One of the questions it comes down to is whether you prefer active or passive management. The differences between mutual funds and ETFs still exist when considering funds that cover the commodities space. (Why mutual funds want in on ETFs).

Overall, passive ETFs cost less than active mutual funds, on average. ETFs also trade all day on an exchange like a stock; mutual funds trade just once. (What will it take for ETFs to overtake mutual funds?)

Don Dion for TheStreet outlines a few of the differences:

Equities-based funds: These ETFs and mutual funds track the stocks of commodity producers. Rather than tracking the physical commodities themselves, these funds track companies that are involved in the commodities business. Basically, with an ETF the fees are lower, there’s freedom of intraday trading and the ease of knowing the holdings at all times. While some ETFs and mutual funds may share the same components, they differ in fees, size and track record.

Futures-based funds: ETFs and mutual funds that hold futures are a more pure play on commodities than their equity-based brethren. They also provide investors exposure to the prices of energy, livestock, agricultural and metals futures. The limitations imposed by the Commodity Futures Trading Commission (CFTC) is expected to set limits on the number of futures contracts that both mutual funds and ETFs can hold. Major changes in these funds could potentially result in higher fees, which are ultimately passed down to shareholders.

The cost-effective structure of ETFs has helped to make these products affordable competitors in the commodity space. Also, ETFs have given traders more adaptability because of their liquidity and tradability.

For more stories about mutual funds, visit our mutual fund category.

An ETF is a basket of securities that represents a specific sector, region or specific index. ETFs are like mutual funds in that respect, but ETFs trade throughout the day like a stock. They are priced and traded continually, and they provide transparency, liquidity, and cost efficiency. (How Wall Street is using ETFs to lure back investors).

According to Mark Kennedy, there are five reasons to consider buying ETFs instead of mutual funds:

• Tax benefits. ETFs only incur capital gains taxes when they are sold. Mutual funds, on the other hand, incur capital gain taxes as shares within the fund are traded through the duration of the investment, even when you still own it.
• Ease. Buying and selling ETFs is done with a single transaction at the stated price. Mutual funds, however, have shares that are constantly being traded to reach a target price and target performance.
• Cost efficiency. Many mutual funds are actively traded and actively managed, thus leading to higher management fees. Most ETFs are passive, meaning there’s no manager for you to pay.
• Variety. The ETF industry is inundating investors with more and more trading themes. Investors are better able to track the performance of an index or achieve a financial goal with an ETF.
• Transferable. When switching managed portfolios to a different firm, some fund positions have to close out before a transfer takes place. Liquidation of mutual funds could increase risk, increase commissions and fees and incur capital gains taxes. But ETFs can be transferred without complications when switching investment firms – ETFs are considered a portable investment.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

Fidelity offers nine mutual funds that correspond to the well-known Select Sector SPDRs family of ETFs. The provider hopes that some of the popularity of sector ETFs will heighten the appeal of its sector-based mutual funds, too.

Morningstar says seven of Fidelity’s sector-based funds have outperformed their counterpart ETFs over the past 10 years. State Street says that the long-term comparison is not relevant because Fidelity switched its benchmarks in 2006. The provider also stated that, over the long haul, lower expense ratios in ETFs will give them an edge over the Fidelity funds, reports Ian Salisbury of The Wall Street Journal.

Fidelity could be facing an uphill battle in marketing the actively managed sector funds because of the broader range of investors that ETFs reach, from retail investors all the way up to institutions.

ETFs hold appeal over mutual funds because their indexing strategy is superior to the strategy of active management. Studies have shown that most actively managed mutual funds underperform their benchmarks. (Why mutual funds want in on ETFs).

The Fidelity funds still don’t offer some of the characteristics inherent in ETFs, namely the ability to be traded intraday, transparency and “in-kind” redemptions. (More reasons ETFs are better than Mutual Funds).

Fidelity does offer one ETF: Fidelity NASDAQ Composite Index Tracking (ONEQ), but the provider has said it has no plans to expand into ETFs beyond that. And why should they? Two-thirds of its revenue comes from 401(k)s. Now that money is coming back into those retirement plans, Fidelity doesn’t want to cannibalize their business model. (Why Fidelity won’t play the ETF game).

For more stories on ETFs, visit our education category.

Kevin Grewal contributed to this article.

According to new research from Cerulli Associates, ETFs are not poised to steal market share in the advisor channel, writes Hannah Glover for Ignites. Cerulli found that around half of advisors surveyed used ETFs; however, ETFs were only about 5% of their client portfolios.

A survey titled “Exchange Traded Funds: Threat or Threatened?” with more than 400 advisors reveals that 45% of participants prefer using actively managed funds in client portfolios instead of passive ETF products and 21.7% are reluctant to reallocate existing client portfolios.

Since 2005, overall assets in ETFs jumped from $300.8 billion to $693.4 billion as of September, and ETF products increased to around 700 products from 204. But observers argue that this is only a small figure compared to the $10.8 trillion in total assets found in mutual funds.

Still, Lisa Cohen, CEO of Momentum Partners, believes that “really good advisors should be able to prove value by using both [ETF and traditional fund products].” ETFs are not simply alternatives to mutual funds, rather they enhance investment strategies by providing access to hard-to-reach areas like commodities, international and other niche markets.

The results of this study don’t jibe with past ones, which have revealed that advisors do plan to use ETFs more in coming years. A study this year by Cogent Research with 1,500 respondents showed that many advisors expect to reduce their clients’ holdings of mutual funds to 27% by 2011, down from 30% today and 35% in 2007. By 2011, they expect ETFs will make up around 14% of their portfolios, or 8% more than now.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

Barclays Wealth is offering a program that uses active managers who allocate clients’ money into a variety of passive index-based ETFs, writes Aaron Pressman for Reuters. By using ETFs, participants are able to use an investment vehicle that has better diversification and greater liquidity. (Mutual funds want in on ETFs). So far, Barclays is one of the largest firms to offer such a program, but there are others introducing them at a fast rate.

The proliferation of ETFs, along with the poor performance of high-priced money managers of last year, has many investors turning to the simpler yet diversified investment product. According to research firm HedgeFund.net, investors pulled $800 billion out of hedge funds and similar investments between July 1, 2008 and June 30, 2009.

ETFs may not be a magic bullet, though. Some investors may be disappointed if the firms’ asset allocation models don’t work as expected, and the programs may have to fight for assets if wealthy clients continue to gravitate toward private money managers. (How ETFs will overtake mutual funds).

For brokers, it was exciting to be able to present hedge fund opportunities to clients, but in most cases, it brought pains instead of gains. Today, investors are looking for transparency, low fees and tax efficiency. They don’t want surprises. ETFs give them what they’re looking for. The big question now is how will brokers justify their large fees?

For more information on fund providers, visit our mutual funds category.

Max Chen contributed to this article.

Mutual funds have a 69-year head start over ETFs. As ETFs gain popularity and start to maximize their profit-making ability, the race is on for a sizable piece of the market share that mutual funds currently enjoy.

Daniel Tovrov for Mutual Fund Wire reports that there are several ways in which the ETF industry could become even more competitive with the mutual fund industry:

• Earning new capital is akey component in determining whether ETFs will remain competitive
• ETFs that stick to less exotic and esoteric indexes could have a greater chance of success
• Cost is a factor; investors are going to want more bang for their buck
• Funds with a long-term focus could attract investors who find a buy-and-hold strategy appealing

The ETF industry isn’t going to take over the mutual fund industry anytime soon – mutual funds are a $12 trillion behemoth. But the rapid growth seen in ETFs have them on the right track.

For more stories about mutual funds, visit our mutual fund category.

As the old saying goes, “If you can’t beat ‘em, join ‘em,” and that is just what certain mutual fund providers have decided to do, in the contest for market share. Janet Paskin for The Wall Street Journal reports that now a handful of major mutual fund firms are jumping into the field with products that go back to the original form ETFs took—straightforward index products.

So far, PIMCO has launched two bond-focused ETFs, while heavyweight Charles Schawb is upping the competition with an ETF family of their own. Old Mutual is a global financial firm from South Africa which is registered to offer ETFs that track the FTSE Indexes. Russell Investments has also declared they are ETF industry entrants as well. Asset managers John Hancock Advisors and Jefferies Asset Management filed with the Securities and Exchange Commission (SEC) for a line of ETFs.

The flood of new interest in the ETF arena is a welcome event, as investors stand to gain everything from this. Higher quality products, more choices and lower fees as a result of competition are just two of the benefits. High fees, poor performance and the lack of ability to trade intraday are a few of the reasons investors are finding mutual funds less appealing than ETFs.

For more stories about fund providers, visit our mutual funds category.

Fidelity is the largest mutual fund company in the United States. While they have reorganized and diversified beyond that core aspect of its business, ETFs apparently are not part of the plan.

On other fronts, the company has reported market share gains this year with more money flowing in across its expanded range of financial services, reports Mark Jewell for The Washington Post. Those include individual retirement planning, employee benefit management and brokerage operations.

Is skipping out on the growing ETF industry wise? Investors bought more ETFs in the first half of this year than they did in the same period last year, reports Sue Asci for Investment News. The net inflows also increased: $35 billion in the first six months of 2009 vs. $26 billion in 2008.

Some feel that Fidelity is positioned to do just fine without ETFs. However, other big names in the mutual fund industry have entered the ETF space, most notably PIMCO. Further studies have supported the need for ETFs. One survey of financial advisors found that many expect to reduce their clients’ holdings of mutual funds to 27% in 2011, down 30% from today, and 35% in 2007. By 2011, expect ETF holdings to make up around 14% of their portfolios, or 8% more from now.

On the other hand, two-thirds of Fidelity’s revenue comes from 401(k)s. If the markets are up or even flat for an extended period of time, and their average fee is north of 1.1% and investors are now beginning to pour money into their 401(k)s again, why should Fidelity be motivated to offer ETFs and cannibalize their current business model?

• Fidelity NASDAQ Composite Index Tracking (ONEQ): up 26.9% year-to-date

I’ll add tom’s comments later

The market plunged 40% last year, socking mutual fund investors right in the gut. Now here comes the kicker: over the last year, fees at equity mutual funds have risen about 5% on average, according to Morningstar. So what gives?

It seems counter-intuitive that a fund company would hike up their fees despite major losses and lowered portfolio values. The reason is that mutual funds actually make their money by charging fees on assets under management. When the market tanked, assets fell, causing margins to follow suit, explain Dan Burrows and Aleksandra Todorova for SmartMoney.

When equity markets declined 40% to 50% domestically and even greater overseas, income to funds representing these asset classes were cut in half. That led to a decline in fees.

Some funds that reduced management fees when markets and fund asset levels were high have been forced to now increase fees to cover underlying expenses. If there is any winner in this, it could be the ETF providers.

Expect ETFs to continue to get more attention as investors feel increasingly comfortable moving back into the market. In most cases their underlying expenses are a fraction of the 1.57% average mutual fund fee. Additionally, most actively managed mutual funds have underperformed their designated benchmarks over time.

For more stories about mutual funds, visit our mutual fund category.