Will ETFs of ETFs make ETFs better for small investors?

Posted Nov 18th 2007 6:10PM by Zac Bissonnette
Filed under: Mutual Funds, Personal Finance

The Wall Street Journal reports that PowerShares Capital Management LLC (subscription required) has "filed with the Securities and Exchange Commission for three new exchange-traded funds that will hold different combinations of other PowerShares stock and bond ETFs."

Here's why this is good for small investors: ETFs with their low expense ratios are a great product, and diversified portfolios of ETFs allow small investors to put together retirement portfolios easily, without the help of an expensive financial adviser.

But there's a problem: If you have a portfolio of $5,000 and divide it up among ten funds and have to pay a commission of $10 per trade, that works out to a front-load of 2% -- then another 2% when you sell. Unless you have a fairly sizable chunk of money to invest, buying multiple ETFs isn't very cost savvy.

Funds of ETFs will be a practical option for a lot of retail investors and could take market share from two groups that deserve to lose market share: financial advisers and big mutual fund companies.

Tags: ETF, Exchange Traded Funds, mutual funds, PowerShares