NEW YORK (TheStreet) -- A troubling economic climate has weighed heavily on investors' confidence in the idea of active portfolio management. This, in turn, has allowed index mutual funds and the ETF industry to expand at breakneck speed.

As evidence of this shift from active to passive investing strategies, Vanguard has managed to dethrone Fidelity Investments to become the largest mutual fund company by assets, putting an end to the latter's two decade reign.

Citing a report from the Investment Company Institute, Bloomberg reported this week that as of the end of July 2010, Jack Bogle's Vanguard Group boasted $1.31 trillion in assets. Comparatively, Fidelity's fund assets total $1.24 trillion.

Although the shift towards passive management may have been a major element leading Vanguard to steal the crown, another important quality to consider is its dedication to keeping costs low. Hailed by many as an investor champion, founder, Bogle has been long been a harsh critic of the mutual fund industry, calling for reduced costs for shareholders.

By utilizing indexes rather than active managers, Vanguard funds typically see far less turnover, allowing for reduced expense ratios.

While impressive, the real disparity between Vanguard and Fidelity is likely far greater than the report claims. According to Bloomberg, the numbers included in the ICI report do not include ETF assets.

Vanguard offers a growing collection of exchange traded products. Meanwhile, with no funds carrying the Fidelity name, it appears as though the mutual fund firm has missed its chance to become a force to be reckoned with in the ETF industry.

Vanguard's taking the top spot in the mutual fund industry is an exciting development and looking ahead I will be closely watching to see if the firm can do the same in the ETF industry.

Although still relatively new to the game, Vanguard has made some impressive steps towards gaining supremacy in this arena as well. It continues to be exciting, each month, to watch the ongoing saga play out between the iShares MSCI Emerging Market Index Fund ( EEM) and Vanguard's Vanguard Emerging Market ETF ( VWO). With lower costs and reduced tracking error, VWO has managed to consistently steal assets from the elder EEM.

VWO has been a success story and more recently Vanguard has launched other products aimed at stealing away additional market share from industry leaders BlackRock ( BLK) and State Street ( STT).

In recent weeks, Vanguard has unveiled two suites of funds designed to track variations of the S&P and Russell Indexes. It will be interesting to see how the veteran products such as iShares S&P 500 Index Fund ( IVV) and SPDR S&P 500 ETF ( SPY) perform compared to newcomer Vanguard S&P 500 ETF ( VOO).

As with VWO, VOO's expenses are less than those of IVV and SPY. If the EEM/VWO battle is any indication as to how this showdown will play out, industry leaders should be concerned.

Seeing Vanguard's army of index mutual funds earn the top spot within the broad mutual fund industry not only bodes well for Vanguard, but also for the broad ETF universe.

Investors remain concerned about economic conditions, wary of entrusting active mutual fund managers with their money, and conscious of costs. With the lion's share of ETFs offering a low cost opportunity to play broad swaths of the market through the use of passive indexes, I predict a bright future for these products.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was not any of the equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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