PowerShares just launched three fund-of-funds ETFs, which means they're ETFs that own other ETFs:The three are:
- PowerShares Autonomic Growth NFA Global Asset Portfolio (PTO)
- PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio (PAO)
- PowerShares Autonomic Balanced NFA Global Asset Portfolio (PCA)
All three funds of funds take in domestic and foreign equities, market caps of all sizes, emerging markets, REITs, commodities, currencies, domestic bonds of varying maturity and quality and foreign bonds. None of the funds make narrow bets on a single country, sector or theme. The choices for inclusion are not limited to PowerShares products but most of the funds are from PowerShares. There is no question the funds are diversified -- they each own between 27 and 30 funds. Not surprisingly, all three funds back-test very well in terms of performance and volatility. (If they were bad, there would be no funds.) Because most of the funds owned within are fairly new, this must mean that NFA did its back test using other back tests. It makes sense to wonder about a second-derivative effect that could make the boilerplate about past performance particularly relevant. Despite the issues raised above, I think the funds hold some promise. I do discount that back test, the holdings of the three funds are well put together and do offer a reasonable chance for a successful risk-adjusted return. The realistic risk is not that the funds blow in some sort of catastrophe (unless that is what the market does), but that they end up looking a lot like iShares MSCI ACWI Index ( ACWI) which, if that were the case, would simply mean a little too much in fees paid as opposed to financial ruin.
These are the first ETFs of ETFs. If they successfully attract assets, there will be other funds in the space that could turn out to be better mousetraps. If PTO, PAO and PCA do end up offering utility, it might tough to recognize what the utility might be in any short period of time. I suspect that the value, if there turns out to be any, would come over an entire stock market cycle -- which is typically how much time is needed to assess this sort of diversification.