How ETFs Have Changed Investing

Active Management

PowerShares recently launched a series of actively managed ETFs that include the PowerShares Active Low Duration Fund(PLK Quote), the PowerShares Active Mega Cap Fund(PMA Quote), the PowerShares Active AlphaQ Fund(PQY Quote) and the PowerShares Active Alpha Multi-Cap Fund(PQZ Quote).

XShares Advisors and State Street(STT Quote) have also recently launched similar products.

Previously, investors who wanted a vehicle that coupled instant diversification with the skill of a portfolio manager would often look to mutual funds. Now, they have the option of utilizing actively-managed ETFs to accomplish this strategy.

"In the past, ETFs had to track an index," McRedmond says. "Now with actively-managed ETFs, there are more options for portfolio managers. This flexibility gives investors the opportunity to try to outperform benchmark indexes."

Access Granted

The evolution of ETFs has enabled investors to enter areas of the market, such as commodities and preferred equities, where access was limited in the past.

"We have seen a pretty good pickup in interest in preferred stock ETFs," McRedmond says.

Last year, his company introduced the PowerShares Financial Preferred Fund(PGF Quote) which has top holdings that include preferred classes of stock from Royal Bank of Scotland(RBS Quote), Merrill Lynch(MER Quote), Goldman Sachs(GS Quote) and Wachovia(WB Quote).

"It can be viewed as a less aggressive way to play the recovery of financials," he says. "It typically pays a monthly dividend that is viewed by the street as attractive for an investment grade portfolio."

iShares also has an ETF that is focused around preferred offerings. The iShares S&P U.S. Preferred Stock Index(PFF Quote) has a yield comparable to its PowerShares counterpart and has preferred classes of stock from Ford(F Quote), Citigroup(C Quote) and Freeport McMoRan Copper & Gold(FCX Quote) among its top holdings.