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Quite the opposite. The majority of ETFs seek to track broad and liquid markets which include U.S. stocks and bonds, and international and emerging markets stocks. Niche ETFs represent less than (10%) of the ETFs available.
Niche ETFs allow investors to tactically focus in on a market segment or industry they may have interest in or have specific knowledge of. A Niche ETF allows is a more passive and comprehensive way to invest without having to pick one particular company.
Similar, but not exactly the same. A thematic ETF can be a Niche ETF, but not all Thematic ETFs are niches. Thematic ETFs can have a very broad base. It can include a whole industry sector, a specific market-cap range, an entire country/region or a specific investing style. Niche ETFs tend to take a “micro-sector” approach or focus on a new-market opportunity.
As Niche investing is relatively new, the exact definition of a Niche ETF can vary. Niche ETFs have a narrow focus. This focus is allows an investor to take part in a very specific – often newly defined – segment of the market. It also has the flexibility to span multiple sectors and market cap ranges. Niche ETFs tend to be dynamic, innovative, disruptive and forward- looking.
NicheETF.com has developed an integrated approach to defining and monitoring Niche ETFs. We are focused on ETFs that meet at least 4 of the 5 Fundamental Factors in order to be included and monitored NicheETFs.com’s universe.
The best application of a niche ETF is the one that best suits an investors needs and objectives. For some, adding niche ETFs to a portfolio can help diversify it. Better diversification may mean lower overall portfolio risk.
For others, niche ETFs are merely tactical, short-term tools to express a view on a highly –specialized segment of the market. This could mean a higher risk to an investor’s portfolio. The single most important thing to do is to some basic research to learn how the Niche ETF is constructed before deciding to invest.
It is important to understand the risks. Niche ETFs tend to be more of a tactical allocation than a strategic one, as niche ETFs are more specialized. As a result an investor could be exposed to a greater degree of risk compared to more a traditional ETF offering. Other factors come in to play. For example, how the index is weighted, liquidity and high tracking errors can also be an issue.
There’s no one way to do it, but understanding the risks is key to successful Niche ETF investing. Because niche ETFs are relatively new, investors may find little information for performance is as many niche ETFs do not have a long-term track record.
Investors may look at broad economic and social factors to find what can be helpful in determining how a niche is likely to perform in the long-run. They can also look at the quality and duration of the underlying holdings.
Most are, but not all. If a niche ETF has in index, the investor has a high-level of transparency and can look at the look at the underlying companies in the ETF and how each individual holding is weighted.
It is easy to evaluate based on how many constituents there are, exposure weightings and type/quality of companies it holds. Keep in mind that indexed fund does not always mean that it is 100% passively managed.
They can be. It depends on many factors. A niche can be a small segment of the market, a specific sub-segment or a thematic area that goes across multiple sectors. As a result the performance often reflects the current market environment or certain industry/sector fluctuations. Niche ETFs can be opened quickly based on perceived investor demand. They can also close quickly because of poor performance or the inability to maintain enough assets to cover operating costs.
On the other hand, many niche ETFs are extremely successful and are well-poised to take advantage of long-term, innovative changes around the globe and how these changes will transform and effect financial markets.
Fees tend to be somewhat higher for Niche ETFs. More creative strategies command higher fees. Also, if a niche ETF is actively managed or has an active management overlay it can contribute to higher expense ratios.
In some cases the fees can actually be lower because the Niche ETF operates in areas of the market where the competition is less intense. Fund size can also play a significant role. Higher asset funds also tend to be cheaper because they have lower overall operating costs.
Most importantly for us to consider an ETF to be a Niche ETF it needs to meet at least 4 of the 5 Niche ETFs Fundamental Factors.
For our purposes, we do NOT considered these types of exchange traded products to be a Niche ETF:
- Inverse/leveraged/hedge funds = ALTERNATIVE
- Bond funds = FIXED INCOME
- Sector only funds = THEMATIC
- Market-cap weighted funds = THEMATIC
- Commodities and REITS = SPECIALTY MARKETS
- Momentum-based funds = TECHNICAL
- Non-indexed Funds = ACTIVELY MANAGED
- Standard Indexes, Sectors, Weightings = BROAD BASED
These are the general guiding principles. There are exceptions. If an ETF is offering a truly innovative approach to an existing theme, we may consider it a Niche ETF and track it as long as it stays within our criteria.
Rarely are two niche products the exactly same. They may cover a similar thematic subject or area of the market, but the underlying criteria for the holdings are generally vastly different. This may include the investment style, number of holdings, types of holdings, market capitalizations, sectors included, country weightings and whether or not it is active or passively managed. Exposure to individual positions depend on if the ETF is market weighted or equal weighted.
Each ETF is required to file a methodology document which in part clearly defines how the ETF is to be constructed. All things being equal, it is also a good due diligence to take a look at the fees and the tracking error rate. Both can have a significant effect on performance.