Despite a turbulent and volatile market, exchange traded funds (ETFs) are continuing to flourish and grow.  With this growth comes many questions, and some have been pondering whether or not ETFs will replace mutual funds.

• Appeal of ETFs. ETFs are highly appealing thanks to their tax efficiency, ability to trade on the market throughout the trading day, transparency, ability to enable investors to gain exposure to specialized sectors and markets, resemblance to traditional index mutual funds, ability to be an excellent hedging tool and relatively low cost.

• The Skeptical ETF. Not all ETFs have been getting good publicity. A recent survey indicates that leveraged ETFs have been drumming up a bit of skepticism in the investment management world, mainly because of their daily compounding characteristics and the lack of investor education on the risky investment tool.

• Current and Future Use of ETFs. In the last year, investors have flooded the ETF market by $730 billion, states Jane Kim of The Wall Street Journal. In a survey conducted by Strategic Insight, of those that currently utilize ETFs, 70% plan to increase their usage. This survey, in addition to the past asset shifting trends and the increasing use of ETFs by average investors has many convinced that ETF assets worldwide will soon hit the trillion dollar mark. Contrary to popular belief, ETFs have been utilized as replacement tools for stocks and separately-managed accounts and not as a replacement for actively-managed mutual funds. In fact, 62.8% of people surveyed stated that ETFs are a complement to mutual funds and not a threat.

This is good news for mutual fund managers and investment firms; they have a little breathing room and don’t have to feel so threatened by the ever-so-versatile and increasingly popular ETF.

Tags: Mutual Funds