Don Phillips addresses the age-old (well from 2002 or so) question of whether ETFs will take over the investing world.

Murray - by the way, I do think it's funny that there is only one ETF panel at the Morningstar event (and yes, you're right, I am on it). I think they have one ETF panel every 2 years or so. Morningstar has been dragged into the ETF business kicking and screaming, similar to the ICI (Investment Company Institute - the mutual fund trade group) which it appears has finally opened its doors to the audacious ETF issuers.

There is a wide range of views on whether ETFs will eventually eclipse traditional mutual funds. Morningstar, as is reflected in their relatively limited coverage and improving, but as yet still round peg in a square hole analysis of ETFs, stands on the conservative end. A significant group of innovators, who think that a wholesale eventual conversion to ETFs is inevitable and is developing active ETF solutions, sits on the other side. The truth probably lies somewhere in between.

First, let's all agree on one thing: With a very few exceptions (I would count small regular investments and potentially a few less liquid asset classes where cash is handy in this group), ETFs are simply a better structure. They allow greater transparency, lower cost, better tax efficiency and the ability to remove the activity of other fund investors from YOUR activity. And you can invest in them at somewhere very close to NAV in real time. That adds up to, well, better.

But the Beta VCR was better than the VHS format, and I'm sure some current video technology that is inferior will probably lose out to a superior technology. So better does not always mean that you will have the winner. In the investing business, as in most business, distribution and marketing is key, and in that arena, traditional funds have a tremendous head start. Add that to the fact that the 401(k) structure was simply NOT designed with ETFs in mind, and you've got some powerful obstacles to ETFs taking over the world.

Frankly, most large mutual fund managers are doing just fine under the current regime, thank you very much. And while they're all looking at exploring the ETF business (and Fidelity already has one), they'll only be dragged into the business kicking and screaming by market forces. And the last few years, market forces have been demanding attention as flows have moved strongly toward ETFs.

Only time will tell if ETFs are a dramatic innovation or a revolution.