Evaluation Criteria for Niche ETFs
You have decided to consider adding niche ETFs to your portfolio and now you need to do some basic research. It is difficult to know where to begin. Currently there are over 2,200 U.S. Listed ETFs and ETNs. Niche funds are just a small portion of that. Many have interesting, often quirky names designed to capture an investor’s attention. On the outset they may sound good, but would they work for you?
Discovering a Niche ETFs Potential
Each investor needs to identify what’s important to them when looking at a potential investment. Most of the part of evaluation process should be assessing an investor’s appetite for risk to determine how it could best fit in their portfolio.
Some investors like risk because hoping for greater returns. By following innovative technologies and disruptive trends, many are looking capture investment opportunities in areas of the market that focus on long-term, transformative and structural changes. While others consider funds with the cheapest fees will be most attractive in order to their minimize expenses.
The Big Picture
In order to help you find a Niche ETF investment that aligns with your priorities, we’ve outlined 4 Critical Questions you should ask to understand before adding any Niche ETF you’re thinking about adding to your portfolio.
1. Market Outlook
On both a macro and micro level, the market environment and potential volatility concerns can have a significant impact for investors in evaluating global trends. Both have merit, and both considerations are required in order to make truly informed decisions.
2. Investment Objectives
A niche ETF is best considered after the amount of asset allocation has been determined. This will ensure you have the proper focus during the screening process. It is important to know the optimal portfolio mix you are seeking in order to find a category and select something appropriate for your risk tolerance.
3. Investment Horizon
Establishing an investment horizon is one of the first steps an investor needs to take. As a general rule of thumb, investors that have a longer investment horizon can take on more risk. It also depends on whether your goal of incorporating a niche ETF into your portfolio is a strategic (long-term) or tactical (short-term) one. Tactical asset allocations are generally driven by market events and should be more frequently adjusted.
Niche ETF’s often allow investors exposure to lesser known names and are an efficient way to create the opportunity to build a well-diversified portfolio. But the opposite can also be true, as many niche ETFs have a narrow focus that may have an overlap with too many similar holdings in one segment or sub-segment. It is important to be mindful of the overall balance of your asset allocation. *
Innovation creates complexity, and Niche ETFs are no exception. While on one hand they are extremely popular and simple incorporate in to an investment portfolio, there are also many details to consider that can affect the overall outcome of how the fund performs.
It is important to check details about construction the fund. Investors should review the ETF’s management style, weighting structure, liquidity, fees, tracking error and AUM to determine if there are any reasons for concern.
*For more information on exposure, see Niche ETFs – Understanding the Elements of Exposure.