It may be OK to have both actively managed and index funds in your portfolio.
Rich Messina, senior vice president of investment product management at E*TRADE Financial, said a hybrid approach allows investors to carefully consider when to use each strategy, taking into account things like asset class efficiency and liquidity and overall fees.
"There are certain asset classes where asset management, like large cap, makes the most sense," said Messina. "In other asset classes like international or fixed income an active manager will add alpha, so as you combine the two it's a more effective portfolio management tool to have."
In light of the growing demand for ETFs as part of an overall strategy, E*TRADE found that U.S. market indexes and dividend ETFs were by far the most popular among investors. Most notably, baby boomers proved to be more interested than younger generations in dividend ETFs. Meanwhile, millennials are more interested than older investors in bond and commodity ETFs compared to boomers.
"They are a lot less risk averse," said Messina. "They are looking for that opportunity. They are going to put a portion of their portfolio in it. It trended toward the bottom and now they are looking for the upward curve. They want to take more of that risk in their portfolios."
As for the slew of so-called smart beta products hitting the market, Messina said they are being adopted by both the boomer and millennial generations.
"If you are looking for an active management component in the ETF space, you are able to get that," said Messina.