From the September 2008 issue of Boomer Market Advisor • Subscribe!

September 1, 2008

Is it time for ETFs to RIP?

The consumer financial press is turning on ETFs. Highly praised for their low fees, transparency and tax efficiency, it's one other (supposed benefit) that some argue might now take them down. Jason Zweig, who took over at The Wall Street Journal when Jonathan Clements departed, says the extreme specialization of many of the funds will work to their detriment. Zweig wrote the following in early August:

"Many ETFs are so overspecialized that they make a pediatric endocrinologist seem like a family doctor who makes house calls. One invests only in companies that get a large portion of their revenue from selling products to Wal-Mart Stores; another holds shares in outfits based in the Pacific (but not in Japan!) that pay high dividends; one owns nothing but ophthalmology stocks. There isn't yet an ETF that seeks to earn three times the inverse of the daily return of the Cuban peso, but the year is barely half-over."

The problem, he explains, is that 204 ETFs or ETNs have total net assets of less than $10 million apiece, and 369 have under $50 million in assets, according to indexuniverse.com. It's troubling, since a fund smaller than $50 million probably loses money for the firm that sponsors it.

In other words, nearly half of all ETFs are too small to survive. The question is not whether, but when, most of them will fail.

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