While both aim to grow your nest egg over the long term, they go about it quite differently.
What is a target-date fund?
The fund starts out aggressively invested in stocks when you are younger.
As you approach the target retirement year (i.e.
The funds remove the need for manual portfolio rebalancing and asset allocation shifts over time.
You simply choose a fund with the target year closest to when you expect to retire.
What is an index fund?
The holdings simply mirror the performance of all the stocks within that index.
For example, an S&P 500 index fund owns all 500 stocks comprising that benchmark index.
Low costs mean the fund can better track its index over time.
Index funds provide broad, diversified exposure to a specific segment of the market.
Most consist of a basket of other underlying mutual funds within an overarching fund structure.
This means you’re essentially outsourcing investment decisions to the fund manager.
There may also be limited transparency into what specifically you own within the overall fund structure.
Instead of layered fund costs, index funds only have one inexpensive fee to track their specific benchmark index.
Target-date funds offer convenience throughautomatic rebalancingand de-risking over time.
This simple, hands-off approach appeals to many investors.
However,you typically pay higher feesfor that “set it and forget it” structure.
As with mostinvesting decisions, there’s no objectively “better” option between the two.
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