ETFs Can Kick You to the Curb

Exchange-traded funds have grown in popularity, and new ones debut regularly. But it's not all champagne and roses in the ETF world. Some close down.

There are well more than 1,000 ETFs on the market, up from 200 in 2005, holding more than $1 trillion in assets (up from $300 billion in 2005). So far this year, there has been a net increase of more than 150 in the number of ETFs. They don't all last, though. Prior to 2008, in a world with considerably fewer ETFs, only a small handful liquidated each year. But in 2008, 2009, and 2010, about 50 shut down annually. Yours might be among them. If that happens, don't freak out -- you probably have some solid alternatives.

Islamic fund shuts down
One ETF closing is the JETS Dow Jones Islamic Market International Index Fund, which never accumulated enough assets to be viable. You might think that it's no big deal, but some Islamic-oriented mutual funds have quite strong records -- and remain available to interested investors.

The Amana Trust Growth (AMAGX) fund, for example, has trounced both the S&P 500 (INDEX: ^GSPC) and Dow Jones Industrial Average (INDEX: ^DJI) over the past 10 years. Part of the reason for the fund's success is its attention to Sharia law, which frowns not only on the usual not-so-socially responsible suspects such as tobacco companies, but also on alcohol companies, gambling companies, and even financial companies and others that deal heavily with interest.

Thus, when Bank of America (NYSE: BAC  ) plunged during the credit crisis of 2008 and dented many mutual funds, the Amana fund was not affected. Of course, this cuts both ways. While many have qualms about Bank of America as it sells off parts of itself and perhaps shoots itself in the foot with its new $5 debit card fees, other banks, such as US Bancorp (NYSE: USB  ) , are regarded as among the best-managed and are poised to perform well.

Airline ETF grounded
The Direxion Airline Shares ETF is another ETF going the way of the saber-toothed tiger. It also never gained enough traction with investors; this time, it's for good reason, as airlines in general have been horrendous long-term investments. American Airlines parent AMR (NYSE: AMR  ) , for instance, is mired in bankruptcy rumors right now, due in part to a rash of pilots retiring. (They have the option of taking their pensions as a lump sum instead of as an annuity that can be compromised by a bankruptcy filing, and that's just what most of them have been doing.) AMR's market cap is now near $1 billion.

Even Southwest Airlines (NYSE: LUV  ) , which has long been the most financially successful airline, hasn't been the best portfolio booster, underperforming the S&P 500 over the past 15 years.

Some ETFs really don't do investors much of a service by existing. Still, if you have your heart set on an airline ETF, you can always switch to the Guggenheim Airline ETF, though it is also very small.

On deathwatch
You needn't end up blindsided by an ETF that closes on you. For starters, you can watch out for and avoid those ETFs with very little in the way of assets. The Islamic ETF that closed, for example, had just $2 million in assets a year ago. Be wary of ETFs with even $100 million in assets; that might be plenty to survive on, but if the market suddenly sinks and shareholders withdraw funds, the ETFs could be in trouble. Favor ETFs with $500 million or even $1 billion or more in assets.

You might also occasionally look in on ETF "deathwatch" lists. A recent listing, for example, included the Columbia Concentrated Large Cap Value Strategy Fund and the Columbia Growth Equity Strategy Fund. If you're invested in such funds, or had been looking at them, consider looking for larger, similar funds, instead. The Vanguard Mega Cap 300 Value Index ETF might be of interest, as might the Vanguard Growth ETF (NYSE: VUG  ) .

Many ETFs that are here today may be gone tomorrow. Look for a respectable size in your ETFs, along with low fees. And know that there are often good substitute investments available.

Let us help you zero in on strong ETFs, via this Motley Fool free special report. You'll find the names of three promising ETFs along with techniques for finding the best ETFs.

Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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