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The trouble with ETFs Add to ...

One of the downside risks to investing in a narrowly focused exchange traded fund is that the fund could get yanked out from beneath you. As the Canadian Capitalist pointed out recently, new funds are multiplying faster than mosquitoes in a puddle of water these days - but funds are also shutting down at a pretty quick pace too.

The reason for a shut-down usually relates to a lack of interest among investors, reflected in low trading volumes and total assets. The Canadian Capitalist looked at ETFs launched by iShares and Claymore, and found that most of the funds appear to be in good shape.

The two exceptions: iShares CDN Jantzi Social Index Fund and Claymore S&P Global Water Index Fund. According to the blogger, both ETFs qualify for the ETF Deathwatch criteria used by Invest With An Edge site. (That is, they must be at least six months old and have average daily trading volumes of less than $100,000 or less.)

According to a recent article in Smart Money , there were just 80 ETFs on the U.S. market in 2000. That number swelled to 737 by the end of 2008, although dozens have shut down as the ETF industry wrestles with what appears to be a glut of products.

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