ETFs: The $2 trillion industry everyone is talking about

For the fifth year in a row, I am covering the ETF.com (formerly IndexUniverse) Inside ETF Conference in Hollywood, Florida, on Monday and Tuesday.

I've reported for years about the advantages of exchange-traded funds (ETFs): transparency, low cost, tax efficiency, intraday trading and the ability to easily buy into international stocks and bonds, as well as commodities.


NYSE New York Stock Exchange traders markets
Brendan McDermid | Reuters

The U.S.-based ETF industry passed a major milestone in 2014: $2 trillion in assets, up 18 percent from 2013.

That is quite a feat. In 2002, when I first mentioned ETFs, there was a mere $100 billion under management. By 2006 it had gone to $400 billion. By 2009 it had doubled, to $800 billion.

Now it's $2 trillion and counting, and that means one thing: The investment world is taking notice.

Here's five ETF trends I see for 2015:


1. Mutual funds panic: Time to buy ETFs?

The ETF business still has a long way to go if it's going to overtake the mutual fund industry, which if you include money market funds has more than $15 trillion in assets. Numbers tell the story: $15 trillion vs. $2 trillion seems like a vast difference, but don't kid yourself. The growth is on the side of ETFs. ETFs and exchange-traded notes (ETNs) had twice the inflows of mutual funds last year.

Money is going out of mutual funds and into ETFs due to a lower cost structure and the inability of almost all active funds to outperform indexes. That means less money for mutual fund companies.

Read MoreETFs about to pass $2 trillion in assets

Here's a bigger problem: The ETF business is dominated by four players (BlackRock, Vanguard, State Street and Invesco PowerShares) who control 90 percent of all the assets under management.

That poses a real problem for those asset managers and mutual funds who see the ETF train leaving the station without them on it. They need to get in, and I predict many will likely seek to buy an existing manager rather than start from scratch. It started last year, when New York Life purchased IndexIQ and Janus purchased Velocity Shares.

Read More10 rookie ETFs that raked in the 2014 cash

Who is a potential buyer of ETFs? My guess would be Franklin Templeton or Fidelity. You may even see non-U.S. companies, like Skandia or HSBC or Societe Generale, jump in.

And don't be surprised if a big famous asset manager like Mario Gabelli or John Calamos does something.

2. Don't count out hedge funds.

It's not just mutual fund investors who are unhappy: Dissatisfied hedge fund investors will also be putting more money into ETFs. ETF alternative investments that mimic hedge funds may get traction. They will also be more transparent than hedge funds.

Here's an idea: How about a hedge fund like KKR or Apollo buying an ETF, then spinning it off five years from now? Not so crazy.


3. Active management gets in.

Think about this: Who hasn't the ETF world cannibalized? Active management. But it's starting to happen.

How about hedge funds starting actively managed ETFs? If you were a hedge fund manager, would you trade high fees for a few hundred institutional investors for low fees to manage, say, a million customers?

Read MoreAre actively managed funds worth it?

The only "actively" managed ETF of large size is PIMCO's Total Return (BOND), but in 2015 State Steet's SPDR ETF business is teaming up with Jeff Gundlach to launch the SPDR DoubleLine Total Return Tactical ETF, which will invest in bonds picked by Gundlach.

Expect other well-known hedge fund advisors to also launch ETFs.

4. Robo-advisors vs. financial advisors.

One of the hot investing trends is the use of robo-advisors, led by Wealthfront. Wealthfront doesn't charge anything for the first $10,000 and only 0.25 percent after that; after filling out a short questionnaire, it will create a portfolio of ETFs to invest in.

Most importantly, the strategist behind this is Burton Malkiel, famed author of "A Random Walk Down Wall Street." Wealthfront's CEO, Adam Nash, was a 2014 CNBC Disruptor. This is a tough road to hoe: Most people don't trust machines; they want a human to advise them. And machines will not protect against losses. But the ability to get a well-known strategist's investment ideas for a low price will have appeal to many.

5. Smart beta: A better way to own the stock market?

Weighting indexes by market capitalization (like the S&P 500) is under attack. The argument is that these indexes overinflate the value of (overbought) stocks.

"Smart beta" is all the rage now. It uses alternative weighting schemes, including equal-weighting or based-on-earnings growth. PowerShares, one of the largest ETF providers, has just launched the PowerShares Russell 1000 Equal Weight Portfolio (EQAL) in December. WisdomTree has also had huge success with smart beta.

Why should investors use this alternative method for owning stocks and ETFs? The answer is, if it gives you a better return, why not?

Coming Monday: The hot ETFs for 2015