Mutual funds, long the backbone of the US managed investments industry, are becoming increasingly unfashionable as the North American market continues to morph through innovation.

If it wasn’t for the tax benefits mutual funds offer, via investments such as 401k plans, then they would prove even less desirable to more sophisticated investors looking for the most innovative products on the market.

The burgeoning evolution of Exchange Traded funds (ETFs) and the increasing growth of bespoke investment products in the Separately Managed Accounts (SMAs) arena are driving the industry forward.

Of course, mutual funds still dominate with over US$11 trillion held across a variety of 401(k) plans, 403(b) plans, 457 plans, SEP IRA , SAR-SEP IRA  and SIMPLE IRA.

This compares to the landmark US$1 trillion now sitting in ETFs as of January.

Advisers are all too aware that flexibility and innovation are critical to the perceived value they provide to clients, particularly in an industry much more evolved than other markets from a fee-based perspective.

Mutual funds are seen in some quarters as ‘blue-collar’ vanilla investment solutions for the masses; while advances in investment, administration has resulted in product areas previously off limits to lower balance clients becoming more widely accessible.

Of course, mutual funds continue to dominate in terms of legacy business in the market, accounting for around 60% of all retail assets across both independent and wirehouse channels.

However, according to Fahrenheit – a CoreData Research product – a greater proportion of new monies in the first quarter of 2011 are flowing into other investment areas.

At first glance, an increase of 15% to 20% into ETFs, for example, does not seem like a major shift but over time this is a significant transfer of assets in the managed funds sector.

There is close to US$1 trillion (A$981.5 billion) residing in ETFs at the end of 2010 – a two-fold increase in just under two years – at the end of January 2009, American investors held US$445 billion in ETFs.

The number of funds has also risen over the period from 737 to 923 to cover almost every eventuality of asset combination.

There are ETFs for Large Cap, Mid Cap, Small Cap, Commodities,  Consumer, Financial, Health, Natural Resources, Real Estate, Technology, Utilities, Global, International, Regional, Single Country, Emerging Markets, Hybrid, Government Bond, Municipal Bond, Corporate Bond & International Bond… just to name a few.

And this excludes some of the increasingly popular geared and leveraged ETFs which seem to be exploding onto the US market and targeted at more sophisticated and active investors.

It will be interesting to see how the flows shift for the remainder of 2011 with many commentators urging caution over funds in developing countries – a backbone of the huge flows that have gone into mutual fund ‘Global Asset Allocation’ investments over the last few years.

Will this mean more money into client held assets within SMAs or a few carefully selected ETFs?