The coming transformation of ETFs into mutual funds.

So, why do it?

Obviously, to make more money. Grail's American Beacon Large Cap Value ETF charges a management fee of 0.79 percent, 44 percent more than the average ETF expense ratio of 0.55 percent, according to Lipper. But it's still cheaper than a mutual fund; Morningstar lists the average expense ratio for active mutual funds at 1.25 percent. The active ETF is definitely a cheaper choice.

But do investors really prefer active management? Probably a third of the investors in active funds want a manager who can give them market-beating returns. Another third have no choice. They're locked up in 401(k) plans with maybe one index option. The final third probably don't even know indexing is an option. They're put into active funds by financial advisers who have an incentive to do so.

Whatever investors' reasons, active management has no great track record. Recent data from Standard & Poor's again suggest why investors should use index funds. Over the five years ended December 2008, the S&P 500 beat 72 percent of actively managed large-cap funds; the S&P MidCap 400 outperformed 79 percent of active midcap funds; and the S&P SmallCap 600 topped an astounding 85.5 percent of small-cap funds. Theoretically, you want an active manager even more in a bear market, but here again, they don't perform well. In eight out of nine equity styles, the indexes performed better than managers over the past year.

Still, you can't blame the ETF industry for trying to squeeze more money out of investors. It's not easy to create an index that captures investors' imagination. In addition, the first ETF to track an index typically gets all the attention and assets. Thus, it's hard for more than one company to sell the same index. For example, compare the only two ETFs tracking the S&P 500. The SPDR (SPY) holds $63.7 billion in assets under management versus $17.7 billion in the iShares S&P 500 Index (IVV).

At a certain point, you can't keep creating more index funds. Eventually, investors will become overwhelmed with new ideas and gravitate to the better-known offerings. Over the past year, nearly 100 ETFs have closed and liquidated their assets. That's partly a reaction to a bad market, but it could also mean there's a limit to the number of indexes investors are willing to use.