Exchange Traded Fund (ETF) of ETFs - Explained
What is an ETF of ETFs?
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Table of ContentsWhat is an Exchange Traded Fund?How Does an ETF of ETFsShortcomings of an ETF of ETFs
What is an Exchange Traded Fund?
An ETF of ETFs refers to an exchange-traded fund which tracks the performance of other exchange-traded funds instead of stocks, bonds, and index. Simply put, ETF of ETFs are basically focused on other ETFs and not on stocks and bonds as a regular ETF. Just like a funds of funds, ETF of ETFs gives managers and portfolio investors the opportunity to diversify without matching all the underlying assets which theyre supposed to trade. In other words, they can simply invest in an ETF which basically invests in different other ETFs. Thus, they get to pick up multiple trading strategies with a single product (the ETF of ETFs in this case). This system merges the cost and the advantages of an orthodox ETF structure with the research and examinations of an actively managed fund. A number of notable providers including Vanguard and Direxion have jumped on the new product offerings that merge different assets and securities or different investment sectors and industries.
How Does an ETF of ETFs
An ETF of ETFs generally refers to a tool which offers more diversification than a traditional ETF. These institutions are constructed on a number of desirable and favorable factors like risk management levels, time differences and sectors or industries. A single ETF of ETFs can provide an investor with the opportunity to access many sectors and securities or assets classes. On an average, ETFs tend to have lower fees while a managed funds consists of more research and cross-examinations. An ETF of ETFs however aims to create a balance between an ETF and a managed fund and also used this newly created system to beat a standard index. ETF of ETFs generally originated from orthodox target-date and other asset allocation funds that aim to present simple investment strategies and solutions. Novice investors who generally lack the skill needed to construct an attractive or profitable portfolio can benefit from an investment in a quality multi-strategy fund, which in this case would refer to an ETF of ETFs. The benefits are also larger than this. An ETF of ETFs grants investors the possibility of instant diversification, reduced fees, and access to broad-based investment strategies that cut across different securities, sectors, and asset classes. In a case where asset classes and securities suffers losses, investing in an ETF of ETFs can reduce losses.
Shortcomings of an ETF of ETFs
The general rule of thumb in an ETF of ETFs is to simply invest in asset classes without much complex strategies so that the novice investor can pick a little piece of knowledge from his portfolio. This however doesnt seem to be the case in most of these institutions. Some ETF of ETFs apply complicated strategies and mechanism in picking investments, thus making it impossible or kind of very difficult to understand the offerings in the fund. Also, returns from ETF of ETFs are excessively higher than that of orthodox ETFs and managed funds. While this might be good when the ETF is winning, a little loss in the market might be a substantial one in the institution as investments are generally carried out with high risks. A better approach to ETF of ETFs is to generate a portfolio which comprises of individual stocks and bond ETFs. However, investors are required to rely on the skill of their portfolio manager to make such crucial assets allocate and also adjust the portfolio on a timely basis. It is important to note that most studies show that a buy-and-hold approach (mostly when left hands-off) tends to perform better than a stock pick method.