Niche ETFs – Understanding the Elements of Exposure
What attracts many investors to niche ETFs is that it is a type of investment that is strategically focused on the transformative and dynamic aspects of the marketplace. While these ETFs may be simple way to invest in today’s changing times – there can be a great deal of complexity in the funds available.
Beyond exposure to the general theme, each niche ETF offers access to many targeted levels of market exposure. This includes capitalization ranges, the type of asset, industries, sectors and geographic locations.The good news is that all ETF holdings are fully disclosed on a daily basis. This allows investors to easily look behind the lens and review the details of the fund’s construction.
Is Your Niche Fund Giving You the Exposure You Want?
Each investor’s ideal market exposure is different. It depends on a combination of his or her market outlook and risk appetite. Once an investor determines the basics of how a niche fund is managed (passive/active and cap or equal-weighted), the next level of review should be to investigate at a more detailed level the exposure levels that the fund offers.
Diversification vs. Concentration
As a general principle, diversification lessens market exposure risk with the goal of reducing the volatility of an investment portfolio over time.
Diversification isn’t to necessarily maximize returns, but to limit the impact of volatility on a portfolio. More aggressive or tactical investors may want a less-diversified portfolio. More conservative investors may prefer a highly-diversified one. It all depends on the level of volatility they are comfortable with.
Zoom In for a Closer Look
Depending on the makeup of the components, funds that are similar thematically can have very different outcomes. Analyzing the fund’s underlying exposure metrics can help an investor be aware of the potential risk and rewards that they may be exposed to. These individual market exposure metrics are tracked by the percentage of the portfolio or dollar amount invested. Each type of market exposure is weighting and expressed as a percentage of the total portfolio holdings.
Resources for Evaluation
Since Niche ETFs are one fastest growing investment product areas, there seems to be no limit to the types of niche funds now available. New products and concepts are constantly coming to market. This provides a great deal of flexibility and opportunity to for investors to fine-tune their market exposure.
Fortunately for investors there are a wide variety of tools available to examine the construction of niche ETFs and see what makes each fund tick. This information generally available from each fund’s sponsor. We also invite to you visit our resource section to see the many options available from industry research providers.