More ETFs, new flavors

Exchange-traded funds are vying for market share with new and unusual offerings — from HealthShares Dermatology & Wound Care (HRW) to iShares MSCI Chile Index (ECH) to Claymore/Sabrient Insider (NFO), which holds companies with high ownership by top executives. You can even bet a sector will lose money with funds like UltraShort Semiconductor ProShares (SSG).

"ETF providers have a bad record of launching narrowly focused ETFs in hot-performing market segments," says Sonya Morris, editor of Morningstar's ETFInvestor newsletter. "This tends to pander to investors' worst instincts — to chase performance ... just as they are about to cool off."

Niche ETFs don't always offer the benefits of broader ETFs, funds that trade like stocks, which are known for low expenses, ease of trading and diversification.

"As soon as you start to drop down into specific areas, you are taking on risk," warns J.D. Steinhilber, president of Agile Investing.

Christian Magoon, senior managing director of Claymore Securities, says when trading big stakes in narrow funds, "do you have to be a little bit more strategic? Yes, you do." But he says issuers can simply create more shares to meet demand.

HealthShares' targeted ETFs offer potential for bigger gains than their diversified cousins, says Chairman Jeffrey Feldman.

But experts warn ETFs that don't catch on might eventually liquidate, which could result in unexpected capital-gains taxes for shareholders. A fund that's under $10 million in assets is probably not profitable, says Paul Mazzilli, Morgan Stanley's executive director of ETF research.