The universe of exchange-traded funds is still rapidly expanding, but the growing landscape is threatening to leave small investors lost in a maze of new options many too narrow for them to ever consider.

The number of ETFs available to U.S. investors has grown by an average of 15 new funds a month since January 2008, according to Morningstar. In this year alone, 130 new ETFs have been added to U.S. exchanges. That brings the national total to about 866 funds that trade like single stocks, according to BlackRock, owner of the iShares ETF family. The asset manager said ETF assets under management stood at $741.3 billion at the end of July, up 5.1% since the start of the year.

The pickup in assets is due in part to the proliferation of new funds, which is raising the broader profile of ETFs but not necessarily benefiting the individual investor.

Experts agree that new ETFs often have a hard time gaining traction in the marketplace because many resemble existing offerings or are so specific and complex that they are not suited to a small investor's portfolio.

Consider the Market Vectors Emerging Markets Local Currency Bond fund, launched at the end of last month by Van Eck Global Advisors. Big investors might use the fund to get a piece of the volatile emerging markets debt market, but it might be too specific for individual investors who cannot afford a wide variety of assets.

Another problem for the average investor is that a growing number of these new products rely on trading blueprints that are difficult to understand.

In July, six of the 23 new launches were leveraged ETFs, funds that use complex derivatives strategies to amplify the results of an index. They are used frequently by hedge funds and big institutional investors, but advisors warn the products aren't really suited for mom-and-pop portfolios. Still, there's a clear market for them 60 of the 210 ETFs launched in the last 12 months use some form of leverage.

Scott Burns, director of ETF, closed-end fund and alternative fund research at Morningstar, says there's a fairly simple way to determine whether a fund is suitable for an investor. He recalls that when a client asked about a commodity fund, he explained the derivative futures strategy it used, along with some of its technical wrinkles, and how that would affect performance.

"He said, 'I don't get it.' I explained it again, as simply as I could, and he said, 'I still don t get it,' so I said, 'If that's the case, then you probably shouldn t be using this. He added, We try to explain the suitability of a fund in very plain English.

Patrick Watson, a portfolio manager at Capital Cities Asset Management, says there's no hard and fast rule for deciding to buy or avoid a new ETF, but experts say prospective investors should consider the size and reputation of the issuing firm, the index on which the fund is based and to total cost of owning and trading the fund.

"The first thing I'd say is to consider your own financial situation, think about your own risk tolerance and the structure of your portfolio," he says. "Those basic questions will drive whether you should even be thinking about it."

Michael Iachini, Charles Schwab director of investment manager research for ETFs, says even a new fund should have at least $20 million under management, and $50 million is better. Look for some big trades to establish that it won't depend solely on small investors that means it will likely be more liquid, and that will keep trading costs down.

Because ETFs are a relatively new investment class for most small investors, the financial services marketplace is busily engaged in educating them as well as marketing to them. Burns says the distinction between the two can be blurred, and urges a back-to-basics perspective in evaluating ETF purchases.

Just like a stock, investors should look at the underlying index say, large-cap technology firms, or Indian infrastructure companies and check the back-dated history of the index. They should look at which companies an equity ETF holds and how closely it tracks its index. If investors are buying a commodities ETF, they should know if it's based on the fund owning actual precious metal or if it tracks an index that is based on futures contracts.

"You have an increase in new issuance and an increase in complexity at the same time," he says. "That creates a burden for some investors, but it's no different a burden than one for investors who buy individual stocks."

Iachini says most small investors should follow the path to the simplest, cheapest and most appropriate offerings for their portfolios.

"We generally don't recommend funds for the sake of newness," he says. "A more established fund has a track record, but if it also has a price that's much lower than an existing product, it's worth taking a look."

That's not to say the price alone is a reason to buy an ETF, though exchange-traded funds average a 0.44% fee, considerably less than the average mutual fund fee of around 1.4%. Iachini warns that ETFs with little money in them or weak trading volumes are less liquid, which means an investor can get hurt by a wide spread on the bid and ask prices during a trade.

Burns, at Morningstar, says that while there's understandable excitement over the proliferation of new funds, average investors aren't going to be the biggest beneficiaries of the surge in new products.

"For most individual investors, the lowest cost products out there are from biggest, most established firms, and are suitable for their needs," he says. "When new products collie with new investors, that's where there's the highest potential for an adverse investing experience."

Number of New ETFs by Month

Source: Morningstar