Four Types of Nontraditional ETFs

ETNs

Rather than tracking a basket of equity, these exchange-traded products track baskets of debt. Inherent in these debt securities is the issue of creditor risk. While the likelihood that a centuries old bank could default may have seemed farfetched in the past, investors should be skeptical in the current economic environment.

Examples: iPath India(INP), iPath Commodities Index(DJG), Elements Rodgers International Commodity ETN(RJI).

ETFs of ETFs

ETFs of ETFs can compound fees and push unpopular products. Early ETFs of ETFs from PowerShares have failed to gain traction while new strategies like the IndexIQ Hedge Fund ETF(QAI) seem to distance themselves from their objectives through the layering of funds.

Single issuer fund-of-fund ETFs should be viewed with suspicion. While the ETF industry is rapidly expanding, nearly 50 funds closed in 2008 due to lack of investor interest. As ETFs with little investor interest wither on the vine, issuers may try to package them in other trading vehicles.

Examples: QAI, PowerShares Autonomic Growth NFA Global Asset Portfolio(PTO), PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio(PAO)

The recent circus of ETF scrutiny has showcased a medley of regulators vying to expose unsuitable strategies and unsavory sales practices. The resulting actions have showcased the industry's eagerness to dodge culpability. Whether it is heaping on disclosure, halting creation or stopping sales, issuers and brokers are preparing for the regulatory ax to drop.

While these problems may seem ominous at first blush, investors should not toss the baby with the bathwater. Traditional passive indexing ETFs like the SPDR S&P 500(SPY) and PowerShares QQQ(QQQQ) still provide low-cost, accessible exposure while mitigating single security risk.

In the post-Madoff era, the age of investor ignorance is behind us. The ETF universe provides ample opportunity for long term allocation and explosive potential for growth. Regulation will hopefully help to further categorize and qualify ETF types for the protection of investors. In the meantime, investors should err on the side of caution when selecting ETFs.

-- written by Don Dion in Williamstown, Mass.

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