New ETFs Struggle to Get Off the Ground

Fleites said it will be difficult for sponsors of these "marginal" ETFs to keep expenses down on funds with smaller asset bases. And unless a sponsor has deep pockets, it might not be able to afford to wait a few years for the product to catch on.

He said these ETFs could end up looking more like closed-end funds, which also trade on an exchange but issue a fixed number of shares. Trading of closed-end funds tends to be illiquid and their share prices can trade at a large premium or discount to net asset value.

Vanguard's Genoni is concerned that these "marginal" ETFs could taint the other products he says are of value to investors.

Genoni believes it will be even harder for sponsors to keep offering ETFs with fewer assets in a bear market. "Choice is good, but product proliferation is not necessarily good for investors," he said. "Remember that a lot of these products are being launched into a hot market."

Xshares' Feldman said one solution would be for some of the smaller players in the industry to band together to create a common pool of seed capital. "If we don't want an oligopoly, and if we want to build a new industry in ETFs, we have to fund other families," he said.

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