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What Is a Fund of Funds?

If you've been investing long enough, you've probably heard about the investment vehicle known as a "fund of funds." But how these products work and whether you should invest your hard earned cash in them isn't always a simple question to answer.

As most folks know by now, exchange-traded funds have brought about a revolution in low-cost investing, allowing investors with only a modest nest egg to access strategies that were once characterized by high fees and exclusive access. As a result, ETFs boast some $9 trillion in assets – and with more than 7,000 total products listed worldwide, finding the perfect fund for you in that sea of exchange-traded funds can be a daunting task.

A prime example comes from ETF giant iShares via its iShares Morningstar Multi-Asset Income Index Fund (ticker: IYLD), a $250 million fund of funds that seeks a portfolio with an asset allocation of 60% bonds, 20% stocks and 20% alternative assets with an aim of producing a diversified stream of income. Its holdings include 12 other funds which are individually focused on Treasury bonds, dividend stocks, real estate investments and the like to give you that broad mix. And you get all that for a net expense ratio of 0.60%, or just $60 per year on every $10,000 invested.

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