The recent rally in the stock market has enabled actively managed mutual funds to regain some confidence, but exchange traded funds (ETFs) continue to put the pressure on and make them less appealing.

Over the last three months, primarily owing to a recovery in the stock market, the pace of money inflows into actively managed equity mutual funds has skyrocketed. In turn, so have the stock prices of asset management companies, states David Bogoslaw of Business Week.

But what the trend means is a matter of debate. Some suggest that this trend will continue as foreign investors start to pour into the markets through mutual funds, whereas opponents believe that investors will be choosy with where they stash their money.

This is where ETFs come into play and their underlying characteristics make them so appealing to investors.  They offer tax efficiency, more diversification, transparency, lower fees and the ability to be traded intraday, over mutual funds.  In fact, ETFs are becoming so popular that asset management giant BlackRock (BLK) recently announced its purchase of Barclay’s iShares ETF group.

Additionally, we think that in due time ETFs will make their way into the 401(k) arena and become standard options in them, which would be a huge boost to the industry.  After all, Congress is already pressuring 401(k) providers to offer lower expense ratios, more transparency and improved reporting methods. By utilizing low-cost ETFs instead of actively traded funds, a portfolio could potentially increase its value by 1% and offer more transparency.  Lastly, as ETFs become more popular, they will eventually force mutual funds to decrease their management fees because of the basic principles of competition.

Kevin Grewal contributed to this article.

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.

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