"If you're looking for active money management, ETFs in their current form aren't there yet," said Scott Burns, director of ETF analysis at Morningstar Inc. "But if you're looking to index or to allocate to a sector or to access commodities or other asset classes that were once hard to reach, ETFs can be a suitable investment."
Hottest current examples are so-called "quantitative active" ETFs, which operate on a quantitative model in their selection process much as many hedge funds do, Burns said.
Two of the oldest successful examples of quantitative active ETFs are PowerShares Dynamic Large Cap Value ETF (PWV), with a three-year annualized return of 6 percent, and PowerShares Dynamic Mid Cap Growth ETF (PWJ), with a three-year annualized return of 8 percent. Both keep their expenses low.
The weak U.S. dollar has popularized those ETFs with international focus this year, Anderson said. Between the SPDR DB International Government Inflation-Protected Bond ETF (WIP) and the SPDR Lehman International Treasury Bond ETF (BWX) more than $1 billion in new money has been invested, he said.
When considering the competition between ETFs and mutual funds in a difficult year for investing in general, one must not overlook the might of the long-standing champ. The mutual fund has gained vast acceptance, including through 401(k) company retirement plans.
"There are over 700 ETFs with just under $600 million in assets, compared to about 8,000 mutual funds with $11 trillion in assets," Anderson said. "It will therefore be a long while yet before one can realistically talk about ETFs becoming bigger than mutual funds."
ETFs represent not only a way to invest in broad market indexes, but a chance to pick up intriguing specialties.
"This year it largely hasn't mattered if you were in an ETF or a mutual fund, but rather what asset class you were invested in," Anderson said. "Money moved into commodities and bonds has done well this year, while you got hammered if you stuck with international or U.S. equities."
Never forget that it is the underlying investment, rather than the vehicle, that always decides results. Style, such as value or growth, makes a difference.
"One thing investors tend not to understand is the concept of style investing, because they tend to compare everything to the S&P 500," said DeLegge, who considers it important to have a reliable benchmark to which you can compare your holdings. "Investors must understand that a small-cap value fund should be compared to a small-cap value index, not just to a small-cap index."