As I've noted before, exchange-traded funds have been undergoing quite a rapid evolution in recent years. They were created to reflect broad market indexes such as the S&P 500, but you can now find all kinds of ETFs focused on tiny and very specialized niches, from the self-explanatory HealthShares Dermatology & Wound Care (NYSE:HRW) ETF to the Claymore/Clear Spin-Off (AMEX:CSD) fund, which focuses on companies that have been spun off from other companies. Pretty soon, I expect we'll see the "G" ETF, invested in companies whose names begin with the letter G.
Here's another new development in ETF-land: actively managed funds. ETFs have traditionally been passive investments, created around a relatively static basket of holdings. Now, the American Stock Exchange, where many ETFs trade, has received patents for software that would help traders use actively managed ETFs. MarketWatch.com has reported that the software "publishes a value for the fund throughout the trading day without the manager disclosing the portfolio holdings or trades." There's also a "committed issuer" ready to launch the first active ETFs, with others expected to follow.
So, which firms have lined up? One of them surprised me: Vanguard, founded by none other than John Bogle, father of the modern index fund -- and also a critic of ETFs. Investment News says: "Like its other ETFs, Vanguard's actively managed ETF would actually be a share class of an existing Vanguard fund, in this case the $9.9 billion Vanguard Inflation-Protected Securities Fund. The fund invests in inflation-indexed bonds backed by the U.S. government." Bear Stearns (NYSE:BSC) is another participant, having filed to offer the Bear Stearns Current Yield Fund, a money market-like fund.
Should you snap up shares of actively managed ETFs? Well, maybe. In many cases, sticking with an established, proven mutual fund can be good enough. But sometimes, such as when a fund's minimum investment amount is too steep for you, opting for an ETF similar to it can make sense. With ETFs, you can buy as little as a single share, just like a stock -- though that isn't always financially prudent.
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I encourage you to learn much more about ETFs by visiting our ETF Center. It features info on how ETFs stack up against mutual funds, how to develop an investment strategy with ETFs, and how to avoid pitfalls and ETF imposters.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool is Fools writing for Fools.
