Growing appeal of a trading product

Exchange-traded funds remain relative upstarts compared with mutual funds. But it's not a stretch to ask whether investors might someday commit as much cash to them as they have to their more established cousins.

Introduced in the early 1990s, ETFs initially were trading tools for professional investors. Similar to low-cost index mutual funds, they track segments of the market and try to match a benchmark stock or bond index rather than beat it.

But ETF shares can be traded throughout the day like stocks. Mutual funds are priced only at the close of daily trading.

Following are ETF trends likely to continue in 2013:

Increased acceptance. Although ETFs remain better known on Wall Street, their low costs and index-investing approach are drawing more typical investors. Individuals own about 60 percent of assets in ETFs. The remaining 40 percent is attributed to institutional investors like pension funds and foundations, according to a recent study by the consulting firm Strategic Insight.

Outpacing mutual-fund growth. ETF assets have doubled over the last three years, reaching $1.3 trillion. They are growing faster than mutual-fund assets. So far this year - with more than $150 billion in net deposits through November - ETFs are on track to match a 2008 record for the amount of new cash taken in, according to Morningstar. Still, for every dollar in an ETF, investors have stashed $7 in mutual funds.

Competitors cutting costs. Several industry leaders recently have cut ETF expense ratios - the amount paid to cover operating costs, expressed as a percentage of assets. Investors need to consider much more than costs, but the recent reductions are a clear positive. Charles Schwab, a relatively small player in ETFs, made a particularly bold move in September, reducing expense ratios at two stock ETFs to 0.04 percent, or $4 a year per $10,000 invested.

The biggest ETF provider, BlackRock's iShares unit, followed Schwab's move by cutting fees at six of its largest ETFs in October. Vanguard has reduced fees at two-thirds of its ETFs over the last 14 months. More trims are expected as a result of a move that will reduce overhead costs. Vanguard is switching the market indexes that 22 of its ETFs and mutual funds track to benchmarks provided by companies that will charge lower licensing fees.

Bond ETFs surging. Increasingly risk-averse mutual-fund investors have deposited huge sums into bond mutual funds since the financial crisis. Bond ETFs also are enjoying strong growth, attracting $52 billion in net deposits through November, for a total $245 billion in assets, Strategic Insight says.

Becoming more active. A small but growing number of actively managed ETFs seek to outperform the market rather than match an index. Among the big industry players making moves into managed ETFs are State Street's "SPDRs" ETFs family and Fidelity Investments.

Only the strong survive. It's been a record year for ETF closures: Through November, 101 ETFs had closed, according to S&P Capital IQ. Among the 1,200 ETFs on the market, there's a big gap between the biggest and smallest in terms of assets. The largest, the SPDR S&P 500 (SPY), has about $114 billion. Most of those that closed had less than $10 million.