So does the ETF load up on BTC and then let people invest in their index fund, which is assured to be less volatile than BTC?
Yes, the ETF owns bitcoins, but no, it's exactly as volatile as bitcoin. The main reason for making it is that as a registered financial product, pension funds / hedge funds etc can legally invest/speculate on the price of bitcoin, where as currently they can't, which many people predict will result in a lot of new money entering the market.