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

The backlash begins

It seems ETFs aren't so grand after all. At Morningstar's annual advisor conference earlier this summer, managing director Don Philips mentioned Jason Zweig was taking over for Jonathan Clements at The Wall Street Journal. Zweig wasted no time causing controversy, and a column in August detailed the beginning of a bust in the ETF space.

"[H]ere we are in 2008, and ETFs are becoming a bad idea. With nearly 800 of the things, the proliferation has become a plague."

Why? They're so over specialized, "they make a pediatric endocrinologist seem like a family doctor who makes house calls."

Egg-head humor aside, he makes a compelling case. He quotes indexuniverse.com, which finds 204 ETFs or ETNs have total net assets of less than $10 million apiece, and 369 have less than $50 million in assets. It's troubling, according to Zweig , since a fund smaller than $50 million probably loses money for the sponsor firm.

"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."

Most rational industry observers have always put ETFs in perspective. Yes, they're popular and address many of the complaints voiced by clients about mutual funds. But it's still a case of the fly and the elephant, with total ETF assets at $578.07 billion to mutual funds' $11.68 trillion in the latest Investment Company Institute compilation.

I'm not making a judgment call about ETFs. I only bring this up to make a point about the theme of this month's issue, which is also our annual mutual fund guide. Overseas investing, for obvious reasons, is all the rage. And too many clients, unfortunately, are chasing performance across the globe. Chris Brown of Pax World Balanced Fund tells us why that's a bad idea, and what can be done about it. Investing in a company in Peoria, Ill. is far different from Porto-Novo, Benin. Sort of like that family doctor and pediatric endocrinologist thing.

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