Let's look at the Target Fund individual components:Equity Index Fund E
is an S&P 500 Index Fund.Extended Equity Market Fund E
tracks the remaining U.S. stock market (Md and Sm caps).BlackRock MSCI ACWI ex-U.S. IMI Index Fund E
is a "Total" International Index Fund w/Developed and Emerging Markets; perhaps no Int'l Sm Caps.U.S. Debt Index Fund E
is a Barclay's U.S. Aggregate Bond Index fund like Vanguard's "total" bond fund.
It may sound weird, but those particular 4 funds are
a 3-fund portfolio. (See here
concerning the 3-fund portfolio.)
I don't drink, but I'd be willing to bet you a virtual beer that if you look at the other 401k Target Funds, you'll see the introduction and gradual increase of TIPS through the inclusion of the following component:US Treasury Inflation Protected Securities (TIPS) Fund E —
By retirement, one probably wants to hold some Treasury Inflation Protected Securities (TIPS), which are inflation adjusted bonds that add a level of diversification for bond heavy retirement portfolios. TIPS count toward one's total bond allocation, regardless. Some people wait until later to add TIPS. Some never use them. Others slowly introduce them into a portfolio as time progresses, which is what your Target Funds do. I'm surprised you don't already see a >1% allocation to TIPs in the 2040 Target Fund, but your particular documentation may be lagging. Vanguard's Target Retirement Funds eventually build a cache of TIPS, too. If you're building a simple portfolio during the accumulation phase, TIPS aren't essential. If you invest in a Target Fund that holds some TIPS, there is no added complexity for you and there's nothing wrong with having them.
What about the other to components to your 401k Target Funds?Developed Real Estate Index Fund E —
Invests in Real Estate Investment Trusts (REITs). The equities in a 3-fund portfolio already include a small, neutral/marketweighted amount of REITs. If you're just starting out and building a portfolio from scratch, you can do without REITs, although this forum shows a few Lazy Portolios (here
) that include them. REITs are stocks and they are volatile, but they don't necessarily go up and down at the same time as the broader market, so some people (or target funds) add more REITs in hopes that periods of lower correlation with the broader market will reduce risk, increase portfolio stability, and even increase returns through a "rebalancing bonus". The inclusion of REITs in your Target Funds should not deter you from using a Target Fund even if you would otherwise ignore them.BlackRock Dow Jones-UBS Commodity Index Daily Fund E —
In other words, commodities. This is a super volatile asset class that does not add or subtract any expected return to the portfolio (if I understand correctly), so it is otherwise non-essential. Some use commodities because they expect commodities to keep up with inflation (even if there is no additional "real" return) and because they don't necessarily move up and down at the same time as stocks. That means that despite their extreme volatility, they can lend stability to the portfolio as a whole. I'd never include them in a DIY portfolio, but the tiny amount used by your 401k Target Funds is fine. If your IRA(s) also hold Vanguard Target Retirement Funds, which do not include commodities, your total exposure to them would be reduced/diluted anyway. Again, I don't think they should deter you from using your employer's Target Funds, even if you would otherwise ignore them.