How Active Is Your Target-Date Fund’s Stock Portfolio?
A fresh look at target-date funds that prefer actively managed funds as new competition from series with private markets are on the way.
This article mentions funds that have an issuer-initiated rating and/or track a Morningstar Index. For full disclosure information, please refer to the specific funds, which are demarcated with a * symbol, listed below.
Target-date funds that invest primarily in actively managed stock and bond funds have been ceding market share to lower-cost passive peers for years, and a new wave of competition from target-date funds that include private markets exposure is on the way. Yet, active target-dates remain a significant part of the almost $5 trillion target-date market, and understanding what drives their performance requires looking past the underlying fund managers.
Looking Under Target Dates’ Hood
Morningstar calls all target-date funds actively managed for Morningstar Medalist Rating purposes. The asset allocation, how risk evolves over time, and underlying fund selection are all active decisions, regardless of whether the underlying funds themselves are active or passive. But looking at what kinds of underlying funds a target date uses adds another dimension to the analysis. Morningstar breaks the target-date universe into three subpeer groups: active, blend, and passive.
Grouping Target-Dates by the Underlying Investment Strategy
Decisions like how much to invest in the US versus internationally, and how much risk to carry at different life stages before and through retirement, often matter more to investor outcomes than the stock- or bond-picking skill of the underlying fund managers. That’s even true for active-based target-dates, where the underlying funds’ active management is a key selling point and the reason they are more expensive.
How Active Target Dates Stack Up
Active target dates get a bad rap because of fees. Fiduciaries of defined contribution plans are wary of higher-fee investments because the threat of excessive fee lawsuits has hung over plan sponsors like the Sword of Damocles for a decade. As we’ve covered before, plan sponsors’ priorities are to keep the company out of legal trouble first and give participants a good experience second.
The average expense ratio for active target-date mutual funds and collective investment trusts is 0.52% in the Morningstar Target Date 2065 Category and 0.50% in the Morningstar Target Date 2030 Category, using all share classes. Those fees are a good deal for fully diversified portfolios of actively managed stocks and bonds, particularly compared with what an individual investor could assemble outside a 401(k). The trade-off is that active target-date funds still cost 3 times as much as the average passive target-date fund in the same categories.
Average Target-Date Expense Ratios by Underlying Fund Type
Morningstar’s US Active/Passive Barometer Report has found that lower-fee funds tend to outperform higher-fee funds across most asset classes, and that’s been true in target dates as well. Over the trailing five-year period ended June 30, 2026, the average passive 2065 target-date fund had a 9.94% annualized return, topping both the average active and blend peer. Trends were similar in the 2030 target-date category.
Lower-Cost Target Dates Have a Performance Edge on Average
Averages obscure a much wider range of outcomes among active target dates. Some, like the Gold-rated Fidelity Freedom and American Funds Target Retirement series, have delivered meaningful outperformance, while others have lagged significantly. That dispersion reflects not only differences in stock and bond selection but also active target-date managers’ greater willingness to make tactical asset allocation decisions, which can have a significant impact on returns. Passive and blend target-date funds, by comparison, have exhibited a much narrower range of returns. That wider dispersion makes outcomes less predictable and raises the stakes of manager selection, helping explain why many plan sponsors have favored lower-cost passive strategies.
Target Dates With Mostly Active Funds Have a Wider Range of Outcomes
Even so, “active” doesn’t always mean differentiated. Many active target-date equity portfolios don’t stray far from their benchmarks’ allocations and have active shares, a measure of how different a portfolio is from its index, of less than 50%.
When More Is Less
The higher the active share, the bigger the difference or activeness of the portfolio. A higher active share doesn’t mean better. Morningstar research has found active share has generally been a weak tool for selecting superior funds. Still, knowing how differentiated an active equity portfolio is can help determine if it’s worth paying more for it than for a passive index fund.
Measuring active target-dates’ active share can be tricky since they often own 10 to 20 underlying equity funds whose holdings overlap or offset each other. One manager’s overweight can be another’s underweight, and a portfolio of a lot of funds can look more indexlike than any of its individual building blocks. That’s what we found when we looked at the five most popular active target dates: American Funds Target Date Retirement, Fidelity Freedom, T. Rowe Price Retirement, Nuveen Lifecycle, and JPMorgan SmartRetirement.
To calculate the active share, we aggregated the individual stock holdings of each series’ 2065 fund using their March 31, 2026, portfolios and compared those composites to passive alternatives. We broke the composites into US and non-US stocks and pitted them, respectively, against the Vanguard Total Stock Market ETF VTI and Vanguard Total International Stock ETF VXUS to remove the effect of home country bias or tactical tilts.
The exhibit below shows each equity portfolio’s overall active share, the underlying funds’ average active share relative to their Morningstar Category index, and the asset-weighted active share. The table also shows how much each series has in index funds.
How Portfolio Construction Impacts Active Share
All five portfolios’ total active share is lower than either the simple or asset-weighted average of their underlying funds. The combined stock portfolio looks more like the market than any single fund in the target date.
A second, smaller pattern shows up in the underlying-fund averages themselves: the simple average is higher than the asset-weighted average in all five cases. That’s because small-cap funds tend to have the highest active share but the smallest portfolio weights, so an equal-weighted average overstates their active share contribution.
Low active share isn’t a guarantee of poor performance anymore than high active share is a guarantee of good performance. But if the main appeal of an active target-date series is its underlying stock managers, investors should realize combining many of them could neutralize their views.
Where the Active Bets Are
The US stock market’s growing concentration makes it harder for managers to differentiate themselves from their indexes without taking more risk than investors signed up for. The Vanguard Total Stock Market ETF’s
VTI
Though not nearly as concentrated, the Vanguard Total International Stock ETF VXUS also is more focused; assets in its top 10 also have roughly doubled to 13.4% at the end of May.
That helps explain why each target-date series’ non-US sleeves’ active share was much higher, as the exhibit below shows.
Active Share Was Higher in Target Dates’ Non-US Portfolios
Most individual positions in the portfolios were within a percentage point of their benchmark weights, but even small over- or underweights in a volatile stock like Nvidia NVDA can have a big effect on relative performance.
The size of an over- or underweight in these aggregated portfolios is itself informative: Larger deviations mark stocks where underlying managers happen to agree, while weights closer to the benchmark often just reflect managers canceling each other out.
Taiwan Semiconductor TSM was the most consistent overweight as of March 31, 2026, a sign that stock managers across the firms remain bullish on the stock.
Notable Active Weights for the Largest 2065 Active Target Dates
Private markets are also starting to make their way into these series. Fidelity Freedom, for example, held an aggregated 0.84% position in SpaceX SPCX before its IPO, and American Funds’ and T. Rowe Price’s active equity funds have begun adding private names like Anthropic to their portfolios. Still, these allocations are small. Future target dates coming to market will invest 10% to 20% directly in private markets.
Active Target Dates Are in the Crosshairs of Private Markets Target Dates
American Funds, T. Rowe Price TROW, BlackRock BLK, and State Street STT have already signaled plans to build private markets into their target-date lineups; others will follow. When these new funds compete for 401(k) space, their real rival will be active target-date series, not low-cost index target dates, which hold more than 50% of target-date assets as of the end of June. The fees will be more comparable, and the sales pitch is the same: differentiation from the cheap, index target dates.
It’s still early days, and it’s far from clear who ultimately wins. But one thing is clear: Active target dates already had plenty of competition, and more is coming. Private markets entrants may find it easier to sell themselves as different not only because there are no private asset index funds today but also because active target dates often end up looking more indexlike anyway.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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