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.

With the managed fund version, you can buy as often as you like without any added cost, but to buy ETFs, you need to buy through a broker, and there is a minimum brokerage cost per purchase.

ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. 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.

Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.

How long should you leave money in an ETF? ›

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

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.

Morningstar excels in its ability to provide a holistic analysis of ETFs. Investors can access detailed information on a fund's historical performance, risk metrics, and expense ratios.

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.

A fund of funds (FOF) is a pooled fund that invests in other funds. FOFs usually invests in other hedge funds or mutual funds. The fund of funds strategy aims to achieve broad diversification and minimal risk. Funds of funds tend to have higher expense ratios than regular mutual funds.