Most Mutual Funds Are Missing the ETF Train

| About: Guggenheim International (XGC)

There are some mutual fund companies who may not appreciate the competition from ETFs but realize that they can't be ignored.

They are the minority, as 99% don't offer ETFs, nor do they relate to or welcome the investors who trade them. Bill Donoghue for remarks that ETFs are the mutual funds of the future: they're less expensive to operate, trade like stocks and have tax benefits.

Top ETF providers include banks, Barclays Global Investors and State Street Global Advisors. The mutual fund companies who have stepped up to address ETFs include Vanguard, ProFunds and Rydex. Vanguard has been able to create an ETF that extends their index fund management into a new product, and with a lower registration cost. ProFunds and Rydex are also extending their product offering with ETFs that tend to be as innovative as their mutual funds.

Donoghue points out that traditional mutual fund managers can't seem to break from their old strategies. Perhaps these managers are wondering where they would even fit in the ETF world.

One fund manager chose to launch an ETF over a mutual fund. According to Aaron Siegal for InvestmentNews, James Huguet's large-cap investment approach was the basis for this month's launch of Claymore/Great Companies Large-Cap Growth Index (NYSE:XGC).

Huguet decided to pass on creating a mutual fund as it would take at least three years to get a rating from Morningstar, whereas the 10-year backtesting could give instant credibility. He thinks fund managers are not embracing ETFs because they fear the ETF will cannibalize their funds.

Whatever the reasons, there is no doubt of the popularity and growth of ETFs. As with any investment decision, an investor must do homework to know what they are buying, review their criteria for adding a holding and make sure they have an exit strategy.

Full Disclosure: Tom Lydon is a board member for Rydex Funds.