The chief advantages of ETFs apply directly to the fund-of-funds structure. For one, they tend to be low-cost. So while a fund-of-ETF structure will still layer fees upon fees, it will at least layer fee upon smaller fees.

More importantly, however, is the fact that ETFs do what they say. Unlike active funds, which often suffer from style drift as managers follow whatever's hot, ETFs hold a publicly disclosed portfolio that doesn't waver or shift; you know what you're getting. For an asset allocation strategy, that's gold.

When you factor in the tax benefits, the choice is clear: ETFs win.

Conclusion

The big picture story, however, is mixed. Like all funds-of-funds, funds of ETFs layer fees upon fees, detracting from long-term returns. In many cases, they follow a simple strategy that a smart advisor could execute at lower cost.

But for some investors, they provide an easy way to achieve a desired exposure, and add in a low-cost and regular rebalancing schedule that studies show improves long-term returns. Beyond question, they make better components for a fund-of-funds structure than actively managed mutual funds. By eliminating style drift and keeping expenses low, ETFs-of-ETFs mitigate the sharpest criticisms of fund-of-fund structures. If you're using a fund-of-fund structure, it might be time to switch.

- Senior Editor Raymond Fazzi contributed to this story.

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