Not all Niches are Worth Filling

Just because there has been a proliferation in niche ETFs, doesn’t mean that you should buy into them

Hortense Bioy, CFA 11 December, 2012 | 11:58AM
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The number of niche exchange-traded funds (ETFs) has mushroomed over the last few years. This seemingly endless trend has been due not only to the growing and ever-evolving investor demand for ETFs, but also as a result of the increasingly competitive nature of the global ETF market.

The race for market share has pushed ETF providers to develop products that offer exposure to ever-thinner slices of the investable universe.  In some cases, this has led to genuinely useful innovations that could benefit investors. In others, we have seen instances where products’ complexity has ensnared those who have failed to do proper due diligence.

The Problem with Niche ETFs

When talking about niche products, sector equity ETFs are often the first example that springs to peoples’ minds. In recent years, we’ve seen a multitude of ETFs emerge that give investors access to some extremely narrow sub-sectors. This is especially the case in the US. These ETFs range from smartphone, cloud computing and social media ETFs to fertiliser ETFs. No doubt that some investors see these types of funds as useful tools to express a view on very particular segments of the market. But the vast majority are overly specialised, too thinly traded, and ultimately not worth considering.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is global head of sustainability research at Morningstar

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