Beyond Performance

Beyond Performance

How to Determine if a Niche ETF is a Good Fit for Your Portfolio

Many investors have found that it can be difficult to evaluate niche ETFs based on performance returns alone. Primarily because niche ETFs often have a limited performance history — in part because the concept is new to the market or the index it tracks has just started. Fortunately there other independent factors to help evaluate how a niche fund is constructed and how efficiently it is managed.

In order to get a well-rounded perspective there are several important underlying considerations to look at beyond performance. These may help investors evaluate the potential opportunities that a niche ETF may offer. Our Beyond Performance infographic highlights the Top Ten Non-Performance Evaluation Criteria that you may find beneficial to review.

Top Ten Non-Performance Criteria

Top Ten Non-Performance Investment Criteria

1. Investment Style

Every style has a different historical return profile and risk/reward scenario. It is a combination of factors, exposure, strategic focus, constituent constraints and how they are managed.

2. Methodology

ETFs are completely transparent in that each Index Provider publishes a document with their pre-defined, proprietary calculation methods and composition used to select, weight and rebalance the constituents.

3. Exposure

Exposure encompasses many qualifying factors that may include such variables as asset class, allocation, sectors, industry, investment style, capitalization, region, country, economic destination and currency.

4. Construction

Investment efficiency is a function of the risk, return and the total cost of owning an ETF. Better built funds operate under a more disciplined framework and have a higher structural integrity that can be monitored.

5. Philosophy

The overall principle(s) that guide an investment and its management toward a desired outcome. It is the defining characteristic of not only the fund itself but also the firms that create, monitor and distribute them.

6. Diversification

Diversification is a risk management strategy of combining a variety of assets to reduce overall risk. It is a delicate balance, as both under diversification and over diversification can affect portfolio absolute returns.

7. Expenses

Operating expenses and fee-related costs have little or nothing to do with how an individual fund performs, but do effect the bottom line. Simpler ETFs tend to have lower fees and specialized ETFs trend higher.

8. Rebalancing

Both passive and actively managed ETFs rebalance periodically. A passive ETF may rebalance on an annual or semi-annual basis. An actively managed ETF might rebalance quarterly, or even more often.

9. Requirements

Each index constituent must meet certain pre-determined qualifying requirements for select factors and exposure to be included in an index. Criteria for similarly-themed indexes can vary greatly.

10. Liquidity

An ETF’s liquidity represents the extent and efficiency by which it can bought or sold quickly at a stable price. Higher-cap products tend to be more liquid than low-cap ones and can be traded during market hours.

These criteria should be able to help investors decide if the risk/reward scenario is something they are comfortable with and the fund offers is a good fit for their short/long-term investing goals. As with all investments the paramount consideration should be the tolerance and comfort in taking on the risk. In theory, more volatile funds have the opportunity for a higher return, but they also have a higher risk possibility. Risk-related scrutiny is important especially if volatility is a concern.

The Final Evaluation

Many popular and emerging themes – by their very nature – are based on themes that have yet to fully play out. As a result there are often few or no peers to measure against. Standard benchmark comparisons to the broad market offer little in the way of a true perspective for the potential returns that a fund may actually achieve.

Since complete transparency is one of the main advantages that any ETF offers, astute investors may find it beneficial to assess the individual holdings that comprise a niche fund. This allows a first-hand look at the quality and types of the companies will most likely be contributing to the fund ‘s overall performance.

Most niche funds are concentrated and generally have a limited number of holdings to review. The details as to how a fund is constructed and the underlying components can be relatively easy to find and analyze on most investment sites that cater to the general ETF marketplace. (Visit our resource section details.)


Discover and Explore. Niche is an independent financial research site focused on identifying and following innovative thematic trends that are driving the economy and impacting financial markets.
This article is for informational purposes and to provide general knowledge about Niche ETFs and related industries only. We do not provide investment advice. The information should not be used as a substitute for professional financial, legal, accounting or tax guidance.

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