Growing Demand for Outcome Oriented Investments
Rather than tracking the broad market spectrum, many Niche ETF Funds are focusing on looking forward to capitalize on specific and identifiable future trends. Today’s dynamic markets have created expanded opportunities with the many continuing disruptive shifts in demographics, consumer behavior and technological innovation. These changes have had a significant effect on the availability of the resources, products and services necessary to support these movements.
The dramatic growth of Niche ETFs has emerged due in large part to the market’s response to investor demand. The sheer number of niche products continues to expand as investors become more aware of them and learn how to use them to their best advantage in seeking to develop an optimal investment portfolio.
Opportunities to Diversify
Never before has there been a greater number of niche ETFs that track such a wide variety definitive market segments. With so many options, passive investors now have the exceptional ability to easily make tactical additions to their portfolios. With minimal effort niche investors can have exposure to particular market segment or sub-segment that they may be interested in or a have particular market viewpoint on without having to purchase individual stocks.
By design, Niche ETFs are not necessarily diverse in the way that they are constructed — but they can play a tactical role for the investor that is seeking to strategically diversify their overall portfolio. A narrowly-focused exchange traded fund can provide targeted exposure to a specific market segme, rather than the broad-base of a traditional asset class ETF that strives to match general market-based returns. One downside to their diversification role is that they may have a higher risk profile due to their concentrated nature.
Performing an In-Depth Review Process
Both qualitative and quantitative factors should be considered before deciding if a Niche ETF is a good fit in an investor’s portfolio. With niche investing the key is not necessary only look at what is trending, but assessing what is right in strategy and allocation size for an individual investment portfolio.
These factors include (1) assessing the market environment for the product outlook to see if it is aligned with market conditions and growth opportunities; (2) reviewing general performance metrics acceptable for the investors return and risk parameters; (3) determining if the Niche ETF is a well-constructed fund tracking a qualified, investable universe and (4 ) identifying if it is an overall good fit for an portfolio based on the each investor’s objectives for risk/return and diversification.
To Be or Not To Be
It is important to keep in mind that Exchange Traded Products are different than most investment vehicles in that they do not try to outperform their corresponding index, but rather the goal is to replicate its performance.
In other words, they don’t try to beat the market, they try to BE the market.
Niche investing is no different. Successful implementation of a niche investment strategy involves being able to identify companies are well poised to capitalize on new markets with a new economy focus. Taking advantage of these changes allows investors to identify the companies with the potential for the proper exposure to benefit from these transformations.
Niche ETFs tend to be active in more dynamic markets. As a result it is critical for investors to determine entry and exit points for niche investments which strive to capitalize on investment themes that have not fully played out or may not have completely materialized yet.