First, the skinny...
"Most of the 291 products on Deathwatch face a real possibility of closure. The largest risk is not, however, that they may close in the future. No, the more notable risk is that they suffer from extremely poor liquidity today. Wide bid/ask spreads, little to no volume behind the quotes, and sleeping market makers can potentially inflict much more damage on unknowing investors than a fund closure.
"Still don’t think illiquidity is a problem? Here’s a fact to consider: On the last day of February, a total of 152 ETFs and ETNs had no trades for the day. Their volume was zero. Seven went the entire month with no volume. One product, iPath Long Extended 3x Russell 1000 TR ETN (ROLA), has yet to post its first trade of 2012.
"What makes ETFs unique and limits discounts and premiums is their ability to create and redeem shares through in-kind exchange. However, this process requires trading activity. The creation/redemption process typically involves 50,000 shares of the ETF. The ETFs on Deathwatch routinely take weeks or months to generate that much volume. For them, the creation/redemption process is virtually non-existent. There is no ability to arbitrage the price to the net asset value."
For a detailed listing of endangered funds, click here.