Mutual Funds Join the ETF Wave

The Huntington Rotating Markets Fund, which currently invests in 22 ETFs and carries an expense ratio of 1.17%, uses a combination of quantitative and qualitative measures to identify which areas of the market to be in.

Jeff Tjornehoj, a senior research analyst with fund tracker Lipper, says those costs are reasonable, particularly compared with those of most active mutual funds, which have an average cost of about 1.5%. And while they are more expensive than just purchasing an ETF (the average ETF fee is somewhere in the 0.40% range), these funds factor in the costs of managers who have some discretion over the fund.

AdvisorOne's five mutual funds also invest almost entirely in ETFs. Two of the funds, the $587 million (CLSAX Quote)AdvisorOne Amerigo and the $130 million (CLERX Quote)AdvisorOne Clermont, were launched in 2002 but didn't fully transition into funds of ETFs until 2003. Prior to that, they were funds-of-funds.

The rest of the family is made up of the $99 million ( CLBLX Quote)AdvisorOne Berolina, which launched in January 2006, and the $106 million ( CLDEX Quote)AdvisorOne Descartes and the $30 million (CLHAX Quote)AdvisorOne Liahona, both of which launched in April 2006.

Robert Jergovic, one of the portfolio managers of the funds, says being able to use ETFs has been a gift. "When we looked at where performance came from in our strategy, it had less to do with security selection and more to do with asset allocation," he says. "And ETFs were made for that."

Jergovic adds that the ETFs also provide lower costs, liquidity and precision, because ETFs are transparent -- you know what you're buying. "It gives you a better perspective of how the pieces of the portfolio fit together," he says, adding that using ETFs also provides scalability to the business, because it is easy to trade large amounts in and out of ETFs, and the transaction costs are minimal.