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Daily Brief 12/8 – Target Date Funds and Uber Self-Driving

Target Date Funds: A staple of a majority of millennial 401(k)’s – Target Date Funds, have many performance drawbacks and don’t perform as well as holding the same as directly holding the basket of ETFs that compose the target date funds according to a new research paper.

The paper comes to the conclusion primarily because of two factors: cash drag and additional hidden fees due to the fund of funds structure of Target Date Funds. Additional hidden fees is obvious and can hinder performance and the paper makes the distinction between fees when it says, “Typically, underlying holdings’ fees make up 60-80% of total fees, with the remainder attributable to fund-of-funds fees” The paper estimates this ‘fee gap’ to contribute from 0.56% to 0.82% in under-performance per year when compared to holding the same ETFs in the Target Date Fund and being invested 100% of the time.

Fidelity Freedom 2030 Replicating Fund Performance – Vanguard ETF Replication. The figure shows the performance of one dollar invested in one of two portfolios: the Fidelity Freedom 2030 TDF (Target Date Fund) or the Fidelity Freedom 2030 RF formed from Vanguard ETFs. The sample performance covers April 2006 through December 2017. The RF (replicating fund) outperforms the TDF by 13.9% over the sample period and the correlation between the two funds’ performances is 0.993

Cash drag refers to the effect holding cash has on performance. Target Date Funds are not always 100% invested and this affects performance, with the paper estimating that cash drag exhibits a 0.37% a year in under-performance. These fees and under-performance add up, especially in the early years and the gap in performance can be very large once we look at the end result.

Apple Chips: Apple is planning to release a new series of Mac processors as early as 2021 that are aimed at outperforming Intel’s fastest chips. Intel stock slid on the news because all Intel knows how to do is lose stock value and fall further behind its competitors.

Source: Koyfin

According to Bloomberg, “Chip engineers at the Cupertino, California-based technology giant are working on several successors to the M1 custom chip, Apple’s first Mac main processor that debuted in November. If they live up to expectations, they will significantly outpace the performance of the latest machines running Intel chips.”

The words “Long” and “Intel” should only be said together if you put an “out of” in between the two.

Uber Gives Up Self-Driving Alone: According to The Verge, “Uber is selling its autonomous vehicle business to Aurora Innovations, a San Francisco-based startup founded by the former head engineer of Google’s self-driving car project, the two companies announced Monday.”

The deal marks the end of Uber’s goal to create a fleet of robot taxis on its own strictly in-house as it now looks to partnerships to make the vision closer to a reality. As part of the deal, Aurora’s self-driving cars will eventually operate on Uber’s platform. Aurora is acquiring 100% of Advanced Technology Group (ATG) in an all-stock transaction and Uber will invest $400 million in Aurora. Uber CEO Dara Khosrowshahi will also join the company’s board of directors.

Uber self-driving car after a crash

Sequoia Black Swan: At the early stages of the coronavirus pandemic, Sequoia advised its companies to reign in spending and to prepare for a new economic reality.

Yet despite its accurate warning and defensive posturing, Sequoia has been one of the biggest beneficiaries of the pandemic. Investors in at least two mature yet active Sequoia funds will see 11-fold returns on paper, after fees, according to performance data reviewed by Bloomberg.

Bloomberg continues, “When Sequoia investors made their prediction in early March, they didn’t fully account for the ways a world of isolation would benefit technology companies or the impact of government stimulus programs, said Roelof Botha, a partner at the firm.”

Pays to be right and lucky sometimes.

Student Loan forgiveness analysis: Goldman Sachs did a macro level analysis on different student loan forgiveness proposals and the results are worth discussing as we millennials are well-versed in student loan debt.

There are a variety of proposals on the topic, but a divided government seems most likely with the Georgia Senate runoffs in January, meaning any forgiveness will be limited by Senate Republicans. In general, higher income and more highly educated individuals hold a larger percentage of large student loan sizes. For this reason, only a targeted approach would be a more “progressive” policy and vast student loan forgiveness is a “regressive” policy, strictly speaking.

The GS analysis is interesting for two reasons – personal tax implications and economic implications. GS says, “Debt forgiveness is usually treated as taxable income to the borrower .. For example, forgiving $50k in student debt for a borrower with $100k in income (and a marginal tax rate of around 25%) would leave them with a tax bill of around $12.5k in a single year.” These are are the types of details aren’t discussed in the student loan debate. Although we would say it would be taken into account by the technocrats crafting policy.

Also, they indicate that the effects of student loan policy on real GDP is negligible. “Forgiving student loans up to $10k would boost the level of GDP by less than 0.1% starting in 2021, with the effect declining over our forecast horizon. Over 10 years, this policy would cumulatively add $0.43 in real GDP for each $1 of forgiven debt … Forgiving student loans up to $50k would generate a large tax bill in the year of loan cancellation that more than offsets the gain from payment reduction, resulting in a slight drag on real GDP in 2021. In the following years, real GDP levels would be raised by slightly less than 0.2%.

Charts and Tweets we like:

US-China trade imbalance

Top performing IPOs

Restaurant pain

Tesla not competitive in Europe?

That’s your millennialmkts update! Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

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