There is a steady and dramatic shift occurring in the investment world toward Exchange Traded Funds. ETFs as they are called, represent baskets of stocks which are managed only to match specific indexes, not to beat them, as is the case for actively managed mutual funds. According to a recent study by Barclays Global Investors US listed ETFs climbed to an all-time high of $607 billion at the end of August. The study suggests that a "conservative" growth rate of 20% compounded annually, would put ETFs above $1 trillion by mid-2011. That total would represent 10% of the US mutual fund industry.  Brad Hintz, an analyst at Bernstein Research, in a Sept. 23rd research note said the growth of passive index products in general and ETFs in particular represent "a threat to traditional asset managers." He expects investors will focus even more on fees and tax efficiency with a sluggish outlook for stock and bond returns after the financial crisis. In this Brief I will demonstrate that there are even more significant advantages to the passive approach offered by ETFs than simply lower costs and taxes.

The US Economy continues to show signs of recovery, particularly in manufacturing. Third quarter earnings will show just how quick the pace of recovery is. Early reports this week were good with Goldman, JP Morgan, Citi, IBM, beating expectations and Intel raising fourth quarter guidance. The stock market continued its steady rise this week as reports filed in with the Dow closing about 10,000 yesterday for the first time in a year. And as has been the case since March, the dollar continues to decline as the stock market rises.

Economic recovery will be in the eyes of the beholder for months to come. From the perspective of employment, the economy may remain anemic for months. And Washington’s stimulus efforts are having no discernable impact. Alternatively, the corporate sector seems to be showing life on several fronts including exports, inventory replenishment, and earnings from increasing sales.

The long and mostly uninterrupted rally took a breather this week as investors wondered if the economic recovery might be losing steam. Some wonder if the market might be ahead of itself, given the anemic nature of the recovery. But it is not news that the recovery is going to be bumpy and uneven. The perennial doomsayers continue to harp on the bad and the perennial optimists harp on the good. Today, we’ll simply report the week’s economic news and let you decide.