Exchange-traded funds (ETFs) were originally invented to make it simple for investors to form a diversified portfolio of stocks and/or bonds. Now, major ETF providers such as BlackRock and Global X offer a new type of ETF that makes it easier to invest in a whole portfolio of underlying ETFs by making just a single investment. There are about 100 of these so-called “fund of funds” ETFs. Most are passively managed, allocating a specific percentage of the portfolio to each of several ETFs and automatically rebalancing on a regular basis. Fund-of-funds ETFs typically come in two flavors.
Some hold ETFs in a variety of traditional categories—such as stocks and bonds or domestic and foreign investments—that will appeal to long-term, hands-off investors. Attractive example: iShares Core Moderate Allocation ETF (AOM) is composed of seven different ETFs with about 60% of its assets in two underlying bond ETFs and 40% in five underlying stock ETFs.
Others are quirkier and better for aggressive investors because their ETF holdings are linked thematically. Example: Global X Thematic Growth ETF (GXTG) taps into disruptive trends in the global economy. It draws from Global X’s roster of seven underlying thematic ETFs including those focused on social media, robotics and longevity.
Caveats when considering a fund-of-funds ETF…
Don’t pay an overlay fee. Some of these ETFs should be avoided because they tack on an extra management fee in addition to the expense ratios of the underlying funds. Neither of the ETFs above carries an overlay fee.
Avoid actively managed ones.Their strategies tend to be complicated and untested. Example: Global X SuperDividend Alternatives ETF (ALTY) includes individual investments such as closed-end funds and private equity companies and ETFs.