What Is an ETF of ETFs?
An ETFof ETFsis anexchange-traded fund(ETF) that tracks other ETFs rather than an underlying stock, bond,or index. Like a fund of funds, this approach provides investors with a method for investing in multiple strategies with a single product. It combines the cost and transparency advantages ofthe traditional ETF structure with the research and analysis of an actively managed fund.
Many well-established providers like State Street and iShares have hopped on the ETF of ETFs bandwagon through newproduct offeringsthat combine different asset classesor rotate between sectors.
Key Takeaways
- An ETF of ETFs is a pooled investment fund that invests in other ETFs.
- Like traditional ETFs, these securities trade on exchanges similarly to traditional stocks.
- The strategy aims to achieve broad diversification and minimal risk while taking advantage of the lower cost and greater liquidity of ETFs.
- ETFs of ETFs tend to have higher expense ratios than regular ETFs due to the additional layer of management.
How ETFs of ETFs Work
An ETFof ETFs is a type of securitythat provides more diversification than a regular ETF. They can be constructed by leveraging certain desirable factors such as various risk levels, time horizons, or industry sectors.
As a result, these ETFs of ETFs can give an investor broader exposure to many sectors and asset classes. On average, traditional ETFshave lower fee structuresthan managed mutual funds that involve more researchand analysis. An ETF of ETFs aims to strike a delicate balance between the two (lower cost and better research) and beat a standard benchmark index.
The concept of an ETF of ETFsfinds its roots in traditional target-date and other asset allocation funds that seek to provide simple investment solutions and follow the fund-of-funds (FoF) strategy seen in the mutual fund and hedge fund industry. An investment in a quality multi-strategy fund is appropriate for novice investors who lack the skill or resources to construct an attractive portfolio.
The advantages don't end there. This novel approach affords investors instant diversification, low fees, and exposure to broad-based strategies across different asset classes. In the event of a downturn, a well-diversified portfolio employing various strategies can help keep losses to a minimum.
Limitations of ETFs of ETFs
While many of the newest ETFs of ETFs claim to simplify investing, they often employ complex mechanisms that make it difficult to understand the various offerings in the fund. What's more, the products are often highly concentrated and tend to exhibit greater turnover than most actively managed funds.
That means if the market turns against the fund, it could quickly become the largest holder of a thinly traded ETF. While cheaper than mutual funds of funds, ETFs of ETFs are also more expensive to own than traditional ETFs due to the added layer of management and fees.
A more straightforward—and cheaper—approach involves constructing a portfolio of individual stock and bond ETFs. Moreover, investors must rely on the skill of the portfolio manager to make critical asset allocations and tactically adjust the portfolio on a timely basis. Most empirical research finds a hands-off, buy-and-hold approach tends to outperform a stock-picking strategy.
What ETF of ETF Can You Invest In?
An investor looking to invest in an ETF that invests in other ETFs has some options, such as the SPDR SSGA Multi-Asset Real Return ETF, which holds the SPDR S+P Global Natural Resources ETF and the SPDR S+P Global Infrastructure ETF, among others. Another option is the iShares Core Moderate Allocation ETF, which holds the iShares Core Total USD Bond Market ETF and the iShares Core S&P 500 ETF, among others.
How Do I Invest in an ETF?
ETFs can be bought and sold just like stocks through a brokerage account. You can open up a brokerage account, for example at E*Trade, deposit funds from your bank account, and start buying securities, such as ETFs.
What Is the Largest ETF?
The largest ETF in terms of assets is the SPDR S&P 500 ETF, which had total assets of approximately $485 billion as of Feb. 21, 2024.
The Bottom Line
ETFs of ETFs provide investors with exposure to a broad array of investments in a simple format. Rather than having to invest in two, three, or more ETFs, an investor can choose one ETF that invests in many ETFs, gaining that broad exposure. This also reduces costs as the investor is only paying one expense ratio as opposed to multiple. ETFs of ETFs provide simplicity, broad diversification, and cost benefits.
FAQs
An ETF of ETFs is an exchange-traded fund (ETF) that tracks other ETFs rather than an underlying stock, bond, or index. Like a fund of funds, this approach provides investors with a method for investing in multiple strategies with a single product.
What is an ETF and how does it work? ›
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
What is ETF advantages and disadvantages? ›
Advantages and disadvantages of ETFs
Investing in ETFs helps to mitigate unsystematic risks due to its passive investment strategy. It also lowers one's overall investment risk. It greatly helps with portfolio diversification. With the limited role of fund managers, ETF investments are comparatively cost-effective.
What is the limit of ETF investment? ›
The Reserve Bank of India (RBI) regulates the fund inflows and outflows involving locally pooled investments in overseas financial assets. Currently, there is an overall industry level limit of $7 billion for investments into overseas mutual funds, and an additional $1-billion limit for foreign ETFs.
What is the primary disadvantage of an ETF? ›
ETF trading risk
Spreads can vary over time as well, being small one day and wide the next. What's worse, an ETF's liquidity can be superficial: The ETF may trade one penny wide for the first 100 shares, but to sell 10,000 shares quickly, you might have to pay a quarter spread.
How do ETFs make money for you? ›
Traders and investors can make money from an ETF by selling it at a higher price than what they bought it for. Investors could also receive dividends if they own an ETF that tracks dividend stocks.
How do ETF payments work? ›
ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.
Why is ETF not a good investment? ›
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
What is the single biggest ETF risk? ›
The single biggest risk in ETFs is market risk.
What are the 4 benefits of ETFs? ›
Positive aspects of ETFs
The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
In order to withdraw from an exchange traded fund, you need to give your online broker or ETF platform an instruction to sell. ETFs offer guaranteed liquidity – you don't have to wait for a buyer or a seller.
What is the 30 day rule on ETFs? ›
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
Can I sell my ETF anytime? ›
Trading ETFs and stocks
There are no restrictions on how often you can buy and sell stocks or ETFs. You can invest as little as $1 with fractional shares, there is no minimum investment and you can execute trades throughout the day, rather than waiting for the NAV to be calculated at the end of the trading day.
What are ETFs pros and cons? ›
In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends. Still, unique risks can arise from holding ETFs as well as tax considerations, depending on the type of ETF.
What are the problems with ETF? ›
ETFs that focus on income, such as dividend or bond ETFs, can be sensitive to changes in interest rates. Rising interest rates can lead to lower bond prices, affecting the value of bond ETFs. Keep in mind that the ETF may hold bonds with different lengths, each experiencing different rate risk.
Why do ETFs lose value? ›
Leveraged ETFs use various financial instruments such as futures, options and swaps to achieve their leverage. These instruments have associated costs, including transaction costs, bid/ask spreads and management fees. These costs can eat into the returns of the ETF and contribute to its decay.
Is it a good idea to invest in ETFs? ›
If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.
When you buy an ETF, where does the money go? ›
An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.
Do you get paid from ETFs? ›
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
What happens to the money in ETF? ›
The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange. The trading value of an ETF is based on the net asset value of the underlying stocks that an ETF represents.
