CHICAGO --

Morningstar

was brave enough to offer the keynote address at its annual investment conference to the chairman of the company that poses the biggest threat to the mutual fund industry.

And

Barclays Global Investors

Chairman Patricia Dunn, did nothing to put the industry at ease, attacking mutual funds as costly and inefficient and dismissing low-cost fund leader

Vanguard

as yesterday's news.

Barclays has launched more than two dozen exchange-traded funds, or ETFs, which are essentially mutual funds that are continually priced and traded on a stock exchange. Many believe ETFs, which have attracted some $45 billion so far, are a potent threat to both actively and passively managed mutual funds because they combine the convenience of stock-like trading with potentially higher tax efficiency and lower costs than traditional funds.

Dunn's first target: actively managed mutual funds that, she said, shun price comparisons by cloaking portfolios and their management process in secrecy, rarely explaining what investors get for their money and making pragmatic comparison shopping arduous.

"Our industry has an enormous vested interest in the mystique of investment management," she says, noting that some $130 billion was taken from investors' portfolios in the form of management fees and other expenses last year.

Too often, she says, investors who own actively managed funds "pay Picasso prices for paint-by-the-numbers work."

Sounding a lot like Vanguard's former chairman Jack Bogle, she trumpeted index funds as the best choice for an investor's core equity investments. "Index funds are like super-securities that allow us to focus on our objectives, rather than the sugar high of owning this year's hot stocks."

Then she promptly attacked Bogle's old shop, Vanguard, and its traditional approach to index investing. She pointed out that exchange-traded funds boast greater convenience and lower annual expenses than traditional index mutual funds.

She noted that shareholders of the

(VFINX) - Get Report

Vanguard 500 Index fund, which tracks the

S&P 500

index, paid 1.77% of their investments in capital gains over the past three years. Over the same period, she said, an ETF tracking the same index,

Spiders

(SPY) - Get Report

, left investors with no capital gains tax burdens.

"There's only one organization that built itself on the value-for-money approach and that's Barclays Global Investors," she says, clearly snubbing cost-obsessed Vanguard, which plans to launch ETFs of its own called VIPERs.

What about the drawbacks of ETFs? Namely that their stock-like trading capability could spur excessive trading, a gripe voiced by Bogle at the conference on Wednesday night.

Dunn, while acknowledging that ETFs typically have shorter holding periods than mutual funds, says the numbers are skewed since active traders typically steer clear of traditional mutual funds, which often levy redemption fees for short-term traders.

Managers Find Value in Tech

Tech-fund managers are sounding a lot like value managers these days.

Three who spoke on a Friday panel at the Morningstar Investment Conference say they have been sifting this year's tech wreckage for oversold stocks that have patents, fat market share or some vital edge that could help them trounce current competitors and ward off new entrants.

"The key to investing in technology is finding companies with key competitive advantages. The size of the moat around your castle will define your success," says John Sykora, co-manager of tech-heavy

(TWCUX) - Get Report

American Century Ultra fund.

Which stocks have the deepest moats?

Cathy Baker, co-manager of

(RIAFX)

RS Internet Age, likes

Knight Trading

(NITE)

a leading market maker in

Nasdaq

stocks, meaning it provides the necessary liquidity to keep bid and offer prices from being too wide for trading to occur. The company's acumen and deep traction with online brokers like

E*Trade

should be a big boost, says Baker.

Ryan Jacob of the

(JAMFX) - Get Report

Jacob Internet fund offered wireless data shop

Aether Systems

(AETH)

because it leads competitors in paving the way for mobile online commerce, where he sees big profits down the road.

"It will not only be a big opportunity here in the U.S., but also globally in terms of providing Internet access," he said.

Sykora says he sees

America Online

(AOL)

as a juggernaut. It has 23 million subscribers and grabs one of every two new subscribers, positioning it to rake in fat advertising revenue, which grew by 100% last quarter, he says.

He also likes

Gemstar

(GMST)

, which owns many patents for the technology used in interactive TV guides.

Jacob and Baker both own online media concern

About.com

(BOUT) - Get Report

, hailing its cost-effective customer acquisition and proximity to profitability.

Despite their excitement about these picks, it's not all blue skies. Lest we forget, many of last year's dot-com darlings have been smacked this year, some dropping 80%. Baker notes that many e-tailers and other unprofitable Net stocks will fold, and Jacob says investors should stay out of Net stocks unless they're prepared for "stomach-churning volatility."

Still, the trio thinks the glass is half-full. When asked if the volatility will continue, Sykora said, "I hope so." He thinks it's clearing a path to attractively priced opportunities.

Miller Gives Tech a Rest

At a panel on value investing, three respected practitioners, Christopher Davis of the

(NYVTX) - Get Report

Davis NY Venture and

(SLASX) - Get Report

Selected American funds, Bill Nygren of the

(OAKMX) - Get Report

Oakmark and

(OAKLX) - Get Report

Oakmark Select funds, and Bill Miller of

(LMVTX) - Get Report

Legg Mason Value Trust and

(LMOPX) - Get Report

Legg Mason Opportunity, presented a united front against critics who doubt the value credentials of managers who invest in technology.

"If you call yourself a value investor, it doesn't mean that you have to say you don't understand technology," says Nygren.

But Miller, famous for his early stakes in

Amazon.com

(AMZN) - Get Report

and America Online, says he's shying away from technology nowadays, feeling it's overvalued. Instead, he says he has been picking up shares of savings and loan

Washington Mutual

(WM) - Get Report

. He also likes grocers

Kroger

(KR) - Get Report

and

Albertson's

(ABS)

.

The Next Not-Too-Big Thing

Mid-cap stocks have been the sweet spot of the market during the tech shakeout, primarily because mid-caps capture much of the growth momentum of smaller companies with the stability of older businesses with track records.

"You don't get your feathers singed if you're in the middle," notes Colin Ferenbach, skipper of the

(HAVEX)

Haven fund.

But when it comes to which stocks are poised for big run-ups, Ferenbach and others on a panel of mid-cap fund managers could find much to agree on, given their different styles. Doug Foreman, manager of the

(MCFAX) - Get Report

MSDW Mid-Cap Equity fund, prefers tech names like semiconductor player

Xilinx

(XLNX) - Get Report

and routing systems provider

Juniper Networks

(JNPR) - Get Report

.

Tim Miller, who runs

(FIDYX)

Invesco Dynamics, is also fond of tech, but focuses on e-commerce software provider

BroadVision

(BVSN) - Get Report

and tech storage player

Brocade

(BRCD)

.

Ferenbach, who employs a growth-at-a-reasonable price strategy, likes medical-devices company

Medtronic

(MDT) - Get Report

, though he thinks it's currently too pricey.

Earlier Morningstar conference stories:

Growth Managers Say Wireless Rings Their Bell

The Fight For Disclosure Rages On

ETFs Take Center Stage