Defining Niche ETFs
Niche ETFs are a relatively new and fast growing investment product area. Due to increased consumer interest and demand they have expanded in size and scope over the past few years. Niche ETFs are a part of the concept of thematic ETFs. While they are similar in many ways to thematic ETFs, niched ETFs also have significant differences. A niche ETF generally targets a narrower focus than a broad-based sector or general theme-based ETF.
Demand for Niche ETFs have increased for the following reasons:
1. Easy to relate to, understand and invest in.
2. Able to carve out a definable, narrow focus.
3. Offers more diversification for investors than owning a single stock.
4. Often targeted to trends that are currently disrupting and driving the economy.
5. Provides a simplified way to incorporate investment ideas into a well-diversified, core portfolio mix.
Niches can be a small segment of the market or a narrow sub-segment of a specific sector. For instance, technology has gained a great deal of investor interest lately. The technology sector itself is considered a strong, general thematic investment category with a broad scope. Niches are created when the sector is combined with different drivers and exposures that can carve out a more targeted focus.
Within the general theme of technology, the sector provides a basis for multiple innovative and disruptive specialized markets — many of which currently have ETFs that have been created to focus on specific products and companies that seek to profit from the long or short-term outlook for many definitive areas of the technology market.
Spanning Sectors and Sub-Segments
A niche ETF can also be a thematic area of investment that goes across many different sectors. The Brand Value ETF would be a good example of this. It provides an enhanced overlay where the fund seeks to provide exposure to well-known, brand-oriented companies that the fund sponsor believes have intangible brand assets that have not been fully appreciated by the market. The 50 holdings in the fund touch almost every single sector. The companies that comprise the fund cross a broad spectrum of sub-sectors and sub-segments.
Flexible. Nimble. Responsive.
Even with a narrow focus, the ability to span multiple sectors, regions and market cap ranges offers a great deal of flexibility in curating the individual holdings that make a well-defined niche concept. These carve outs have specific investment requirements that are set up as requirements by the ETF Sponsor or Index Provider.
Many factors can be included in the requirements to determine what qualifies as a constituent or holding. This may include such variables as asset class, allocation, sectors, industry, investment style, capitalization, region, country, economic destination, currency, liquidity and exposure.
When comparing niche ETFs that may seem similar on the surface, but a look at the underlying holdings and management style can actually show significantly different approaches to how the investment or index is constructed and supported.
Niche ETFs are Evolving
With the emerging role of niche ETFs today’s investment marketplace, the precise definition of what a niche ETF is can vary among investment professionals. The one thing that they do agree on is that at their core they are a theme-based way to allow an investor to take part in a very specific segment of the market.
At NicheETFs.com we are focused on monitoring and tracking specialized ETFs that meet at least 4 of our established 5 Fundamental Factors. Each of the criteria must be meet and maintained in order to be included Niche ETFs universe.
The niche ETF space is constantly changing as markets and investment ideas evolve. New product and concepts are steadily emerging and previously, established ones are no longer active. For ease of tracking, ranking and organization, at Niche ETFs we have created three main categories.
Innovation investors aim to capture growth through rapid advancements in technological developments and developing industries in targeted market segments.
Innovative ETFs are based on disruptive thinking with forward-looking approaches. These disruptive technologies are changing the way new products and services are being brought to market. Often these dynamic changes provide a potential growth opportunity that allows investors focus on next-generation technologies.
2. IMPACT INVESTING
Impact investors actively seek to capitalize on market-based solutions that align with their individual values — while addressing social and environmental challenges based on shared values.
It is a relatively new concept that involves the ability to make a difference in ways you can measure through investments with the goal of helping to make the world a better place. It also has the benefit of the potential to produce financial returns while doing a social or environmental good.
Many traditional infrastructure-oriented industries are well-poised to thrive in a new market economy with the integration of the direction of consumer behavior and technological advances.
In general infrastructure-based Niche ETFs tend to be asset-based. They rely on physical structures, networks, transportation and other equipment that provide the products and services essential to economic productivity.
Categories and Sub-Segments
Increasing Investor and Advisor Interest
No matter how you define it, niche ETFs have created a great deal of interest from individuals, advisors and institutional investors. The development of many niches that can be pursued as concentrated investment opportunities seems almost limitless — and at times overwhelming.
It may appear that niche ETFs can come and go rather quickly. Some successfully carve out a corner the market with a long-term track record of growth and strong market potential. Others seem fade away as the hot new trend turns to be more of a fad, or have been built around a concept that simply does not attract enough assets to maintain the fund.
No matter how the individual funds play out, the overall the number of niche ETFs continues to grow steadily each year as sponsors take on more themes and subsectors of industries and specialized product areas.