Mediocre track records from asset managers will help drive more growth within the exchange traded fund industry. As the business is evolving the importance of performance will be in focus, and ETFs could cut expense ratios more.

“We believe that centralized research teams might not be as important for some asset managers in the future as they are today. The autonomously run boutique asset management business model might become more prevalent in the future,” Eric Berg of RBC Capital Markets wrote in a note to clients. [ETF Performance Beats Active Management]

Asset managers are now faced with changing and evolving their approach to investing as competition between active and passive indexing is getting stiffer. More investors are realizing that fees can be a drag on performance and passive management is an alternative to expensive mutual funds. Within the ETF industry, expense ratios are getting slashed lower as tight competition is working in favor of investors preserving more capital. [Checking Under the Hood of ETF Managed Portfolios]

iStockAnalyst reports that there will be demand for strong, active managers, managers who can produce strong results on a consistent basis – but the field could become less densely populated. The total universe of active management could get smaller as performance gets put under the microscope, and talent becomes essential.

“One of the reasons many advisors have not warmed up to active ETFs is that the fees are a multiple of what their clients would pay for passive ETFs. This has not deterred asset managers from bringing new actively managed ETFs to the market,” Berg noted. [Investors Tired of Lagging Active Funds Pile into ETFs]

An area of interest that could take off in active management is the bond sector. The bond market is not easy to price and using fixed income on an exchange gives bonds some transparency and liquidity. The biggest obstacle to managing a bond portfolio is the risk mitigation. Most bond funds report an average credit quality statistic, which can overstate a mutual funds true credit quality. Understanding the true risk requires analyzing the portfolio bond by bond or equity by equity.

Tisha Guerrero 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.