Exchange-Traded Funds are a fantastic investment tool. They give you quick, easy access to key market segments. But, like every tool, ETFs can also be dangerous.

Some of the danger begins when investors pick the wrong tool for the job. Pounding nails with a screwdriver doesnt work very well and can make your problems worse.

The problem can also lie in the ETF itself. Fund sponsors constantly roll out new products in the hope they will attract assets. However, it doesnt always work and the new ETFs stay tiny. Early investors in these ETFs face several kinds of danger.

• Expense ratios tend to be higher in small ETFs because the relatively small shareholder base bears fixed administration costs;

• Thinner trading volume can elevate bid/ask spreads;

• Big transactions can distort differences between market quotes and underlying asset values; and

• Low turnover in small ETFs doesnt attract the authorized participants whose arbitrage trades keep an ETFs market price aligned with its net asset value.

I run into these problems myself. One recent situation reminded me of a guideline I never expected to encounter.

Compound Gold couldve already

DOUBLED Your Money this month!

Over the past three weeks, James DiGeorgia and Geoff Garbacz closed 5 winning trades for a potential 140.9% in gains.

Just this week, they told their readers to exit USO options for a gain of up to 50.7%. That trade couldve turned a $5,000 grubstake into $7,535!

This wasnt over a year or 6 months or even 3 weeks. They opened that trade on Monday and cashed out the very next day. Thats more than a $2,500 profit in one day!

Plus, theyve also recently closed out winners like 16.9% on POT 20.3% on EWZ 24.3% on another USO trade and 28.7% on CLF all of them in a matter of days or weeks.

Thats an average gain of 6.4% a day almost better than you can expect the S&P to hand you each YEAR.

Find out how to get in on the next round of trades. Get the details here!

Internal Sponsorship

As I often do, I was reading the great information at IndexUniverse.com. (The sites name, by the way, is a misnomer. In addition to indexes, they have abundant data on ETFs and other topics. IndexUniverse would be a great addition to the useful free investor sites my colleague Tony Sagami recently recommended.)

ETFs generally have slim expense ratios, compared to many open-end mutual funds. While the median expense ratio of 1,504 U.S. ETFs tracked by Morningstar is 0.6%, I noticed that some on the IndexUniverse screen had significantly higher expenses.

I cross-checked some examples against the Morningstar database. This confirmed the ETFs were indeed burdened by outsized annual report net expense ratios.

For competitive reasons, ETF sponsors sometimes absorb certain expenses that are normally passed through to shareholders. For example, the fact sheet for the iShares MSCI Emerging Markets Growth ETF (EGRW) shows total management fees are 0.68% of assets, yet the funds net expenses for shareholders currently stand at 0.49%.

EGRW is a relatively young fund, only a year and a half old. With assets of only $5.2 million in a sometimes-popular sector, it needs to show a competitive expense ratio in order to gain assets and eventually generate a profit for the sponsor.

EGRWs online fact sheet clearly states that the ETF is waiving 0.19% of its management fee. Sponsors are not always so forthcoming with information.

For instance, the fact sheet of the FactorShares 2X Oil Bull/S&P500 Bear ETF (FOL) lists a 0.75% management fee with this footnote: Other fees apply including brokerage commissions. See Breakeven Table in the Prospectus for more information.

Where do you get a Prospectus for FOL? It is not immediately available on the FactorShares website. You have to complete an online questionnaire and the firm then sends it to you by e-mail.

Why does FactorShares make potential investors go through extra steps just to read a prospectus? This was unusual enough to make me resurrect an old rule.

When someone would ask me about selecting funds on the Internet, one rule I always passed along was

Dont buy a fund unless all the information you need is available on its website!

FactorShares might have good reasons to ask for personal information before sending a prospectus. But in todays world of instantly available data, I dont want to wait and I dont want to get buried in spam because I gave them my e-mail.

4 Big Reasons for Caution in Small ETFs