Too Many ETFs?

A Lack of Investors

That means a lot of ETFs are going to be left out in the cold -- something that, to an extent, is already happening.

According to Mazzilli, as of last week, there were 320 ETFs trading. Of those, he says, 81 had fewer than $50 million in assets, and 38 had fewer than $25 million. Recent State Street data put total ETF assets at $363 billion. The largest ETF, the S&P 500 SPDR (SPY Quote), has around $57 billion in holdings, or 16% of the total market share, followed by iShares MSCI EAFE (EFA Quote), which has around $31 billion in assets, or 9% of the market. Rounding out the top three is the Nasdaq 100 Trust Shares (QQQQ Quote), which has $18 billion, or a 5% share.

One product that has had trouble attracting cash is the First Trust Dow Jones Select MicroCap (FDM Quote). This ETF has been out for over a year, yet has only $18 million in assets. In addition, the streetTRACKS DJ Wilshire Mid-Cap(EMM Quote) has been out since November and has only $16 million in holdings. And last month, the SPDR O-Strip ETF (which used to trade under the symbol OOO) shut down altogether. At the time, it had around $5 million in assets.

Ronald DeLegge, publisher and editor of ETFguide.com, says, "The problem is that small funds in the ETF space don't work. That is the bottom line.

"Expense ratios and profit margins are so tight that you need economies of scale," he says, adding that ETF closings are "for the most part pretty rare. But we've seen such an influx of ETF products, we get spoiled into thinking it's not possible for products to go away."

"At some point -- as this business matures -- as with traditional mutual funds, we will see product start to merge or liquidate," he says.