Too Many ETFs?

In 2005, 100 exchange-traded funds premiered in the U.S. With an entire quarter left in 2006, that figure has already been matched, and most observers expect it to be eclipsed by the end of the year.

"I wouldn't be surprised if more ETFs are launched this year," says Marta Norton, a fund analyst with Morningstar. "We've certainly been at a tremendous pace.

"I think there is a lot of anticipation from investors, and I think companies are alluding to the fact that they will be pushing out more ETFs," Norton adds.

She declined to say how many products she expects will be rolled out during the next three months, but some industry followers estimate that 100 new ETFs could hit the market between now and the end of the year.

But is this necessarily a good thing?

One camp says it is. This group reasons that with thousands of mutual funds on the market, compared with a few hundred ETFs, there is plenty of room for the space to grow and fill untapped niches in the market. Some also argue that by tweaking the traditional index-based ETF model or adding a new twist, they can provide investors with better products.

The other contingent, led largely by industry analysts, believes that most of the necessary gaps in the market have already been filled and that many of the ETFs now launching are targeted at very small audiences, or are moving away from what the product is all about.

And this, they say, poses some risks.

For one, the introduction of many new -- and often esoteric -- ETFs means there is a greater possibility that less sophisticated investors will end up in the wrong product.

"ETFs in general are a great idea and make a lot of sense," says Norton. "But a lot of the funds that have been launched are pretty trendy and pretty risky and might not be as useful as they're advertised as being."