There’s been a tsunami of new ETFs coming to market this year, and we all know that tsunamis cause destruction. There have been far too many new ETFs for the market to absorb. My list of ETF IPOs, new ETFs that made their debut in the past six months, currently contains 137 names. The list would be even longer, but there are more than 20 that I have not been able to obtain price and volume data on. More than 150 new ETFs were introduced in just the past six months.

Once I saw the staggering number of ETF IPOs coming to the market, I quickly realized that not all would survive. These 150 new products have to compete with the 650 existing ones for investor’s attention. The market can only absorb so much. There will be a day in the future when 800 ETFs are not enough. For now, 800 constitutes too many. There will be casualties.

My preliminary research into ETFs that are likely to fail turned up many from the HealthShares family. Then a funny thing happened, on August 21, XShares Advisors, sponsor of the HealthShares, announced that they were shutting down 15 of the HealthShares ETFs and restructuring the remaining four. They had reached a similar conclusion. Curiously, one of the four ETFs being kept alive tops our ETF Deathwatch list today.

There have been 30 ETF closures so far. The death count will jump to 45 when the 15 HealthShares stop trading on September 19. The average age of those 45 ETFs was 13 months when they ceased trading. ETF sponsors have not been giving new ETFs a lot of time to gain traction with investors. Four ETFs, the Treasury FITRS, were shutdown before they reached the age of seven months back in 2003. The closed ETF that lived the longest was the SPDR O-Strip, which lasted two years before its demise.

I believe that sponsors need to give a new ETF at least six months to gain market acceptance before shutting them down. After that, if investors haven’t discovered it yet, the sponsors should give serious consideration to closure.

Looking at Asset Under Management (AUM) is a popular way of gauging the health of ETFs. After all, the fees an ETF throws off is determined by it AUM. I’ve decided to take a different approach by looking at the average dollar volume (price times volume) of shares traded.

Many of these new ETFs can go for days without a single trade. If an ETF has low dollar volume, then it tells me that either:

1) Sponsors developed an unneeded product
2) Sponsors failed to drum up interest
3) Market makers are not making a market
4) Investors are unaware that the product exists
5) Investors have no interest in the product
6) A combination of the above

The financial media likes to jump to the conclusion that ETF closures are the result of poor design that fail to meet investor demand. But, there is more to it than that. Some well-designed products have bit the dust, and there are other well-designed ETFs that are having trouble attracting volume and AUM. Sometimes a good product fails simply because the sponsor’s marketing plan failed and investors are either unaware of the product or do not understand what differentiates it from others on the market.

With little or no trading taking place, these products are likely to be added to the growing death count of ETFs: