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New ETFs Can Serve as Caution Signs

For more coverage from TheStreet.com Ratings team, check out TheStreet.com Ratings section.

There's something you need to know about that shiny new exchange-traded fund that just launched. Historical evidence suggests you might be better off dumping your investments in that fund's entire sector rather than jumping feet first into that "can't miss" ETF.

Now that there are more than 800 of these investment vehicles available in the U.S. market, management firms are having to dig ever deeper into their inventories of creativity to come up with new concepts to add to their ETF offerings. The bold minds who determined there was an absolute need for ETFs in the areas of "metabolic endocrine disorders" and "dermatology and wound care" investments now have to reach even further for new product concepts. (And in case you were wondering, the HealthShares Metabolic Endocrine Disorders ETF and the HealthShares Dermatology and Wound Care ETF were humanely euthanized some time ago.)

The lag between the emergence of a new investment trend and the time it takes to gain enough validity to convince the ETF industry that it merits a new vehicle can seem interminable. When you factor in the time it takes to design and construction a new ETF offering plus the lengthy registration, approval and listing process, the concept for that fund could easily be at its peak -- or even over the hill -- before the PR machine even begins advertising the fund as the hot place to invest your cash.

There are many notable exceptions, but all too often an ETF's debut coincides with the moment when investors should be starting to think about taking profits in the area of the fund's focus.

As is evident in the table below, this isn't a new phenomenon. In 1966, the incipient ETF industry was bolstered by the addition of a quartet of Asian funds. Just 16 months later, Asian currencies nosedived and stock prices throughout the region collapsed, kneecapping investors with double-barreled blasts.

Then, in 1999 and 2000, as the technology/telecom frenzy approached its zenith, the ETF industry accommodated investor thirst for funds targeting that sector with an array of offerings -- just in time for the tech bubble to burst.

At one time, BRIC -- with stands for four markets, emerging powerhouse Brazil, resource-rich Russia, outsource-destination India and manufacturer-to-the-world China -- may have seemed like investment nirvana. Geographically and economically diverse and growing rapidly, a BRIC investment couldn't miss, or so it seemed. But not many months after the introduction of two BRIC ETFs, that investment area joined the rest of the market in a downward spiral.

More recently, the fund industry accommodated the ascending popularity of the financial, housing and emerging markets by offering an array of new ETFs in those sectors -- not long before each collapsed. The table below offers a sampling of examples.

Selected Ill-Timed ETF Launches
Name (Ticker), TheStreet.com Ratings Grade
Inception Date
Advisor
What Went Wrong?
iShares MSCI Hong Kong Index Fund (EWH), C
3/12/1996
Barclay's Global
Asian stocks and currencies collapsed in mid-1997.
iShares MSCI Japan Index Fund (EWJ), C
3/12/1996
Barclay's Global
Asian stocks and currencies collapsed in mid-1997.
iShares MSCI Malaysia Index Fund (EWM), B+
3/12/1996
Barclay's Global
Asian stocks and currencies collapsed in mid-1997.
iShares MSCI Singapore Index Fund (EWS), B
3/12/1996
Barclay's Global
Asian stocks and currencies collapsed in mid-1997.
PowerShares QQQ (QQQQ), C
3/9/1999
Invesco PowerShares
Tech/telecom stock bubble burst in 2000.
HOLDRS Internet (HHH), D
9/24/1999
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
HOLDRS Telecom (TTH), B
2/2/2000
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
HOLDRS B2B Internet (BHH), C-
2/24/2000
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
HOLDRS Internet Architecture (IAH), B-
2/25/2000
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
HOLDRS Internet Infrastructure (IIH), D+
2/25/2000
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
HOLDRS Broadband (BDH), D-
4/6/2000
Merrill Lynch
Tech/telecom stock bubble burst in 2000.
iShares Dow Jones U.S. Telecom Sector Idx Fd (IYZ), C
5/22/2000
Barclay's Global
Tech/telecom stock bubble burst in 2000.
PowerShares Dynamic Financial Sector Port (PFI), C
10/12/2006
Invesco PowerShares
Financials collapsed because of credit crunch.
ProShares Ultra Financials (UYG), E+
1/30/2007
ProShares Advisor
Financials collapsed because of credit crunch.
SPDR S&P Bric 40 ETF (BIK), E-
6/19/2007
SSgA Funds
BRIC stocks tanked in summer/autumn of 2008.
iShares MSCI BRIC Index Fund (BKF), U
11/12/2007
Barclay's Global
BRIC stocks tanked in summer/autumn of 2008.
FocusShares ISE HomeBldrs Idx ETF (SAW), U
11/30/2007
FocusShares
Homebuilding collapsed.
Market Vectors Gaming ETF (BJK), U
1/23/2008
Van Eck Associates
Casino stocks crumbled in autumn of 2008.
Barclays Asian & Gulf Currency Reval ETN (PGD), U
2/5/2008
Barclay's Global
Credit crunch and petroleum decline hurt Gulf region.
ELEMENTS ETN - British Pound (EGB), U
2/20/2008
Elements
Huge U.S. dollar rally in autumn of 2008.
ELEMENTS ETN - Euro (ERE) U
2/20/2008
Elements
Huge U.S. dollar rally in autumn of 2008.
PowerShares DB Commodity Double Long ETN (DYY), U
4/28/2008
DB Comm Services
Commodity prices plunged in summer/autumn of 2008.
Market Vectors Double Long Euro ETN (URR), U
5/6/2008
Van Eck Associates
Huge U.S. dollar rally in autumn of 2008.
SPDR S&P Emerging Markets Small Cap ETF (EWX), U
5/12/2008
SSgA Funds
Emerging market stocks slumped in 2008.
WisdomTree Dreyfus ETF Brazilian Real Fund (BZF), U
5/14/2008
WisdomTree
Huge U.S. dollar rally in autumn of 2008.
WisdomTree Middle East Div Fund (GULF), U
7/15/2008
WisdomTree
Credit crunch and petroleum decline hurt Gulf region.
SPDR SP Intl Con Disc Sect ETF (IPD), U
7/16/2008
SSgA Funds
Consumers hurt by recession and credit crunch.
SPDR SP Intl Materials Sec ETF (IRV), U
7/16/2008
SSgA Funds
Materials sector tumbled in the autumn of 2008.
Market Vectors-Gulf States (MES), U
7/22/2008
Van Eck Associates
Credit crunch and petroleum decline hurt Gulf region.
iShares MSCI All Cntry Asia ex Jap (AAXJ), U
8/13/2008
Barclay's Global
Emerging market stocks slumped in 2008.
Claymore/Delta Glb Shipping Index (SEA), U
8/25/2008
Claymore Advisors
Worldwide recession depressed maritime rates.
PowerShares Global Coal Portfolio (PKOL), U
9/18/2008
Invesco PowerShares
Coal joined petroleum in moving lower in 2008.
Source: TheStreet.com Ratings (Data as of 9/30/2008.)
For more information, check out an explanation of our ratings

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