Mutual funds, watch your back. ETF management looks like it’s here to stay.

The increasing popularity of exchange-traded funds throughout the past two decades has spawned a new breed of asset management: ETF model portfolio firms.

A June 13 article published on Reuters examines how these establishments have caught the attention of private equity firms looking to provide them with venture capital funding. In short, ETF model portfolio firms manage investor portfolios comprised predominantly of ETFs. The irony here is that one of the biggest draws to ETFs are their low-maintenance nature that doesn't call for outright active money management to maintain performance.

Because they are not trying to outperform the market, but instead match it, they require minimal direct human upkeep and involvement. This administration style is known as “passive management,” and because the investment behaves independently, fewer fees are inflicted upon the investor. By investing in the strength of the market itself, as opposed to a fund manager, ETFs are able to evade almost any managerial risk normally associated with traditional investments or mutual funds.

So now enter ETF model portfolios, and while the investor is gaining greater exposure to a mix of passively managed index ETFs, the mix itself is under active management. But this isn’t necessarily a bad thing; with the strong influx in ETF usage arising, an investor needs some structure on how to best use them - something the ETF model portfolio firm can provide.

Also, today’s volatile markets have called for an element of agility amongst the way money managers operate within different asset classes. Mutual fund managers generally have very limited ability to perform tactical allocation and switch from one asset class to another to generate returns, while ETF model portfolio managers can easily do so.

There’s no doubt that due to their recent entrance on the financial scene these firms are still green. But given the prior success of exchange-traded funds, the need for managers of an ETF-laden investment portfolio will continue to grow. And as they become increasingly more mainstream, one can’t help but wonder: could this mean danger for the mutual fund?

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