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

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) and the Market Vectors-Gulf States Fund ( MES). 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)

Widows holds positions in the iShares MSCI Hong Kong Index Fund and the iShares MSCI Singapore Index Fund in a retirement account.

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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