, expenses, and other important information should be considered carefully before investing. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, Inc.
- Vanguard is responsible only for selecting the underlying funds and periodically rebalancing the holdings of target-date investments. The asset allocations Vanguard has selected for the Target Retirement Funds are based on our investment experience and are geared to the average investor. Regularly check the asset mix of the option you choose to ensure it is appropriate for your current situation.
- All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.