Who Benefits From ETFs In 529 Plans?

Exchange traded funds (ETFs) have taken the financial industry by storm over the last few years as investors have flocked to the fund type. Blending the line between traditional indexing and active trading, investors have poured more than $1.1 trillion into roughly 1,251 different funds since their creation in 1993, according to data from State Street. Much of this growth has come at the cost of traditional mutual funds, which continue to see outflows.

Faced with shrinking contributions and meager returns, ETFs are now making inroads into 529 college savings vehicles and 401(k) retirement plans as administrators hope to make up for the market's recent poor performance and volatility.

For the countless parents who have joined such plans in order to help pay for their children's future college expenses, the question remains, are there any real benefits to adding the security type to their plans?

Rising Tuition Amid Poor Performance
With the cost of getting a college education rising all the time, financially savvy parents, and grandparents for that matter, are doing everything they can in order to help turn the tide. For many, that means turning toward state-sponsored 529 plans as a way to save for their children's future room and board, tuition and books, etc. The beauty of a 529 account is that investments in the savings plan are not subject to federal tax as long as the money is used for college expenses. Currently, mutual funds make up the lion's share of most 529 plan assets; however, that is quickly changing.

In an effort to attract more investors by providing increased diversification and extra protection from volatility, several states have now added ETF options to their portfolios. States such as New York and Arkansas now offer the security type as an option in their plans, while Nevada's Upromise 529 recently moved almost exclusively over to ETFs and shifted away from traditional mutual funds.

The hope is that the ETF-based plans will be able stem the losses 529s have recently suffered. After the 2008 downturn, several plans added a wider range of mutual funds and accounts that guaranteed principal. However, plans still on average lost almost 1% last year, according to Morningstar, while the broad S&P 500 returned about 2%.

Let's be clear, this isn't about being able to day trade your kids' tuition money. Most 529 plans are set-up as an asset allocation option such as aggressive, conservative, etc., or as target-date option. The underlying investments are chosen by plan administrators and sub-advisors and most 529 plans only allow investors to change their portfolios once a year.

Still Many Benefits
While the ETF hallmark of inter-day tradability is lost in the plans, there are some major benefits, the biggest of which are lower costs. According to State Street, t he average annual cost for its ETF-based 529 plans is just 0.49%. That compares to an average cost of 0.87% for open-end fund based plans. Likewise, Arkansas' ETF plan, which is sold exclusively by financial advisers, costs only around 0.61%. The average fees in adviser-sold plans are normally a high 1.12%.

Then there is the performance to consider. The Arkansas 529 plan - which uses BlackRock's iShares line of ETFs - returned 3.3% in 2011 and has returned an average of almost 1% since 2007. The average 529 plan lost nearly 3% during that time.

Overall, the flexibility of using ETFs seems to be working, as plan administrators can minimize losses and help boost performance on a daily basis. While adding this active trading into the recipe does introduce the new risk of the manager to make the right call, adding ETFs to the 529 mix seems to be a prudent choice for plan sponsors.

The Bottom Line
With more states adding exchange traded funds to their 529 plans, the real benefactors will be investors and their children's lower student loan bills. The security type will help lower plan costs as well as help to drive performance. Ultimately, the addition of ETFs could be seen as a win-win situation.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Oil prices fall as Saudi Arabia dampens prospects of output freeze
    Oil prices fall as Saudi Arabia dampens prospects of output freeze Reuters - 8 minutes ago

    Oil fell on Friday and was set for its largest weekly decline in a month after the Saudi energy minister cooled expectations that top producers might agree next month to curb crude output levels. Brent crude oil futures were down 52 cents at $49.15 … More »

  • Kerry, Lavrov meet on Syria conflict
    Kerry, Lavrov meet on Syria conflict AFP News - 14 minutes ago

    US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov met in Geneva on Friday for an expected push towards resuming peace talks for war-ravaged Syria. The pair sat down in a luxury hotel on the shores of Lake Geneva, launching … More »

  • Try chargeback request to get refunds, aviation commission tells Rayani Air's customers New Straits Times - 16 minutes ago

    KUALA LUMPUR: The Malaysian Aviation Commission (Mavcom) has advised Rayani Air’s customers who have purchased tickets using credit or debit card to initiate a chargeback request in order to recover their monies. The commission in a statement said … More »

  • European shares down as investors wait for US Fed cue
    European shares down as investors wait for US Fed cue Associated Press - 19 minutes ago

    European shares were mostly lower Friday following mixed trading in Asia, with investors preferring to sit on the sidelines ahead of U.S. Federal Reserve Chairwoman Janet Yellen's speech later in the day ... … More »

  • British economy escapes Brexit 'bomb', for now
    British economy escapes Brexit 'bomb', for now Reuters - 24 minutes ago

    Britain's high streets are heaving with shoppers despite June's shock vote to leave the European Union, big companies have reported few signs of distress and some tabloid newspapers are even talking about a post-Brexit economic boom. The … More »

  • AB InBev expects to cut 3 percent of jobs after SABMiller takeover Reuters - 26 minutes ago

    Anheuser-Busch InBev (ABI.BR) expects to cut some 3 percent of its combined workforce after it has acquired rival SABMiller (SAB.L), according to takeover documents published on Friday. AB InBev is aiming to achieve pre-tax savings of at least $1.4 … More »

  • Agricultural Bank Grinds Out 0.5% Profit Gain as Bad Loans Climb Bloomberg - 30 minutes ago

    While Xu Yiming, the chief financial officer of China Construction Bank Corp., told a briefing in Hong Kong on Friday that his bank was seeing less pressure from bad loans, Agricultural Bank Chairman Zhou Mubing told reporters in Beijing that the … More »

  • 11 Turkish police killed in bombing blamed on PKK
    11 Turkish police killed in bombing blamed on PKK AFP News - 43 minutes ago

    Eleven Turkish police officers were killed and 70 people injured Friday in a car bombing blamed on Kurdistan Workers' Party (PKK) rebels, as Turkey's army pressed an offensive against a Kurdish militia in neighbouring Syria. The early morning blast … More »

  • FTSE edges lower as pharmaceuticals weigh again
    FTSE edges lower as pharmaceuticals weigh again Reuters - 54 minutes ago

    By 0900 GMT, the FTSE 100 (.FTSE) was down 4.20 points, or 0.1 percent, at 6,812.70, down 0.7 percent for the week and set for a second straight weekly fall. Investors were awaiting a speech by Federal Reserve Chair Janet Yellen at a summit in … More »

  • Offshore Yuan Set for Second Weekly Drop as Fed Rate Odds Climb Bloomberg - 1 hour 5 minutes ago

    Wagers on higher Fed rates have been boosted this week as officials including Vice Chairman Stanley Fischer signaled that a 2016 rate increase is still under consideration, even as evidence of uneven global growth casts doubt over the U.S. central … More »

  • Dollar dips, shares touch two-week low before Yellen
    Dollar dips, shares touch two-week low before Yellen Reuters - 1 hour 6 minutes ago

    By Atul Prakash LONDON (Reuters) - The dollar edged down and global shares slipped to a two-week low on Friday as investors turned cautious before a keynote speech by Federal Reserve Chair Janet Yellen ... … More »

  • Hong Kong Tribunal Says Citron’s Left Culpable of Misconduct (1) Bloomberg - 1 hour 11 minutes ago

    The Market Misconduct Tribunal of Hong Kong said Friday that information in the Citron note was “false and/or misleading as to material facts or through omission of material facts,” and that as such Left was either “reckless” or “negligent” in … More »

  • Iran wants 'pre-sanctions oil market share'
    Iran wants 'pre-sanctions oil market share' AFP News - 1 hour 26 minutes ago

    Iran wants its pre-sanctions share of the crude market, Oil Minister Bijan Zanganeh said on Friday, dampening the prospects of agreement on an output freeze at an OPEC meeting next month. "Iran had no role in disrupting the stability of the oil … More »

  • Asia markets, dollar turn lower ahead of Yellen speech
    Asia markets, dollar turn lower ahead of Yellen speech AFP News - 1 hour 37 minutes ago

    Asian markets mostly drifted lower Friday while the dollar dipped, as investors waited on a speech later in the global day by Federal Reserve chief Janet Yellen. With few catalysts to drive business this week, Yellen's talk at the annual Jackson … More »

  • UBS trimming headcount in Paris by 15 jobs -source
    UBS trimming headcount in Paris by 15 jobs -source Reuters - 1 hour 40 minutes ago

    Swiss bank UBS (UBSG.S) is cutting about 15 investment banking jobs as it scales back its share trading business in Paris, a source familiar with the bank's plans said. The cuts, currently under negotiation, are on its share trading platform and at … More »

  • VTTI says suspends operations at Malaysia terminal after oil spill Reuters - 1 hour 58 minutes ago

    VTTI, the storage division of the world's largest oil trader Vitol, said on Friday it has suspended operations at its terminal in southern Malaysia after receiving a notice from the authorities following an oil spill. The spill occurred on … More »

  • Investor group rebukes Sports Direct, wants review of management Reuters - 2 hours 15 minutes ago

    An investor group whose members manage 850 billion pounds ($1.1 trillion) of UK equities has taken the unusual step of publicly rebuking the management of Sports Direct and calling for an independent review. The Investor Forum, which speaks for … More »

  • Tokyo stocks end lower, dealers await Yellen speech AFP - 2 hours 18 minutes ago

    Tokyo stocks ended the week in the red Friday as dealers awaited a speech by Federal Reserve chief Janet Yellen and after data showed Japan is still struggling in its battle to kickstart inflation. Many ... … More »

  • China Tightening Risk Seen Looming as Bonds, Property Surge (2) Bloomberg - 2 hours 20 minutes ago

    While economists aren’t predicting the central bank will raise benchmark lending rates anytime soon, there are signs that policy makers are looking to curb leverage in the debt and property markets. "The market’s liquidity right now is too big,” … More »

  • Bolivian deputy minister killed by miners
    Bolivian deputy minister killed by miners AFP News - 2 hours 33 minutes ago

    Bolivian miners kidnapped, tortured and beat to death a deputy minister who tried to negotiate with protesting workers on Thursday, in what the government condemned as a brutal murder. "All signs indicate that our deputy minister, Rodolfo Illanes, … More »

  • Singapore’s Air Quality Remains Unhealthy as Haze Worsens (1) Bloomberg - 2 hours 36 minutes ago

    Fire hotspots have appeared over Indonesia’s Sumatra island and West Kalimantan, where the Indonesian government said last week it deployed fire fighters. The number of hotspots is lower than 2015, when dry conditions from the El Nino weather … More »

  • World’s Biggest Pension Fund Loses $52 Billion in Stock Rout (1) Bloomberg - 2 hours 55 minutes ago

    (Bloomberg) -- The world’s biggest pension fund posted a $52 billion loss last quarter as stocks tumbled and the yen surged, wiping out all investment gains since it overhauled its strategy by boosting shares and cutting bonds. … More »

  • Restaurant Group to sell or shut 33 sites Reuters - 3 hours ago

    (Reuters) - Britain's Restaurant Group (RTN.L), the struggling owner of the Joe's Kitchen chain, said it identified 33 underperforming sites for sale or closure as a part of its ongoing strategy review ... … More »

  • Asia stocks wary, dollar slips before Fed Chair Yellen's speech
    Asia stocks wary, dollar slips before Fed Chair Yellen's speech Reuters - 3 hours ago

    SINGAPORE/TOKYO (Reuters) - Asian stocks were largely steady on Friday, with modest losses in some markets and gains in others reflecting nervousness before a keenly anticipated speech by U.S. Federal Reserve Chair Janet Yellen. European markets … More »

  • Oil prices dip, Saudis dampen hopes on output talks AFP - 3 hours ago

    Oil prices dipped in Asia on Friday after Saudi Arabia's oil minister cast doubt on the need to cut output, denting hopes for a deal at talks next month aimed at addressing a global supply glut. The commodity ... … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.129+0.001+0.78%
    N21.SI
    1.855-0.040-2.11%
    MC0.SI
    2.84+0.02+0.71%
    C52.SI
    4.22-0.05-1.17%
    Z74.SI
    0.58-0.01-1.69%
    5TP.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.29+0.08+38.10%
    5VI.SI
    0.36+0.07+22.03%
    BPF.SI
    0.192+0.030+18.52%
    AYD.SI
    0.27+0.04+17.39%
    BLU.SI
    0.40+0.05+14.29%
    BFK.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.205-0.055-21.15%
    BTJ.SI
    0.34-0.06-15.00%
    BCD.SI
    0.39-0.06-13.33%
    AYB.SI
    0.31-0.04-11.43%
    5VP.SI
    0.24-0.02-9.43%
    BAZ.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3521-0.0009-0.07%
    USDSGD=X
    1.5266-0.0001-0.01%
    EURSGD=X
    1.7846+0.0003+0.02%
    GBPSGD=X
    74.2580+0.013+0.02%
    SGDJPY=X
    5.7343+0.0061+0.11%
    SGDHKD=X
    2.9714+0.0074+0.25%
    SGDMYR=X
    9,767.2217-51.3633-0.52%
    SGDIDR=X
    4.9322+0.0119+0.24%
    SGDCNY=X
    1.0327+0.0021+0.20%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,329.10+4.50+0.34%
    GCZ16.CMX
    18.62+0.13+0.71%
    SIU16.CMX
    96.51+1.17+1.23%
    ^XAU
    2.09+0.01+0.55%
    HGU16.CMX
    47.18-0.15-0.32%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.16+0.01
    ^FVX
    1.58+0.02
    ^TNX
    2.26+0.02
    ^TYX