IIP-###: Launch the Target Retirement Indices (TRI10, TRI20, ..., TRI80)

IIP: ##
Title: Launch Target Retirement Indices (TRI10, TRI20, . . . , TRI80)
Status: Proposed
Authors: @JosephKnecht (Article21), @mringz (Index Coop)
Requires: IIP-58: Launching Pulse Aggregate Yield (PAY), IIP-89: Launch Polygon Diversified Index (PDI)
Created: 06 Oct 2021

Simple Summary

The Target Retirement Indices (TRI) are portfolios of crypto indices which risk-adjust as the investor approaches retirement age. The TRI series is based on Target Retirement ETFs and mutual funds which are among the largest and most popular passive investment vehicles by AUM.

Abstract

Target retirement funds are the cornerstone of investment planning. The basic principle is to begin with a growth-oriented portfolio early in an investor’s life and then follow a ‘glide path’ to a more conservative, income-generating portfolio as the investor approaches retirement.

Target retirement funds currently have $2.8T AUM and are growing rapidly. However, in spite of their enormous size and popularity in TradFi, there are no target retirement indices for cryptocurrency. Index Coop has an opportunity to reinvent one of the largest investment product categories for crypto, as well as to position its indices as the cornerstones of retirement planning.

These would all be Set Protocol “simple” indices and so require the least amount of engineering effort.

Motivation

Rationale

Broadly diversified, passive portfolios have been shown to optimize risk-adjusted returns. However, investors’ risk-reward preferences and requirements change throughout their life as their personal liabilities change and retirement approaches. For example, a younger investor may be better-served with a higher-risk, growth-oriented portfolio whereas an investor in retirement needs a more stable, income-bearing portfolio.

Target retirement indices are designed to optimize risk-adjusted returns based on the investors’ risk-reward preferences and needs at the current point in their investment cycle. Given their simplicity and high risk-adjusted performance, target date indices have proven enormously popular.

The largest examples include:

Specification

Overview

The TRI indices would contain a broad representation of the crypto market including Index Coop’s major thematic indices, mirrored equity indices, and yield-bearing stablecoins. The allocations would follow a glide path from growth- to income-oriented assets as the investor approached retirement age. Additionally, the investor could opt for a more aggressive or more conservative strategy by choosing, respectively, a later or earlier effective retirement age.

Differentiation

Index Coop currently has no retirement-focused indices in its current product line. Based on our research there is no retirement-focused, target retirement, or time-adjusted crypto products on the market.

Example composition

The Target Retirement Index series will consist of the following 8 index tokens:

  • TRI20 (Target Retirement Index 2010) - 10 years post-retirement as of today
  • TRI20 (Target Retirement Index 2020) - At retirement
  • TRI30 (Target Retirement Index 2030) - 10 years away from retirement
  • TRI40 (Target Retirement Index 2040) - 20 years away from retirement
  • TRI50 (Target Retirement Index 2050) - 30 years away from retirement
  • TRI60 (Target Retirement Index 2060) - 40 years away from retirement
  • TRI70 (Target Retirement Index 2070) - 50 years away from retirement
  • TRI80 (Target Retirement Index 2080) - 60 years away from retirement

Each product reflects different allocations for the respective target retirement date. Draft allocations are shown above. These particular index components were chosen purely for illustration and may change depending on their approval status and community input. mSPY is mirrored SPDR S&P 500 ETF Trust (SPY). Note that ideally there would be a total crypto market cap index like VTI to serve as the core growth component. In its absence, we use BED which is the closest we have to a total crypto market cap index. We strongly recommend that IC create a total crypto market cap index as these are by far the largest index in traditional equity markets. The investment literature is highly contradictory on what the optimal balanced crypto-equity portfolio should look like and focuses primarily on Bitcoin as the only crypto asset.

Performance

TBD after DG1 once the composition is finalized barring consultation with the PWG & EWG,

Size of Opportunity

Across all of the retirement indices, we predict the total AUM of the whole series to be the following:

Across all of the retirement indices, we predict the total AUM of the whole series to be the following:

Year AUM
1 $500 000 000
2 $1 000 000 000
3 $2 000 000 000

Most importantly the retirement funds would create another marketing and growth opportunity for the IC products.

Market & Customer Research

Target Customers

  1. Retail investors - From TradFi looking for a similar product to a Vanguard or Fidelity target retirement ETF.

  2. Passive investors - Looking for a broadly diversified crypto index fund, but not necessarily interested in retirement planning per se.

  3. Registered investment advisors - Looking to offer a comprehensive investment solution for their clients that encompasses both crypto and synthetic equity.

User stories

Jane is an experienced passive equity investor. She knows that a target retirement ETF will maximize her risk-adjusted returns over the course of her total investment horizon. She does not have the time, knowledge, or risk-appetite to purchase individual cryptos or even multiple crypto indices. She wants to hold a single token that will accommodate her long-term “set it and forget it” approach. She’s 45 years old and plans to retire in 2040 but has a slightly higher risk tolerance so she buys TRI50 (Target Retirement Index 2050).

John is 18 years old and does not plan to retire until 2070. After suffering multiple rugs, exploits, MetaMask spoofs, and dust attacks, he has become very risk-averse. Consequently, he prefers to invest in stable yield coins but still wants some upside to remind him of his more carefree degen days. He chooses TRI20 (Target Retirement Index 2020) to match his conservative investment style.

Methodology

Initial Composition & Token Inclusion Criteria

Selection criteria for tokens

  • ERC-20 index tokens representing large-cap thematic sectors i.e DPI, MVI, BED, DATA, PAY, JPG, PDI
  • Mirrored equity indices i.e mSPY

Weightings

Weightings would be done according to a glide path that begins with risk-on crypto indices furthest from retirement and then progresses to primarily yield-bearing stablecoin indices and mirrored equity at retirement.

On-Chain liquidity analysis of underlying tokens

To be determined after DG1.

Maintenance

The index will be rebalanced monthly to rebalance as well as to update the allocations according to the glide-path formula.

Costs

Cost to customer

To be determined after DG1.

We anticipate the TRI indices to have a 2-3% management fee given the uniqueness and innovation of the project.

Rebalance frequency

Monthly

Manual Rebalance magnitude

We anticipate trading all of the positions each month due to the glide path.

Fee split

To be determined after DG1.

Meta / intrinsic productivity

Not applicable

Liquidity

To be determined.

Author Background and Commitment

@JosephKnecht is a methodologist at Index Coop and Founder of Article21

Michael Mtenga (@mringz) is co-lead BDWG and has been consistently contributing to the Index Coop since February 2021, contributions that have led to him being awarded Gold Owl within the DAO. His contributions include initiatives with PoolTogether, Perpetual Protocol & Rabbithole. Furthermore, he has been a key member within the business development working group (BDWG) creating and leading the DeFi Partnerships vertical. He also serves as the protocol ambassador for Maker DAO.

Article21 is committed to developing the next generation of crypto index strategies.

Marketing support / distribution / partnerships

The methodologist will promote the token/s. The methodologist will also be available for AMAs and interviews.

Revision history

Copyright

Copyright and related rights waived via CC0.

10 Likes

The DAO does not absolve us of duty of care. Because of our stated and percieved expertise any kind of guiding questionnaire crosses the line into (negligent) financial advisory. Ditch the guide in favour of a DYOR statement.

Def an opportunity worth exploring! be great to see some quantitative or even qualitative data to show in market demand.

3 Likes

That makes a lot of sense. I’ll remove the questionnaire from the proposal tout suite.

I agree some market research would be very useful. I’ll discuss with GMWG.

2 Likes

Love this, cool ideas. Thanks you two!

4 Likes