State managers of 529 plans are increasingly including ETFs in their portfolios. SmartMoney reports that Nebraska added four new ETFs to three of its 529 plans, New York added six new ETFs to one of its plans, and Nevada's Upromise 529 dropped mutual funds in favor of ETFs. These moves buck the historical trend for the college-savings industry, in which mutual funds have long been dominant.

The move away from mutual funds to ETFs has been facilitated by disappointing and unpredictable returns, market swings, a desire for diversification, and lower fees for plans with ETFs compared to the industry average. Plan managers adding ETFs argue that doing so provides portfolio flexibility and protects against losses.

This new trend has its critics and skeptics. College-savings programs have been seen as long-term investments for decades, and the addition of ETFs to this model may encourage short-sightedness and more risk-taking with active trading.

ETF proponents point to the positive results so far: the Arkansas iShares 529 plan has outperformed its peers, returning an average of 3.3 percent last year, while 529 plans lost an average of almost 1 percent. Investors are opening new accounts with this Arkansas plan more quickly than they have with any other 529 in the past three years. 

Edited by: DW


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