Exchange traded funds are becoming a larger threat to the asset pool of traditional mutual funds because of their ability to do more than passively track an index. Many of the newer ETFs on the market are aiming at outperforming an index, or gaining alpha, according to a recent report.

“It ends up being a hybrid between active and passive,” Ryan Issakainen, ETF strategist at First Trust, told Bloomberg News. “The ETF itself is still a passive instrument insofar as it follows an index, but the index is much more active than a traditional market-cap-weighted set of companies.”

The inherent tax advantages, lower fees, and tradability of an ETF has attracted investors and assets that rival the mutual fund industry. Asset managers have also been keen on the security selection process of a mutual fund and seek to combine this with the qualities of an ETF, reports Christopher Condon for Bloomberg BusinessWeek. [Where in the World is ETF Risk Today?]

“Investors are looking for broader solutions; those with exposure to global markets, as well as continued demand for alternative products,” he said. “You have two types of ETF products right now; the traditional structured products that came on the exchange, and then you have more of the ETF “tools” that are being developed. The ETF tools will never be part of a core portfolio. As it is often said, ETFs began as structured products that came on the market and they remain structured products on the market, Scott Burns of Morningstar said in a recent interview on AdvisorOne.

Which leads to the actively managed ETF space, a sector that could segue into further erosion of the mutual fund industry. Actively managed ETFs are in demand, currently, as the PIMCO Total Return ETF (NYSEArca: BOND) has proven that ETFs can take the best attributes of active management. The overall concept has proven successful thus far. [ETF Growth Creates the Need for More Education]

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