New ETFs Can Serve as Caution Signs

A bit more recently, petroleum looked like a cinch to top $150 a barrel and the U.S. dollar appeared inexorably destined for the dustbin of currencies, while commodity and materials prices looked like they could climb forever. The result: a gusher of new energy, commodity and materials ETFs as well as funds linked to the appreciation of currencies such as the euro and the British pound relative to the dollar. But with the recent implosion in the price of crude and the remarkable rebound of the greenback, these funds have, with the exception of "bear" petroleum funds, proved generally unprofitable.

Perhaps even more dramatically, until a few days ago it seemed as if the Middle Eastern Gulf states, with the huge reserve of petroleum and their enormous "sovereign wealth funds," were financially invincible. Naturally, the ETF industry created funds such as the WisdomTree Middle East Fund (GULF Quote) and the Market Vectors-Gulf States Fund (MES Quote). They might have seemed like investments that couldn't miss. But as petroleum quotes retreated and word got out that some Persian Gulf State banks weren't immune to the global credit contagion, the two funds joined the downtrend.

The previous table is selective in that it doesn't include all the ETFs that badly timed their introductions, nor does it list the many ETFs that have proved to be consistently profitable over time. But rather than jumping onto the latest investment trend merely because a host of new ETFs appear in a particular area, an investor should gauge the maturity of the trend and decline to participate if evidence of a bubble is detected.

A stampede of new ETFs in a particular area should be viewed with skepticism. You don't need a PhD in finance to follow this advice: If ETFs are piling into an area and it looks to you like a bubble, then stay away.

For this reason, it's worth noting what areas are seeing the launch of new ETFs. As a guide for investors, the second table summarizes the investment objectives that the industry has been targeting so far this year.

Summary of Newly Created ETFs, by Investment Focus
Investment Objective	Number of ETFs	Number Added in 2008	% of ETFs Added in 2008
Corporate - High Yield	3	0	0.0
Corporate - Investment Grade	4	0	0.0
Emerging Market Equity	17	2	11.8
Emerging Market Income	2	0	0.0
Equity Income	160	8	5.0
General Bd - Investment Grade	10	3	30.0
General Mortgage	1	0	0.0
Global Equity	38	17	44.7
Global Income	2	1	50.0
Government Bond	14	0	0.0
Growth - Domestic	200	36	18.0
Growth & Income	26	8	30.8
Municipal - High Yield	1	0	0.0
Municipal - National	11	2	18.2
Municipal Single State	2	0	0.0
Non-US Equity	153	46	30.1
Sector - Energy/Natural Res	77	32	41.6
Sector - Financial Services	24	4	16.7
Sector - Health/Biotechnology	30	4	13.3
Sector - Precious Metals	15	8	53.3
Sector - Utilities	13	1	7.7
Grand Total	803	172	21.4
Source: TheStreet.com Ratings (Data as of 9/30/2008)