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Funds of ETFs Can Work for You

This kind of one-stop shopping can be cost-effective if done by a firm such as T. Rowe Price (TROW - Get Report), which packages its own reasonably priced funds and doesn't charge a sales commission upfront.

"If you don't know what you're doing and you need to be protected from yourself, that can be money well spent," says Jeff Tjornehoj, senior research analyst at Lipper.

He adds that funds of ETFs are less likely than funds of mutual funds to be locked into investing in other products offered by the same firm, since few mutual fund firms have their own stable of ETF products. So they "can potentially get a best-of-breed strategy."

Funds of ETFs also can be helpful for people who have a relatively small amount of money to invest but want a diversified portfolio. It would take tens of thousands of dollars to build a diverse portfolio of ETFs, but with funds of ETFs you can get this kind of exposure for an initial investment of as little as $1,000.

The downside is that when you invest in ETFs through mutual funds, you lose much of the advantages of these products.

Because ETFs track indices, investors always know what they're holding. By comparison, mutual funds only have to report their holdings once a quarter, and if they are actively managed, the information can quickly become outdated. And unlike mutual funds, which can only be bought or sold once a day at the market's closing price, ETFs trade throughout the day. But investors lose these benefits when they buy funds of ETFs -- although the fund manager still enjoys them.

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