ETFs Get Active

Mutual funds may not have the low management fees, easy-to-use structure and perceived transparency of exchange-traded funds, but they are typically closely monitored by money managers who reallocate their portfolios to give investors the very best returns.

Now ETFs want in on this game, too. ETFs are designed to merely track indices, but new products are appearing that give investors the benefits of active management. Moreover, some industry watchers say that true actively managed ETFs aren't far off in the distance.

"If you look at the more recent crop of ETFs, you'll see funds that are based on indices that are intended to be 'better indices,'" says Tony Baker, managing director of the exchange-traded marketplace at the American Stock Exchange. "They are based on someone's research that indicates that this basket of stocks [has been carefully chosen] to be better than a standard index." ...