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By Jason Stipp | 09-01-2010 11:04 AM

The Active Role of Passive ETFs

The investment industry is shifting from one focused on stock-picking to one focused on tactical and strategic asset allocation using index-based investments, says IndexUniverse editor Matt Hougan.

Jason Stipp: I'm Jason Stipp from Morningstar, reporting from the first annual ETF Invest Conference in Chicago.

What's next for the ETF industry?

Here with me to offer his take is Matt Hougan. He is editor of IndexUniverse.

Thanks for joining me, Matt.

Matt Hougan: Glad to be here.

Stipp: Several things I want to talk to you about, pick your brain a little bit. I know you're very closely watching, and write about, the ETF industry.

ETFs have held up pretty well as some other managed products, certain kinds of mutual funds have seen assets flow out of them since the market crisis.

We're continuing to see lots of interest ETFs, new ETF products, new ETF players. Where do you see the growth of the ETF industry right now? Is it reaching a maturity or is it still ramping up?

Hougan: No, it's still ramping up. I think you're seeing a sort of fundamental change in the way investors approach the market. From one focused on stock-picking, to one focused on tactical and strategic asset allocation, where they're using beta products or beta-plus products in an ETF wrapper to generate alpha themselves individually as supposed through individual securities selection. And I think that process is just in the second or third or fourth inning. It's still getting going. I think it's a major shift.

Stipp: So, really what we're seeing is, although these are in and of themselves are often passive investments, managers are actively using them in different combinations to be an actively managed investment product?

Hougan: Absolutely. The idea that indexing is on the rise, classic, passive Bogle-style indexing, I'm not so sure I agree with that. The idea that index-based investments used in the active ways, as you described, that's absolutely what's going on.

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