Are exchange traded funds (ETFs) the investment choice of the future? The ETF industry has taken in over $450 billion in assets and little by little they are gaining ground on the $8 trillion mutual fund industry. ETFs are an innovation that yields tax advantages, such as little or no capital gains, and cost reduction along with intraday liquidity and transparency.

Dave Lindorf of On Wall Street points out ETFs are typically purchased based on the past performance and future projected performance of their underlying indices.  There currently are not any actively managed ETFs, but when they are rolled out they will not have the index track record to go on.  These new products will be treated like conventional mutual funds–with investors basing their decisions to buy on the track records of the funds’ managers.

During the late 1960’s there were only a few hundred mutual funds, and the number didn’t peak until the year 2000, when there were 11,000 mutual funds. Since then, underperforming mutual funds have been getting killed off at a rate of 300-500 per year. ETFs and their assets are expected to grow in part because of an investor shift away from mutual funds.