Super ETFs: Do ETFs of ETFs Offer Benefits for Retail Investors?

Exchange-traded funds (ETFs) have oftentimes been described as the single most disruptive trend within asset management in the last 20 years. The size of the global ETF market has ballooned to over $9.6 trillion in assets under management spread over 8,754 funds.

ETFs have become so omnipresent it can be easy to forget that ETFs were not always the norm. The first ETF ever listed in the US only dates back to 1993, only reaching Europe in 2000.

Ten years later, in 2010, ETFs would reach the $1 trillion mark before leapfrogging to $9.6 trillion just thirteen years later. Calling ETFs “a success” would be the world’s biggest understatement.

ETFs make investing remarkably easy and provide more diversification than investing in a single or a basket of stocks ever can. That’s likely why they were so fast to take off, becoming the dominant force in modern financial markets. It seems, however, that we might be stepping into a new age. The age of the “Super ETF” has arrived.

A “Super ETF” is an ETF that tracks other ETFs instead of tracking stocks, bonds, or indexes.

One such example of a Strategy Shares Nasdaq 7 Handl™ Index ETF (NASDAQ:HNDL), which tracks 19 separate ETFs that represent around 20,000 individual securities. Compare this with Invesco QQQ Trust (NASDAQ:QQQ) and JPMorgan Equity Premium Income ETF (NYSE:JEPI), which consist of 102 and 135 holdings, respectively. Both QQQ and JEPI are in HNDL’s top 10 holdings.

Super ETFs are gaining traction likely because they take the idea behind ETFs to a whole new level of diversification. They’re effectively a one-stop solution that provides investors with exposure to a wide range of asset classes, sectors, and geographic locations. HNDL, for example, has a balanced portfolio of US equities, bonds, and alternative investments.

Vanguard All-Equity ETF Portfolio (TSX:VEQT), on the other hand, takes an all-equity approach dividing its $2.75 billion in assets between a range of US, Canadian, and global equity ETFs.

Super ETFs also allow for partial leverage exposure. For example, investing in JEPI entails a leverage ratio of around 1.25x. This leverage is used to amplify the returns of the underlying index, but they come at the cost of potentially increasing losses. Super ETFs, like HNDL, can better manage the risk of leverage while still raising returns by combining leveraged ETFs with their non-leveraged counterparts. As a rule, HNDL employs leverage in an amount equal to 23% of the portfolio.

It’s important to note, however, that ETFs of ETFs do have some key limitations. For starters, these Super ETFs tend to be pricier than traditional ETFs due to the additional layer of management and the associated fees. It’s also important that investors understand the objectives of the ETF that they’re investing in, which can be more complicated for an ETF of ETFs than a traditional ETF. That said, HNDL does try to make its objective both clear and simple.

The goal is a relatively generous 7% target distribution per annum paid out monthly, making HNDL an attractive alternative to fixed-income investment solutions. Since HNDL was launched in 2018, it has consistently met this target distribution.