So Many Niche ETFs, So Few Investors Who Care

"A lot of ETF launches we've seen are focused on extremely narrow slices of the market," says Morningstar analyst Dan Lefkovitz. "The industry seems to be repeating the mistakes of mutual funds during the tech bubble."

Specialists MIA

Another dark cloud on the horizon is the decline of specialists, the elite floor traders on the New York and American stock exchanges that make a market in ETFs. Specialists play a key role in providing seed capital to launch ETFs. They also keep ETF share prices in line with the value of their holdings: when demand pushes prices above net asset value, they buy the constituent stocks and create new shares; conversely, when prices fall below NAV, specialists break some up into their constituent stocks and sell the individual securities.

But these firms are becoming less willing to fund start-ups that they believe are unlikely to attract significant asset. They're also less willing to put their capital to work making a market in smaller ETFs. So products that fail to catch on can become illiquid.

Some ETFs are moving their primary listings to electronic trading platforms, such as the Nasdaq and the NYSE Arca, but this could also result in fund prices moving out of line with their holdings, as well as bigger bid-ask spreads.

According to IndexUniverse, there were 445 ETFs and exchange-traded notes in registration as of Dec. 18. If all those products came to market next year, the total number of offerings would increase by another 67%.