Query on ETF vs ETF FoF (2024)

FAQs

Query on ETF vs ETF FoF? ›

What is the difference between ETF and FOF? Exchange-Traded Funds (ETFs) are passively managed investment funds that trade on stock exchanges, offering diversification and intraday trading. Fund of Funds (FOFs) invest in other mutual funds, providing diversification through a single investment.

ETFs and FoFs are both very sound investment products that can cater to different classes of investors. While ETFs are less risky, the returns generated are more or less equal to their underlying benchmark. FoFs on the other hand, are considered to be riskier than ETFs but the returns generated can be higher.

Strategy and Risk Tolerance

Mutual funds are available for all different types of investment strategies, risk tolerance levels, and asset types. ETFs can be limiting as they are mostly passively managed indexed funds that invest in the same securities and mirror the chosen index.

And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.

Since the job of most ETFs is to track an index, we can assess an ETF's efficiency by weighing the fee rate the fund charges against how well it “tracks”—or replicates the performance of—its index. ETFs that charge low fees and track their indexes tightly are highly efficient and do their job well.

Disadvantages. There are fees involved when investing in a managed fund, as you are hiring the service of the fund manager to produce returns on your investment. The amount of fees can vary greatly and can have a significant impact on your overall returns.

Advantages to actively managed ETFs include lower expense ratios than mutual funds and the participation of seasoned financial professionals. Many actively managed ETFs have higher expense ratios than passively-managed index ETFs, which puts pressure on fund managers to consistently outperform the market.

What is the best ETF for S&P 500? ›

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

The two ways to see how closely an ETF matches the index performance are 'tracking error' and 'tracking difference'. Tracking difference addresses how closely the ETF tracks the index returns, while tracking error reflects how consistent over time the tracking quality is.

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

Compare the ETF's Market Price to the NAV

Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.

Funds of funds (FoFs) are well suited to the new or small investor who does not have enough knowledge to manage the portfolio. If you are the one who wants to diversify your portfolio but does not have the expertise to manage your portfolio on your own, then FOFs can be an option.

Experts believe fund of funds are generally better suited for smaller investors that want to gain access to a range of different asset classes or for those whose advisers do not have the expertise to make single manager recommendations.

The Bottom Line. Both index mutual funds and ETFs can provide investors with broad, diversified exposure to the stock market, making them good long-term investments suitable for most investors. ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges.