New exchange traded funds continue to hit the market but building specialized portfolios of existing ETFs could be a more important component of the industry’s growth moving forward.

So-called ETF managed portfolios are becoming increasingly popular with investors and financial advisors who focus on asset allocation.

ETFs are very attractive portfolios building blocks due to their indexed approach, low costs, transparency and tax efficiency.

At year-end 2009, ETFs in managed accounts totaled $82 billion in assets; by this June, they reached $220 billion, or 19% of all the money invested in ETFs, The Wall Street Journal reports. Assets at ETF strategists tracked by Morningstar, the investment-research firm, rose 48% between last September and this June to $49.6 billion.

“What has driven the growth? Many advisors are good at financial planning and managing their clients’ emotions—but not necessarily at the time-consuming details of running money,” reports longtime index-fund advocate Jason Zweig. “Therefore, many of them are eager to deputize other firms with the task of running at least a portion of clients’ portfolios.”

ETF managed portfolios usually have more than 50% of portfolio assets invested in ETFs.

“They represent one of the fastest-growing segments of the managed account universe,” Morningstar says. “Professional money managers are packaging portfolios of ETFs into investment strategies to meet a wide array of investor demands, and thanks to the continual development of individual ETFs they are providing access to both stand-alone investment strategies and one-stop, complete solution offerings.” [Fee-Based Advisors Driving Growth of ETF Managed Portfolios]

However, Zweig cautions that it’s important for investors to check the fees and composition of ETF managed portfolios to understand exactly what they’re buying.

After underlying ETF fees, custodial expenses, transaction costs and management fees, an ETF managed portfolio can cost 1% to 3% of assets annually, he writes.

He also warns investors to take theoretical, “back-tested” performance with a grain of salt because the strategy hasn’t been implemented in the real world.

The opinions and forecasts expressed herein are solely those of John Spence, 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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