Mutual Funds Join the ETF Wave

In recent years, exchange-traded funds been giving mutual funds a run for their money. ETFs have many advantages in terms of tax efficiency, diversification and asset allocation. But instead of competing against ETFs, mutual funds are increasingly investing in them.

According to fund tracker Mornginstar.com, there are 39 funds that invest at least 80% in ETFs -- baskets of securities that trade on an exchange the way stocks do. More of these products are expected to roll out this year and in the future as awareness of ETFs and their benefits grows.

(HRITX Quote)The Huntington Rotating Markets Fund, geared toward retail investors, has been investing solely in ETFs since it rolled out about five years ago. Paul Koscik, portfolio manager of the fund, says he uses ETFs mainly because of the flexibility they provide.

For instance, he says, a large-cap manager is limited to large-cap stocks. If that group goes out of favor, the manager is stuck. A portfolio of ETFs however, he says, lets you rotate into different segments of the market in an easy and cost-effective way.

The fund, which has $50 million in assets, rotates between four segments: U.S. large-cap stocks, U.S. mid-cap stocks, U.S. small-cap stocks and global. Currently the fund is in the global segment and has 54% allocated to U.S. stocks.