Are Target-Date Funds … Un-American?

I recently wrote about how fund investors’ stake in US equity has drifted higher over the past decade. That increase owes mostly to US stocks’ standout returns over that period, rather than investors’ frenzied buying of US stock funds and exchange-traded funds. In fact, net flows to US equity funds were a rather tepid $91 billion over the 10 years ended Aug. 31, 2025.

One question I got from readers was whether target-date funds could have something to do with the anemic demand for US stock funds. Specifically, they asked whether target-date funds could have kept a lid on flows to US stock funds by capping those funds’ weights in their allocations (most target-dates allocate to other funds) and by shifting away from US stock funds toward lagging foreign-stock and bond funds as part of the rebalancing they do.

It’s an interesting question. Target-date funds have become a large part of the fund market, with $2.2 trillion in aggregate assets as of Sept. 30, 2025. While that represents only 6.3% of overall US fund assets, target-dates have been a key swing factor for demand given investors routinely contribute to retirement plans that have set target dates as the default investment option. Thus, target-date funds gathered a cumulative $251.5 billion over the decade ended Sept. 30, 2025.

What further piqued my interest was how target-date funds’ aggregate asset mix had shifted over the decade ended Sept. 30, 2025: Target-date funds’ aggregate percentage stake in US equities fell slightly over the period, from 46% of assets to around 44%. On its face, that dip would seem to suggest target-dates did curb flows to US stock funds, for otherwise the US equity weight wouldn’t have slid that way.

Given that, I decided to take a deeper look at the extent to which target-date funds’ asset-class weights and rebalancing routine could have affected flows into the major types of funds they allocate to: US equity, international equity, bonds, and cash. (Hint: They appear to have had a sizable effect, as explained further below.)

Examining the Effect of Target Weights

For starters, I compiled the net flows of the 252 target-date funds offered by the nine largest target-date fund families (by assets) over the decade ended Sept. 30, 2025. I pulled together data on each target-date fund’s monthly percentage weighting in US stocks, foreign stocks, taxable bonds, and cash. Then I multiplied each target-date fund’s net flows in a month by its average asset-class weights in that month, thereby approximating how much of that flow went to each asset class.

For example, suppose a target-date fund got a $100 million net inflow in a month where its assets were split 40%, 10%, 40%, and 10% between US stocks, foreign stocks, taxable bonds, and cash, respectively. In that month, I’d assume the target-date fund plowed $40 million of that inflow into US stocks, $10 million into foreign stocks, $40 million into taxable bonds, and $10 million into cash, and so forth for all other target-date funds and months. Then I summed those estimated asset flows across all 120 months.

The 252 target-date funds received $164.1 billion in aggregate net inflows over this 10-year period. When I estimated how that sum had been allocated across the asset classes (using the approach described above), it came out as follows:

Source: Morningstar Direct, author’s calculations. Data as of Sept. 30, 2025. Figures may not sum to total due to rounding.

At first blush, it makes sense that these target-date funds parceled out more of their flows to stocks than bonds. After all, around 68% of these target-date funds’ aggregate net assets were held in equities over the decade, on average. And so as each incremental dollar rolled in, more of it would have flowed into stocks than bonds.

The reason the distribution is lopsided—with US and foreign stocks getting all the flows and then some—is that nearer-dated target-date funds (2025 and before), which hold more in bonds, were in net outflow over this period and thus selling bonds to meet redemptions. Whereas longer-dated target-date funds, which allocate more to stocks, saw net inflows.

Source: Morningstar Direct, author’s calculations. Data as of Sept. 30, 2025. Figures may not sum to total due to rounding.

All told, it doesn’t look like target-date funds asset-class weights would explain the soft demand US stock funds saw over this decade. If anything it’s the opposite—flows to target-date funds and their sizable weightings in US stocks buoyed demand: The $159.3 billion in estimated net flows to US stocks from target-date funds would have exceeded the $91 billion of net inflows US stock funds received overall.

Rebalancing as a Factor

That’s only part of the picture, though. A target-date fund can still affect flows to its underlying fund holdings even if the target-date fund itself hasn’t seen an inflow or outflow. That’s because when target-date funds rebalance, they shift assets between holdings, creating inflows and outflows for the funds concerned. (Often, target-date fund managers will use fresh inflows and outflows as a means of topping up or trimming positions, so as to leave the rest of the capital undisturbed.)

My previous estimates of flows to underlying target-date fund holdings would have reflected any changes made to those weights as part of rebalancing activity, as I was simply multiplying the target-date funds’ monthly net flows by the funds’ average asset class weightings each month. But that would only pertain to those target-date fund flows, not the vastly larger pool of assets already sitting in the target-date funds.

Given that, we also need to account for the rebalancing-related effects. Doing so is more art than science but I’ve laid out how I approached the calculation in the Appendix to this article. Here’s how the figures came out:

Source: Morningstar Direct, author’s calculations. Data as of Sept. 30, 2025.

In summary, these target-date funds shifted $340 billion or so from stocks to bonds and cash, nearly all of that coming from US equity funds. In the table below, I’ve combined these rebalancing-related flows with the flows I previously estimated to form a more complete picture of the approximate effect target-date funds had on flows to other funds:

Source: Morningstar Direct, author’s calculations. Data as of Sept. 30, 2025. The $171.6 billion total flow shown above doesn’t match the $164.2 billion in net flows that target-date funds received over the decade ended Sept. 30, 2025, because the estimated rebalancing-related flows weren’t zero. Those rebalancing-related flows didn’t balance to zero because of differences between the actual returns of target-dates underlying fund holdings and the asset-class returns I used as a proxy for those funds’ returns.

While these rebalancing effects might seem large at first glance, it’s worth keeping in mind that target-date allocation weights aren’t static. They’ll shift per the fund’s glide path, which generally dictates a smaller stake in equities and correspondingly larger allocation to bonds and cash as it marches toward its target year. That’s evident when you examine these funds’ aggregate average weight in US stocks over the decade, which I’ve shown for three of the largest target-date fund categories in this chart.

As these funds gradually adjust their allocation in this fashion, they reallocate assets from US stocks to other asset classes, which the rebalancing-related flow estimates pick up. (My colleague Jason Kephart, also pointed out that earlier in the decade several of the largest target-date fund managers, including Fidelity, modified the strategic mix of the portfolios’ equity sleeve to put more weight on foreign stocks. That likely also explains the trend.)

With respect to international equity and why those funds appear to have largely treaded water over this period from a rebalancing standpoint: This likely reflects a push-pull, in which these funds received assets from outperforming US stock funds as part of routine rebalancing, but also lost assets that were rebalanced away from foreign stocks in favor of lagging bonds and cash.

Conclusion

Based on this analysis, it appears target-date funds tamped down demand for US stock funds. While the flows to target-date funds ensured they funneled new money to US equity funds, the target-date funds’ rebalancing activities swamped that. That could explain why demand for US stock funds was relatively weak over the decade ended Sept. 30, 2025, and, conversely, why bond funds enjoyed strong flows despite pedestrian returns.

Overall, this is a welcome trend. Left untouched, these assets could have gone badly askew, with US stocks soaking up a disproportionate share given their strong performance compared with other asset classes. Instead, target-date funds did their job, parceling out assets to all asset classes in line with their target weights and shifting the mix toward bonds and cash as time went on.

While this arguably came at US stock funds’ expense—as they were denied billions in additional compounding in dollar terms—it should benefit target-date fund investors, whose allocations are more balanced as a result.

Caveats

One missing piece of the puzzle here is collective investment trusts. Surely, the target-date flow figures reflect some outflow activity related to CIT conversions, whereby a retirement plan sponsor replaces a target-date fund series with a lower-cost CIT version of the same. In that scenario, the flow figures impound the “sell”—that is, the outflow from target-date funds, but not the corresponding “buy” of the CIT versions.

Nevertheless, I’ve excluded CITs from this analysis for a simple reason: They typically don’t invest their assets in other mutual funds but rather other trusts. Given this, even if I’d included target-date CITs in the study, it wouldn’t have changed the fund flows picture much. (A notable exception is Vanguard, whose CITs invest a portion of their assets in lower-cost fund share classes.)

That said, if one’s goal was to try to estimate how much money had reached the underlying stocks and bonds via target-date strategies more broadly, then the analysis would need to include CITs as well. But my purpose here was narrower given the question at hand—why haven’t US stock funds received more flows and do target-date funds have something to do with it?—explains their absence.

Switched On

Here are other things I’m saying, reading, listening to, or watching:

• Barry Ritholtz and I discussed how fund investors can avoid underperforming their investments on his excellent “At the Money” podcast
• Owen Lamont rises to quarterly reporting’s defense and weighs in on the spate of daisy-chain AI/supplier deals
• The FT gets "mathy" on leveraged single-stock ETFs
• Rarity: A fund board told a manager to buzz off; drama ensued
• To the question, “What’s an even more preposterous thing we could do?” Volatility Shares apparently has an answer: 5x ETFs
• Behold the mighty edifice! Or, what a yield mirage looks like
• No earthly idea: One ETF gained triple digits, another lost nearly all its value. Guess which one investors made money in?
• “What could go wrong?”

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.

Appendix

I compared a target-date fund’s starting dollar allocation to an asset class (that is, its percentage weight on Oct. 1, 2015, multiplied by the target-date fund’s net assets on that date) to its ending dollar allocation (the percentage stake on Sept. 30, 2025 times the target-date fund’s net assets that day).

A few items reconcile the difference between the two.

• First, there are assets that the target-date fund funneled into, or withdrew from, that asset class as it received net inflows or outflows. I’ve already estimated those amounts (see the “Examining the Effect of Target Weights” section), which can be thought of as “flow through.”
• Second, there’s “performance drift,” which is the target-date fund’s starting dollar allocation in that asset class multiplied by the difference between the cumulative return of that asset class and the target-date fund itself over the period.
• Third, there’s the target-date fund’s return, which for each asset class is equivalent to that asset class’s dollar weight in a month multiplied by the target-date fund’s return that month, summed across all months.

The formula resolves to the following:

Estimated rebalancing-related flows = (Ending asset-class dollar allocation – beginning asset-class dollar allocation) – (Beginning asset-class dollar allocation x (Asset-class return – target-date fund return)) – (Beginning asset-class dollar allocation x target-date fund return) – Flow through

Note that I used index returns as a proxy for each asset class’s return (Russell 3000 for US stocks; MSCI ACWI ex USA for foreign stocks; Bloomberg Aggregate Bond for bonds; and the Bloomberg US Treasury Bill 1-3 Month plus 75 basis points for cash). I added a spread to the cash index return to acknowledge that that bucket could include not just cash and cash equivalents, but also other instruments like convertible bonds and certain derivatives.