The active vs. passive debate has an interesting twist. Some actively managed mutual funds have surprising top portfolio holdings: ETFs.

Investors expect active funds to outperform the indices through savvy stock picking. However, some managers are trading baskets of securities with ETFs.

Ian  Salisbury for SmartMoney made an example of the Columbia Small Cap Core fund (SSCEX), an equity mutual fund with $900 million in assets that recently cited its top position as the iShares Russell 2000 ETF (NYSEArca: IWM) instead of a single-stock holding.

The iShares ETFs are the most popular with portfolio managers, namely IWM. There are over one dozen mutual funds that hold IWM, as well as other ETFs, according to the story. [ETFs to Track Market Sentiment]

“When the market plunges, investors often want to sell their shares en masse. That can force fund managers to dump some of their favorite stocks at unfavorable prices to pay off anxious investors. So, fund managers say, they own own ETF,which is easy to sell and lets the fund keep the stocks it really likes,” Salibury wrote. [Investors Moved Back Into Stock ETFs in July]

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