ETFs' Strategy to Challenge Mutual Funds

BOSTON (TheStreet) -- The likes of BlackRock's(BLK Quote) Barclays Global Investors, ProShares and Vanguard could help lift exchange traded funds to the level of mutual funds if they made ETFs more investor friendly, according to a Deloitte & Touche LLP executive who oversees asset management.

Asset-management firms are slicing and dicing ETFs, whose assets surged to a record of more than $600 billion last year from about $70 billion at the beginning of 2001, into niches, racing to corner the market on the latest hot investment trend. But if they appealed to 401(k) investors, who have $7.5 trillion socked away in long-term, broad-based stock and bond portfolios, exchange traded funds could erode the popularity of mutual funds, says Cary Stier, U.S. leader of Deloitte & Touche's Asset Management Services Practice.

"Some of the larger firms will start to see retirement products expanded or advanced into ETFs," Stier says. "Until we start to see that happen, I'm not sure the traction will be there. You've got the Vanguards of the world and others that sort of have this model and a very good patented product that plays well into that space. It is going to be other organizations, which have a large mutual fund presence in retirement, who see an opportunity for investors who lost a lot of their retirement savings. Those companies might be thinking about how to expand their product lines into ETFs."

Companies including BlackRock, which bought Barclays' iShares this year to become the biggest U.S. ETF company, and global titan State Street(STT Quote) may help decide the future of the ETF 401(k) market, Stier says. That's because large firms "are at the table already," he says.

A barrier to 401(k) plans for exchange traded funds are high annual fees compared with index mutual funds, which charge as little as 0.1% a year. ETFs can be five times or more than that. Nevertheless, ETFs offer advantages over mutual funds: the reduced role of a portfolio manager and his or her whims, securities transparency, tax efficiency and investment flexibility.