This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Making Sense of Open-End Funds of ETFs

An effort of a couple of years ago to form open-end "funds of ETFs" has yet to gain more than a little momentum, but Ratings is monitoring the phenomenon's potential.

The Ratings database was parsed for open-end mutual funds that invest -- with the possible exception of cash and equivalents -- entirely in ETFs. It produced the accompanying table of only nine asset allocation funds.

No such funds could be found that were introduced more recently than a year and a half ago, though some ETFs of ETFs were recently launched, or you could try to build your own.

Combined with the fact that the aggregate net assets of the group total only $251.6 million -- a small fraction of 1% of all fund assets -- it seems to indicate that the concept of open-end "funds of ETFs" remains an idea whose time has not yet arrived.

Six of the funds on the list debuted more than two years ago, with the most recent arrivals being the Seligman Target ETF Fund 2035 (STZAX) and the Seligman Target ETF Fund 2045 (STQAX), which checked into the world in October of 2006.

Each of the funds in the table is available in multiple classes of shares. The Seligman funds are each available in five classes, including institutional and retirement versions. The Wilmington ETF Allocation A (WETFX) is kept company by an institutional class and the trio of Federated funds of ETFs come in three varieties each.

Buying these funds, as opposed to directly owning the ETFs, seems difficult to justify. Sales charges and expenses would limit the potential for these funds for most investors, compared with traditional index funds or even direct purchases of ETFs. Possible exceptions would be those with small initial investments who would want to make modest periodic additions to their holdings.

All the funds in the table are available for a minimum investment as low as $1,000, except for the Federated offerings, which require minimum initial outlays of at least $1,500.

Some investors interested in diversification beyond what they might achieve with low-expense no-load index funds conceivably might find reason to consider a fund of ETFs. In these cases, the sales charges on the funds would likely be less than brokerage commissions on direct purchases of ETF shares. But the expense ratios of the funds of ETFs -- all higher than the levies on the ETFs in their portfolios -- would eat into the total values of investor holdings over time.

Because ETFs have yet to penetrate 401(k) retirement plans to any significant extent, open-end funds of ETFs might have appeal for investors in these plans. However, most retirement plans offer traditional index funds with lower expense ratios than the funds of ETFs.

The logic behind the seven "target" funds on the list is that risks can be tolerated early in a long-term investment program, but that capital preservation should be stressed as the plan approached maturity.

For example, riskier investments with potential for above-average returns make up close to half the Seligman Target ETF Fund 2045. The iShares Russell Mid Cap Index ETF (IWR) makes up 24.8% of its portfolio, with the iShares Russell 2000 Index ETF (IWM)adding 24.6% to its holdings. The more conservative SPDR Trust (SPY) makes up only 14.75% of its portfolio.

The Seligman Target ETF Fund 2015 FTOAX, which is closer to its target date, holds only 20.3% of its portfolio in the iShares Russell Mid Cap Index ETF and 11.3% in the iShares Russell 2000 Index ETF. But its position in the steadier SPDR Trust is 22.1%.

Federated Target ETF 2015 A (FTOAX) U 0.57 -1.47 6.6 0.71 5.50
Federated Target ETF 2025 A (FTWAX) U 0.85 -3.22 10.9 0.72 5.50
Federated Target ETF 2035 A (FTHAX) U 1.24 -3.92 7.1 0.70 5.50
Seligman TargETFund 2015 A (STJAX) U 2.49 -4.83 40.2 1.21 4.75
Seligman TargETFund 2025 A (STKAX) U 2.66 -4.67 41.9 1.19 4.75
Seligman TargETFund 2035 Class A (STZAX) U 2.29 -4.61 6.9 1.25 4.75
Seligman TargETFund 2045 Class A (STQAX) U 2.29 -4.53 4.8 1.24 4.75
Seligman TargETFund Core A (SHVAX) U 1.22 -2.77 93.8 1.19 4.75
Wilmington ETF Allocation A (WETFX) U 3.86 -2.78 39.4 1.23 3.50
* Total net assets for all share classes of multi-class fund.
** Includes total expenses levied to holders of fund & for underlying ETF fees & expenses.
Source: Ratings - Data as of 4/30/2008.
For an explanation of our ratings, click here.
Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
IWR $162.25 -0.49%
SPY $203.91 -0.52%
IWM $109.56 -0.63%
TSLA $209.50 -0.96%
YHOO $36.78 -0.43%


Chart of I:DJI
DOW 17,590.58 -70.13 -0.40%
S&P 500 2,042.16 -8.47 -0.41%
NASDAQ 4,689.8610 -27.2330 -0.58%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs