Recently Chester Spatt, chief economist at the SEC, stated his support for indexing, which is the tracking strategy that exchange traded funds (ETFs) follow. While Spatt’s support is definitely encouraging news, Jim Wiandt of Index Universe brings up an excellent point: Is it becoming increasingly difficult to tell the difference between indexing and actively managed funds? We already have low expense ratios with ETFs, so to see expense ratios lowered on actively managed funds begins to nullify one of ETFs’ biggest advantages.

While there’s nothing wrong with actively managing your portfolio (have an investment strategy and discipline ready), using actively managed funds can be murky when compared to the clear-cut approach indexes provide. Wouldn’t you rather buy something that you can see what’s inside?

One of the biggest benefits of indexing is that it provides complete transparency for investors, something that actively managed funds cannot offer. Actively managed mutual funds have created so many problems in the past that it’s no wonder an alternative developed naturally. Keeping a clear line between indexing and actively managed ETFs is a must if the industry is to continue to thrive.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.