Funds of ETFs Can Work for You

Exchange-traded funds are so hot that even mutual funds are buying them.

According to Morningstar, there are currently 23 funds that invest the majority of their assets in ETFs, which are portfolios of securities that trade throughout the day on an exchange. Most have been launched in the past 12 months. Eight are listed as target-date funds, which automatically rebalance into a more conservative mix of investments as investors approach retirement age. But all of them employ some kind of asset allocation strategy.

ETFs offer a number of advantages over mutual funds, including low costs, transparency and tax efficiency. But it's debatable whether funds that invest in ETFs, or "funds of ETFs," have any advantages over funds of mutual funds.

For people who have neither the time nor inclination to do their own investment research, both funds of mutual funds and funds of ETFs can fill a need -- the fund manager does all of the work for you. In the case of target-date funds, which are retirement-planning vehicles, the asset allocation will shift over time, lightening up on stocks and buying more bonds, as investors age.

Target-date funds and other kinds of asset-allocation funds received a big boost from the Pension Protection Act of 2006, which allows employers to automatically enroll employees in 401(k) retirement plans, increase their savings over time, and put their assets in sensible long-term investments.