As the market for exchange traded funds (ETFs) continues to expand, problems with the mutual fund market contributed greatly to this growth.

Chuck Jaffe for the Boston Herald examines the mutual fund world and how five years ago, it was plagued by the biggest scandal in the 80-year history of the industry. Underlying this scandal, firms gave certain customers trading privileges that were not offered to all shareholders. For example, some funds engaged in rapid trading in order to pick up quick profits at the average shareholders’ expense.

In the aftermath of this “market-timing scandal,” firms were instructed to pay back shareholders of these scandal-tainted funds. Shareholders in those accounts are just now starting to receive compensation. Although these paybacks won’t come close to the daunting numbers investors lost in the bear market, checks are clearly not being turned down.

Putnam and Janus recently payed out $40 million and $18 million respectively. Over the next six months, another $110 million will be payed out to Putnam shareholders while an additional $80 million will be shelled out to Janus shareholders.

These problems related to mutual fund investing truly reveal the strengths in ETFs. These scandals play a large part in the success of ETFs, because the more people become fed up with mutual funds, the more investors are likely to turn to ETFs.

However, Jim Wiandt for IndexUniverse points out that there are many obstacles that still exist in the way of ETFs as they try to tap into some of the biggest asset pools, such as retirement. The retirement market is clearly on the ETF radar, there are certain characteristics that make ETF investing very practical with regard to that area. ETFs are much more efficient when it comes to cost and trading, particularly with active funds.

As ETFs continue to grow, the potential is limitless as they start to take tremendous shares of new assets that flow into the market. On top of this, they have started to attract many investors who do not exactly fall into the typical index investor category.

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.