ETF-Ception: ETFs of ETFs

Exchange-Traded Funds (ETFs) are exploding in popularity. Driven by the rise of passive investing, the industry is not only getting bigger but more innovative. ETFs used to simply hold a basket of stocks, now we have ETFs that hold other ETFs!

How Do They Work?

Classic ETFs hold securities to replicate an index. ETFs of ETFs takes it up a notch. Instead of holding stocks or bonds directly, they hold other ETFs. A fund of funds.

Take for example XEQT, iShares' Core Equity ETF. It doesn't own any stocks directly. Instead it holds 4 ETFs that between them own thousands of stocks.

What's The Point?

Diversification and convenience.

XEQT allows you to own a global portfolio within a single fund. It holds a Canadian (XIC), US (ITOT), International (XEF) and Emerging Markets (IEMG) ETF, all wrapped up in a neat package.

Previously to get this level of exposure, you would have to combine and juggle multiple ETFs yourself.

What you gain in connivence, you pay for in a slightly higher fee. Directly buying the underlying ETFs is cheaper. Less layers, less fees.

Also you give up flexibility. For keen DIYers, individual ETFs allow you to better tweak and optimize your portfolio.

Wouldn't I be Paying Fees Twice?

XEQT has a fee. The underlying ETFs also have fees. So am I being charged twice?
Simple answer is no. ETF providers are not allowed to double dip. You only pay a single fee.

Again, the fee will be slightly larger than if you bought the underlying ETFs directly, so in a way you're paying for it.

Conclusion

ETFs of ETFs can seem complex at first but they actually makes things simpler. The structure paved the way for all-in-on funds like XEQT. Making investing in a diversified portfolio as convenient as mutual funds with the low fees of ETFs. The best of both worlds.

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