The TSP I Fund (“the Fund”) which is one of five individual funds open to investors in the Thrift Savings Plan.
In this article, we will be looking at the following topics:
- What are the eligibility requirements to participate?
- What is the investment strategy of the Fund?
- What are my expected returns if I invest in the Fund?
- What is the risk profile of someone who would invest in the Fund?
- Can you list some primary reasons for investing in the Fund?
- What do I need to know before investing in the Fund?
What are the eligibility requirements to participate?
The Federal Employees Retirement System is the umbrella program under which the TSP falls. Hence, most people employed by the United States government are allowed to invest in the Fund. The official TSP site provides the complete list of participation requirements here.
What is the investment strategy of the Fund?
The Fund is classified as a passively-managed fund and its investment strategy is to replicate the performance of the MSCI EAFE (Europe, Australasia, Far East) Index. The MSCI EAFE Index is a stock market index that measures the equity market performance of developed countries outside of North America. The index currently comprises 930 different stocks from 21 different countries; the countries are, in alphabetical order:
|7||Germany||14||New Zealand||21||United Kingdom|
The charts below show some of the key characteristics of the index; you can download the full fact sheet here.
What are my expected returns if I invest in the Fund?
In the below table, you will be able to view the Fund’s historical performance. Please note that although past performance does not necessarily translate to future performance, it is still useful as a general guide for you to see an expected range of returns. Also do note that the numbers below assume dividend reinvestment.
What is the risk profile of someone who would invest in the Fund?
As you can see from the above returns table, the performance of the Fund has been historically quite volatile. Hence, it is probable that an investor who would allocate a significant portfolio amount to the Fund would be one who is pursuing higher growth and in turn is willing to take on higher risk. As an aside, it should be noted that as at end-2015, the Fund only made up about 7.5% of the total TSP Funds, indicating that only a small percentage of TSP participants are willing to take on that risk.
Can you list some primary reasons for investing in the Fund?
1. Geographical Portfolio Diversification
The Fund is the only non-US centric TSP fund. Hence, should you feel bearish about US market conditions or bullish about the rest of the developed world, the Fund is a good way to obtain said diversification. Some investors may also wish to have a global portfolio, and that is also a good reason to invest in the Fund.
2. You Are More Knowledgeable About Global Macroeconomics
If you are an investor who is more knowledgeable about the global economy and global macroeconomic trends, this Fund is the only way to take advantage of that knowledge while remaining under the TSP program. You understand and accept the increased risk and volatility associated with the Fund and are willing to take that risk to try to identify mispriced investment opportunities abroad for the potential of higher returns.
3. Lowest Expense Ratios When Compared to Other Index Funds
The average expense ratio for TSP Funds was 0.029%, or $0.29 per every $1000 invested in 2015. This is much lower compared to other index funds; in the table below you will see the expense ratios of 6 other index funds that track the MSCI EAFE, which are the iShares MSCI EAFE.
|Index Fund||Expense Ratio|
|Vanguard Developed Markets Index*||0.20%|
|Vanguard FTSE Developed Markets ETF*||0.09%|
|iShares MSCI EAFE||0.33%|
|Schwab International Index Fund||0.19%|
|Pax MSCI International ESG Index Fund||0.80%|
|Fidelity Spartan International Index Fund||0.19%|
Source: Respective company websites, http://www.investopedia.com/articles/investing/011916/4-best-international-equity-index-mutual-funds.asp
* Tracks the FTSE Developed ex North America Index instead, which is quite similar but also includes South Korea.
What do I need to know before investing in the Fund?
1. There is Currency Risk
In addition to the usual market and default risk, investing in the Fund also carries along additional currency risk. As such, should the US dollar depreciate against the international currencies of the countries in the index, the degree of your returns or losses will be amplified and vice versa. The chart below shows the historical 5 year performance of the US Dollar Index, which tracks the performance of the US dollar against a basket of foreign currencies.
As you can see, over the past 5 years, the US dollar has been on a generally strengthening trend, meaning that returns and losses from investing in the Fund will be lowered.
2. Lack of Flexibility
As TSP funds are not the most flexible of funds, while a savvy investor might be able to assess global market conditions, he or she might not be able to take advantage of that as only 2 interfund transfers are allowed on a monthly basis (unless transferring into the TSP G fund). Additional restrictions include:
- Payable income taxes upon withdrawal.
- A 10% early penalty tax when using the hardship withdrawal option, followed by a 6-month restriction on making contributions to your account after.
- One partial withdrawal allowed only after leaving government employment after which only full withdrawal is available.
The full list of withdrawal conditions can be found at: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals
We hope you found this article to be of use to you in helping you choose the right plan for your investing and retirement needs. We have written articles on the other TSP Funds as well; please have a read if you are interested.