ETF Industry Might Be Growing Too Fast

Even some exchange-traded fund executives think the industry may be growing too quickly for its own good.

ETFs are baskets of securities that trade throughout the day on an exchange, like stocks. According to Morningstar, 290 ETFs hit the market last year, up from 159 launches in 2006.

Greg Friedman, the head of iShares product management Americas for Barclays Global Investors, a unit of Barclays PLC(BCS Quote) and the largest ETF provider, questions whether the blistering pace of launches is really in the best interest of the industry -- or its investors.

Friedman, who was speaking at an industry conference in Palm Beach Gardens, Fla. last week, didn't spell out how investors could be harmed. But many new ETFs with narrow investment mandates failed to gain much traction. The industry's assets grew nearly 50% to $623.6 billion last year, according to Morningstar. But much of the trading volume is concentrated in a few large products that track broad indexes. In fact, the 20 largest ETFs comprise 58.44% of all the ETF assets under management.

This can make trading in newer ETFs extremely illiquid, and may even cause share prices to trade out of line with net asset value.

Friedman said merely that the "investment rigor" that fuels the ETF industry could be in jeopardy.

Friedman predicted the industry would grow to 1,000 ETFs with $2 trillion in assets under management by 2010. But unlike the current land-grab, where sponsors try to stake a claim in as many unique investing ideas as possible, future offerings should be more well thought-out, he says.