Many of the derivatives and swaps behind them could sharply decline in value as investors shun risk and demand dries up, making them hard to unwind. Or, collateral that ETF providers expect to use as a backstop to return money to ETF holders could turn out to be worth a lot less than expected.

"More and more ETFs are based on strategies, not assets," says Andrew Lo, a market expert who teaches finance at the Massachusetts Institute of Technology's Sloan School of Management. "During normal times, everything looks just fine," he said. "But strategies can be liquid until they are not, and the unwind risk is tremendous. One counterparty can get in the hole for a large amount and default."

Lo is not saying this threat is imminent, but he said he's concerned about a lack of transparency that makes the strategies hard to assess.

Many esoteric ETFs are being created by players who list them in Europe, Singapore and Hong Kong, where disclosure rules aren't as strict as they are in the United States, said Srichander Ramaswamy, an ETF expert at the Bank for International Settlements, in a recent study on these risks.

The sheer number of players behind synthetic ETFs can make it hard to figure out what's really going on, Ramaswamy added.

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One source of comfort is that the amount of assets in these instruments is relatively small, around $150 billion. But the rapid growth in ETFs is likely to continue because of two forces: Investors love them, and so do the banks cooking up the financial instruments behind synthetic EFTs. Banks like them because they're profitable, and they also offer a convenient way to make money from assets they typically have to hold anyway.

Choking off funding for small companies?

ETFs may also make it harder for small companies to get funding to grow, says Harold Bradley of the Kauffman Foundation. As money flows into ETFs that represent small-company indexes like the Russell 3,000, many ETF managers will buy shares of virtually all the companies in the index. Unlike professional money managers, they don't distinguish between good companies and weaker ones. They just drive up the shares of all.

But this blunts one of the key roles of the stock market, which is to reward superior companies by giving them an advantage in raising capital when they issue new stock. When good and bad companies advance indiscriminately, some money that would have gone to the superior companies goes instead to the weaker ones.

On the other hand, ETFs representing a broad index like the Russell 3,000 often do not buy the smallest of the companies in the index, because trading volume is low. Instead, they use financial tools to compensate for the tracking errors. The upshot is that the shares of some really good, but very small, companies inevitably get left behind, Bradley said. This makes it harder for them to raise the capital they deserve.

Seeing this play out, some small companies decide not to go public. Bradley said fewer initial public offerings among small companies threatens the economy by depriving small companies of the cash they might use to hire workers and grow.

"ETFs are now undermining the traditional price-discovery role of exchanges, discouraging new companies from wanting to be listed on U.S. exchanges," he said in a study called "Choking the Recovery: Why New Growth Companies Aren't Going Public and Unrecognized Risks of Future Market Disruptions."

ETF risks and your portfolio

ETFs can also do some serious damage to portfolios, especially the leveraged ETFs that can rise or fall two or three times as much as the overall market. "Leverage ETFs are like a stick of dynamite that can, and often do, blow up," said Andrew Stoltmann, a Chicago attorney who represents investors who have lost from $50,000 to $500,000 using leveraged ETFs.

Stoltmann cautions investors to limit leveraged ETF exposure to less than 5% of the overall portfolio size, and to "be prepared for potentially very large losses."

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Leveraged ETFs are best used to hedge portfolios, or to place very short-term bets on one- or two-day moves in an index, said Brian Ullmann of Ford Financial Group in Fresno, Calif.

ETFs using derivatives to replicate the performance of an underlying asset pose another risk to your portfolio. Since they use derivatives instead of buying the actual commodity, they can miss big in trying to replicate the moves of that asset. This happens more often than you might think with commodity ETFs.

"Sometimes what is advertised is not what you get," cautioned Michael Perelstein, a professor at Columbia University who also has extensive experience managing money. "You end up winning on the idea but you feel like a loser," he says. "For an investor, that is frustrating."

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.