Current Affairs News:

The active vs. passive debate has an interesting twist. Some actively managed mutual funds have surprising top portfolio holdings: ETFs.

Investors expect active funds to outperform the indices through savvy stock picking. However, some managers are trading baskets of securities with ETFs.

Ian  Salisbury for SmartMoney made an example of the Columbia Small Cap Core fund (SSCEX), an equity mutual fund with $900 million in assets that recently cited its top position as the iShares Russell 2000 ETF (NYSEArca: IWM ) instead of a single-stock holding.

The iShares ETFs are the most popular with portfolio managers, namely IWM. There are over one dozen mutual funds that hold IWM, as well as other ETFs, according to the story. [ETFs to Track Market Sentiment ]

When the market plunges, investors often want to sell their shares en masse. That can force fund managers to dump some of their favorite stocks at unfavorable prices to pay off anxious investors. So, fund managers say, they own own ETF,which is easy to sell and lets the fund keep the stocks it really likes, Salibury wrote. [Investors Moved Back Into Stock ETFs in July ]

Cory Banks for Index Universe reports that the concern comes down to fees. Shareholders of a mutual fund pay fees for their slice of the pie: transaction costs, advisory fees, marketing and distribution expenses—all on top of the fees paid to the fund manager herself. The fees are one of the several reasons why many advisors are moving to lower-cost exchange-traded funds.

Some analysts conclude that fund managers are buying ETFs instead of futures,where margins would climb. ETFs give both managers and investors fast, and cost effective exposure to the market. [Actively Managed ETF Education is Key ]

The use of ETFs in mutual funds is a good thing for the industry. Managers get the benefits of ETFs,which are passed down to shareholders. In turn, ETFs will continue to gain more assets under management and positive feedback.

Tisha Guerrero contirbuted to this article. 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.