Many also believe that credit research in the bond market gives active managers a bigger opportunity to outperform benchmarks. That’s the chief reason that most of the money in municipal bond funds, currently one of the hottest segments of the fund industry, is in actively managed mutual funds.

It appears, however, that investors are getting over those worries in much of the bond market. Over the last year, actively managed taxable bond funds have lost $80 billion in assets, while passively managed bond funds have taken in more than $108 billion.

“Investors have become more familiar and comfortable with fixed-income ETFs,” said Morningstar’s Johnson. “They’re using them to build out larger parts of their portfolios.”

Again, the reason is low cost. “You can own the entire bond market for 8 basis points,” said BlackRock’s Small, referring to the cost of his firm’s market-leading AGG bond fund, which tracks the Barclay’s Capital Aggregate Bond index. It currently manages $37.7 billion in assets. “We’ve reached a tipping point where the facts have overwhelmed the criticism [of bond ETFs].”

There are currently about $2.2 trillion in assets in ETFs — roughly 15 percent of the market for retail investment funds. Small expects growth rates to be 10 percent to 12 percent annually for the next decade and total ETF assets to reach $9 trillion by 2026.

“We will be able to index so much more of the capital markets, and ETFs will expand into every asset class that can be indexed,” he said.

— By Andrew Osterland, special to CNBC.com

Source: CNBC.COM

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