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ETF Deathwatch

Rowland says that some of the most likely candidates for liquidation are actively managed ETFs, which aim to outdo benchmarks. So far active funds have not gained large followings because ETF investors mainly prefer index funds.

Active funds on the Deathwatch include Grail RO Growth ETF (RPX) and PowerShares Active Alpha Multi-Cap (PQZ). All five of the active Grail funds are on the list, and the company has announced that it is putting itself up for sale. "Eventually people will leave active mutual funds and switch to active ETFs, but that will take some time to happen," Rowland says.

The number of names on the Deathwatch is likely to increase because money managers are planning to introduce hundreds of new funds. Big companies that have registered ETFs include Goldman Sachs (GS) , John Hancock and T. Rowe Price (TROW). "Major mutual fund companies are hurrying to bring out new issues because they are afraid that ETFs are stealing market share," says Matt Hougan, global head of editorial of indexuniverse.com.

Many of the new crop of ETFs target narrow niches, such as steel or smartphones. Not many of such narrow funds have succeeded in recent years. A noteworthy liquidation occurred when XShares Group closed all 19 of its specialized healthcare funds. The funds focused on fields such as cardiology. Most investors were not impressed and continued buying funds that track broad benchmarks.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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