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ETF Specialist

Our Picks From the Recent Crop of New ETFs

Plus, general tips on investing in new exchange-traded products.

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The last six months have seen over 200 new exchanged-traded products, bringing the total number of funds to nearly 1,300. Fund companies have been pushing out dividend funds, high-yield funds, and international funds in an effort to address investors' demand for income and growth. In this article, we'll discuss the risks of new exchanged-traded funds, how to pick the best ones, and then we'll highlight some interesting new launches.

Buying a New ETF
Investors need to exercise extra caution when investing in new ETFs, especially when considering niche products. A key risk is that the ETF may not behave as expected. Consider investors who rushed into  United States Oil (USO) and found themselves falling far behind oil's spot-price performance. Financial innovation is often messy; no doubt many investors in new ETFs wished that they didn't volunteer to be beta testers. You can usually avoid nasty surprises by sticking to ETFs that invest in comprehensible, traditional asset classes, such as liquid, investment-grade stocks and bonds, and by avoiding bells and whistles, such as leverage and inverse performance. Another risk is that the ETF may not gain traction, leaving you to pay unexpected capital gains or even the ETF's shutdown costs, as in the case with one now-defunct ETF family. Finally, exotic vehicles sometimes come with exotic tax implications. Unless you want to deal with the risk of a whole new set of tax schedules to file, it might make sense to hold off until you get a sense of the ETF's tax treatment.

Patricia Oey has a position in the following securities mentioned above: EWG. Find out about Morningstar’s editorial policies.