Slew of Sophisticated ETFs Hits the Market

"Originally, ETFs came out and built on the premise behind indexing -- that if you have a broad portfolio and keep expenses low, the odds of beating the typical active manager are pretty good," says Morris. "But the landscape has changed over the past couple of years and ETF providers have sliced and diced the market into narrower and narrower segments, which is very different from the original intent and the goal of indexing."

State Street says its newest ETFs have been developed to meet demand for higher-return vehicles and more-refined portfolio construction.

"These ETFs provide a real benefit through their precise exposure to targeted industries," says Greg Ehret, senior managing director of SSgA.

But Morningstar's Morris notes that by breaking down the market into smaller and smaller segments, these extremely focused funds could attract performance chasers.

"That was a phenomenon in the late 1990s, when investors ran after Internet funds and broadband funds, and we all know that didn't end particularly well for investors," she says. "But the ghost of the 1990s has not been enough to keep momentum chasers out of the market. For example, we've seen things like energy funds gathering assets at a breakneck pace. Performance chasing is just one of those behavioral biases that investors have."

Dodd Kittsley, State Street director of ETF Research, says that Morris has a valid concern, but ETFs have never purported to be solutions.

"They're merely tools," says Kittsley. "These more granular, targeted ETFs provide investors a way to access targeted sectors in a more diversified way than they were able to before, and at a very low cost."

Kittsley also emphasizes that some of the more industry-specific ETFs are probably more useful for sophisticated institutional investors.