New ETFs Struggle to Get Off the Ground

The large number of new products hitting the market isn't the only reason ETFs are having a harder time attracting specialists. There are also fewer specialists to go around. Over the past year, as the NYSE switches to electronic trading, it has lost more than 30% of these elite traders.

That means the amount of funding the typical new ETF can expect to attract has fallen dramatically.

For example, when the Nasdaq launched the QQQ(QQQQ - Cramer's Take - Stockpickr) in 1999, it attracted $150 million of seed capital from Susquehanna Investment Group. But Jeffrey Feldman, chairman and founder of Xshares Group, said that when his company filed the prospectus for its first five ETFs in February 2006, it was still possible to raise $25 million to $50 million. "Now it's barely possible to get $10 million," he said.

Richard Genoni, ETF product manager at Vanguard, says some ETFs are getting as little as $3 million in start-up funds.

There was widespread agreement among conference participants that the major players in the ETF industry, such as Vanguard, State Street Global Advisors and iShares, have less to worry about than some of their smaller competitors.

"The well-capitalized firms will seed their own," XShares' Feldman said. "But the smaller, upstart firms without access may have trouble launching new products."

ETF sponsors that can't get the funding to create enough shares at the outset of trading may also find it harder to attract investors, making trading illiquid. With fewer buyers and sellers, the spread between bid and offer prices for these ETFs is likely to be wider than for ETFs with more assets.