Fund of Funds: Pre-Built Multi-Asset Portfolio Solutions
A fund of funds (FOF) is a mutual fund that invests in other mutual funds rather than individual securities. Vanguard Target Retirement 2060 (VTTSX) invests in four Vanguard index funds — total US stock, total international stock, total US bond, and total international bond — in a single, automatically rebalanced package.
Funds of funds solve a critical problem for investors: portfolio construction and maintenance. Instead of researching and selecting individual securities or even individual funds, an investor buys one fund that holds a diversified portfolio of underlying funds managed by professionals. The most popular funds of funds are target-date funds (2025, 2030, 2035, ..., 2065), which automatically shift from stocks to bonds as the target date approaches. Target-risk funds (conservative, moderate, aggressive) maintain a fixed stock/bond allocation. Balanced funds are the simplest form — typically 60% stocks and 40% bonds in a single package.
The primary concern with funds of funds is the layer of fees. An FOF charges its own management fee on top of the fees charged by the underlying funds. Vanguard's target-date funds solve this by investing exclusively in other Vanguard funds and waiving the additional layer — the total expense ratio of VTTSX is just 0.08%, the same as the underlying funds. Most other fund families charge an extra 0.25% to 1.00% for the fund-of-fund wrapper. Morningstar found that the average FOF expense ratio is about 0.85%, while a self-built portfolio of low-cost index funds costs 0.10% or less. Over 30 years, that 0.75% difference on a $100,000 portfolio costs approximately $100,000 in forgone returns.
Real-world example: An investor who put $100,000 in the Vanguard Target Retirement 2060 Fund (0.08% ER) in 2014 would have approximately $225,000 in 2024. The same investor putting $100,000 in a typical actively managed fund-of-funds (0.85% ER) with the same underlying allocation would have approximately $205,000. The FOF investor paid $20,000 more in fees over the decade. Over a full 30-year career, the difference would exceed $150,000.
Types of Funds of Funds
Target-date funds (also called lifecycle funds) are the most popular type of FOF. They follow a glide path that starts aggressive (90% stocks) when retirement is far away and becomes conservative (30% to 50% stocks) after retirement. T. Rowe Price, Vanguard, Fidelity, and BlackRock all offer target-date series. Target-risk funds (lifestyle funds) maintain a constant allocation — Vanguard LifeStrategy Growth (80/20), Vanguard LifeStrategy Moderate Growth (60/40). Balanced funds like the Vanguard Balanced Index Fund (60/40 stocks/bonds) are the simplest FOF. Alternative FOFs include hedge fund-of-funds (investing in multiple hedge funds) and private equity fund-of-funds. These alternatives carry significantly higher fees — typically 2% management fee plus a 10% to 20% performance fee on top of fees in the underlying funds.
FAQs
Should I use a target-date fund or build my own portfolio?
Use a target-date fund if you want maximum simplicity and can accept the slightly less tax-efficient structure. You buy one fund, set up automatic contributions, and never need to rebalance. Build your own portfolio if you want lower taxes (by placing bond funds in retirement accounts), more control over asset allocation, or lower fees (if your fund family charges FOF fees). For most investors, a low-cost target-date fund from Vanguard, Fidelity, or Schwab is the best choice — it eliminates behavioral errors and ensures proper diversification.
Are funds of funds more expensive than individual funds?
They can be, but not necessarily. Vanguard, Fidelity, and Schwab offer FOFs with no additional layer of fees on top of the underlying fund expenses. The total expense ratio of Vanguard Target Retirement 2060 is 0.08% — the same as buying the underlying index funds separately. Other providers add 0.25% to 1.00% for the asset allocation and rebalancing service. Always check the "acquired fund fees and expenses" (AFFE) line in the prospectus to see the total cost of an FOF.
How do funds of funds rebalance?
Target-date funds rebalance automatically according to their glide path. As stocks outperform, the fund sells stocks and buys bonds to maintain the target allocation. As the target date approaches, the fund gradually shifts from stocks to bonds — typically reducing stock allocation by 1% to 2% per year in the final 20 years before retirement. This rebalancing happens within the fund, so you do not need to take any action. The fund may also adjust its international allocation, tilt toward value stocks, or add inflation-protected bonds as retirement approaches.