Clearly active management is another area. And there are more strategy-based ideas that can come to fruition; for example, there's a lot of chatter about ProShares and their upcoming 130/30-related product.

So there are a lot of things on the fringes. I think that alternative energy and thematic funds will have a life all their own. You'd be surprised what people can think of when you have a wave like the ETF industry that is moving the way it is. I have a feeling that a lot of people are thinking this is one of those shots where, after a certain amount of time, it's too late and the party's over. Kind of like where the mutual fund industry was maybe 25 years ago. The amount of innovation that Wall Street has in its ability to think of something new to sell is actually quite amazing.

IU: Do you think actively managed ETFs will be a good thing for investors when they finally hit the market? Do you think they're going to successfully add value?

Kang: Here's the thing: If John Bogle is right and a lot of ETF investors are more and more involved in the active management of ETFs and really getting into high turnover and potentially tripping over themselves, then the problem of chasing returns in the mutual fund space, the sport of chasing active managers will transition over to the ETF space. It is sport; it's a competition where there will be winners or losers-there's no other way to characterize it.

If that happens, then I don't know who will be the winner-maybe the fund of funds who goes about selecting managers. In the U.S. you have something called a wrap, in which people package a bunch of mutual funds and they put them into models. That might be an area where somebody may be successful if they are actually good at picking managers. I'm not trying to have a negative stance on this, but once you do that, you add a new complexity to the ETF space and the concept of active risk management and everything that goes into the difficulties of actively managed products.

Once you get into active management and manager selection you add another significant potential for failure. Let me put it to you this way: If you're an investor and if your portfolio is completely dependent on picking ETFs, which are all index-based products, first you have to get the asset mix right. Then, for each component, you've got to pick the index.

For each one of those things, let's just say you have a 50/50 shot at outperformance. If the first one is a 0.5 chance and the second one is a 0.5 chance, and they're independent events, you already have just a 1 in 4 chance of success. Once you get into that asset class and then you add a manager selection, then you've got to figure that guy has a 50/50 chance of actually beating the index for whatever you determine to be success. That's 0.5 times 0.5 times 0.5, and now you're getting closer to 10% to 15% success.

Furthermore, the SPIVA [Standard & Poor's Versus Active] report cards that S&P used to provide often found that roughly 80% of managers underperformed their benchmark index. Sometimes it was 30%, sometimes it was 40%, but generally the number tends to be somewhere closer to 20% to 25% that can beat market. When you get down to numbers like that, it doesn't look good.

Certainly, I can understand the economics of actively managed ETFs, and I think that the concept of active management in an ETF structure makes sense under some conditions. I'll be interested to see how many new entrants, big and small, will enter the ETF space once actively managed ETFs become established.

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