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Funds of ETFs Can Work for You

Another advantage to investing in ETFs is that you don't pay capital gains taxes until you sell them. By comparison, mutual funds are required to distribute any capital gains generated on their holdings once a year -- regardless of how long you've owned the fund. The same is true of funds that invest in ETFs.

Finally, when you invest in ETFs via a mutual fund, you are paying an additional layer of management fees, eating into your returns. That's to be expected; after all, in addition to the ETFs themselves, you're getting investment advice. What you might not realize is that you, the investor, are paying not only the mutual fund's expense ratio, which can range from 1% to 2.5%, but the expense ratios of all of the ETFs it holds.

Even more surprising is that while funds of ETFs hold less-expensive products than funds of mutual funds, they actually charge more to run. According to Morningstar, the average fund of ETFs has an expense ratio of 1.56%, compared with 1.45% for the average fund of mutual funds.

On top of that, since most funds of ETFs can only be purchased through an investment adviser, you're also paying him or her a fee.

This is the hardest fee to swallow. Any investment adviser worth his salt should be able to create an asset allocation plan for you. Basically, you pay this guy a front-end load of around 4% to pass you on to another money manager. If you really want a fund of ETFs, get rid of this useless middleman and buy the fund on a fund supermarket platform.

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