In spite of all the worries about investor sentiment amidst a sluggish recovery, assets in mutual funds and ETFs both hit record highs in August, with $8.8 trillion and $1.2 trillion, respectively.

Nonetheless, investors showed a conservative streak, favoring fixed income products. Taxable bond and municipal bond ETFs were two of the only three ETF asset classes that took in net cash every month this year, according to new analysis by Cerulli Associates. (Sector ETFs, which make only narrow bets on individual industries was the third.) In fact, August was the 20th consecutive month in which taxable bond ETFs enjoyed positive net cash flows.       

So with all the appetite for cheap, passively managed investments, it might seem that launching an ETF is a license to print money. It isn't. As nearly every nook and cranny of the market has its own ETF, new entrants have a tough row to hoe, according to Cerulli. That's because it takes about $100 million for an ETF to be profitable for its sponsor. And about half of the 1,268 ETFs on the US market can't claim assets of more than $500 million. Even PIMCO, the biggest name in fixed income, has 19 ETFs with less than $50 million in assets as of July.

The challenges for product providers mean ETFs could be withdrawn easily. That means advisors should choose the offerings they use for clients carefully.  

In this crowded environment, even one of the more established names in indexing - Russell - has thrown up its hands, joining the lesser-known FocusShares in recently announcing it would be closing its ETF offerings. "New firms will have to provide additional value in their products along with substantial distribution efforts to avoid Russell's fate," the report said.

So which of the surviving products to use for clients? Cerulli suggests that some asset classes lend themselves more obviously to using ETFs, while others still need active portfolio managers to make them prosper. Large cap stock is an area where active managers have struggled to perform above the benchmark. So it's no surprise that Fidelity and American Funds have each shed $20 billion in cash this year. But in that time, Vanguard, one of the passive giants, took in $71 billion.

However, Cerulli reckons emerging markets, small- and mid-cap stocks, fixed income and alternatives all benefit from active management. Since these areas encompass riskier individual securities, savvy security selection can help power a fund past its benchmark.