During the next four years, exchange-traded funds should continue to have the fastest growth rate among the three major fund types used by retail investors, according to a new study.

That follows similar growth patterns forecasted in the past for ETFs over active mutual funds and index mutual funds. The latest, done by Financial Research Corp., also projects that by 2012, ETFs will represent 6.8% of the retail investment marketplace's total assets.

That may not seem like a huge number, but keep in mind that would represent the first time that ETFs eclipse index mutual funds in terms of market share among all major investment product categories.

Active funds will also drop to 55.1% market share, down from 61.1% at the end of 2007, and 68.1% in 2002. (In 2002, only 2.1% of the investment market was represented by ETFs.)

While 6.8% might still seem fairly small in comparison to the longtime majority figure for active funds, there are some realities of the asset management industry that dictate ETF gains against active funds will continue to be a gradual success story.

Kristin Adamonis, senior editor at FRC and author of the study, said, "The asset base for actively managed funds is so huge that I don't think even in 10 years any product will overtake it in total market share. Chipping away at market share will be the method."

There is also an important caveat to the data. ETF growth in net sales and total assets is both an institutional and retail story.

The data for ETFs cannot be separated into retail and institutional (e.g., retail distribution platform use of ETFs versus mutual fund manager, small pension plans and hedge funds' use of ETFs). Mutual funds, on the other hand, are primarily retail investments, though many mutual funds do offer an institutional share class that can be used by small institutions.

In the end, comparisons between ETFs and mutual funds are less than apples-to-apples when looking at net sales to retail investors. Adamonis said FRC had used "conservative" numbers in making its projections.

Still, the ETF numbers are very healthy, and FRC expects them to remain that way through 2012.

Since 2004, ETFs have been grabbing 20% per year in fund industry net sales, as compared to the figures for active and passive mutual funds. Beginning in 2007, annual net sales of ETFs first began to rival the sales of actively managed mutual funds, FRC data shows.

A snapshot of 2006 and 2007 shows how quickly ETFs have assumed a higher profile among investors, versus the net sales rate of the mutual funds:

*Retail mutual fund net sales versus total (institutional and retail) ETF net sales

ETFs spike of 16% in net sales from 2006 to 2007 is an important growth story, relative to the net sales rates for active and passive mutual funds.

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