Some pundits just love to negatively chime in regarding the
goings on in the exchange-traded product industry. Whether it is
criticizing leveraged ETFs for sport, saying that low volume
products should always be avoided or
saying that only those funds with $100 million or
more in assets under management should be embraced, there are
plenty of folks with plenty of opinions about ETFs. Another realm
of the ETF universe that draws plenty of criticism is nice, or
narrowly focused products. There is some, emphasis on "some,"
validity to the criticism of niche ETFs. The world probably does
not need the iPath Global Carbon ETN (NYSE:
) or the UBS ETRACS Oil Futures Contango ETN (NYSE:
In some cases, the market does get around to sending ETFs and
ETNs with too much of a niche feel packing. ETFs tracking Hong
Kong small-caps and fisheries may have seemed like good ideas at
the time of inception, but the market did not warm to those
products and the ETFs are no longer with us.
There are some compelling points in favor of some niche ETFs.
First, the market is overly saturated with S&P 500 and other
broad market ETFs. Second, many niche ETFs,
like their low asset, low volume counterparts
, deliver solid returns.
Yes, it is fair to say a carbon ETN is a niche product. So are
ETFs devoted to sub-sectors such as cloud-computing and Brazilian
banks. In fact, the Global X Brazil Financials ETF (NYSE:
) was mentioned as niche play
in a recent USA Today piece
on hyper-focused ETFs.
That piece says funds such as BRAF are risky. Risky compared
to what? Brazil is Latin America's largest economy, home to some
of the region's largest banks and the average market value of
BRAF's constituents is over $12.2 billion,
according to Global X data
. Over the past year and year-to-date BRAF has outperformed the
larger and more mainstream iShares MSCI Brazil Index Fund (NYSE:
As for the First Trust ISE Cloud Computing Index Fund (NASDAQ:
), which was criticized for its narrow focus when it debuted in
July 2011, that fund now has almost $72 million in assets under
management. The median market cap of SKYY's holdings is $9.9
billion and it should be noted the ETF is not littered with
unfamiliar stocks. Holdings include Oracle (NASDAQ:
), Google (NASDAQ:
) and Amazon (NASDAQ:
). SKYY is up 8.6 percent this year.
Not all niche ETFs will survive. That much has been made clear,
but then again, not all ETFs will survive period. Just look at
some of the ETFs that have been shuttered this year. Scottrade's
FocusShares lineup was by no means too narrowly focused. Those
funds were essentially
rivals to the sector SPDRs
, but all 15 were shuttered.
With the ETF market maturing and a glut of benign fund
offerings already populating the market, investors have little
use for another ETF holding Treasuries or another fund offering
exposure to U.S.-based consumer staples stocks.
Some niche ETFs do thrive in terms of gaining assets and
delivering returns. The assertion is supported by some ETFs that
track the emerging markets consumer theme, arguably a niche
concept. The Global X China Consumer ETF (NYSE: CHIQ
has over $116 million in AUM
while the EGShares Emerging Markets Consumer ETF (NYSE:
) has $450 million in assets. In the past three months, those
funds are up 16 percent and 12 percent, respectively.
Niche concepts can be found in the bond arena, too, but the
evidence supports the notion that ETFs that give investors
senior bank loans and emerging markets corporate
are credible ideas.
That much is clear as the PowerShares Senior Loan Portfolio
) has accumulated over $1.1 billion in AUM in less than two years
of trading. The WisdomTree Emerging Markets Corporate Bond Fund
) debuted in March and already has $88.3 million in AUM.
BKLN, EMCB and some other narrowly focused
have proven popular with investors. Expect that trend to continue
as income investors look for alternatives beyond low interest
For more on niche ETFs, click
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