Published October 22, 2012
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: GRN) or the UBS ETRACS Oil Futures Contango ETN (OILZ).
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.
Defining Niche 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 (BRAF) 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 (EWZ).
As for the First Trust ISE Cloud Computing Index Fund (SKYY), 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 (ORCL), Google (GOOG) and Amazon (AMZN). SKYY is up 8.6 percent this year.
Expect More 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 (ECON) 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 exposure to senior bank loans and emerging markets corporate bonds are credible ideas.
That much is clear as the PowerShares Senior Loan Portfolio (BKLN) has accumulated over $1.1 billion in AUM in less than two years of trading. The WisdomTree Emerging Markets Corporate Bond Fund (EMCB) debuted in March and already has $88.3 million in AUM.
BKLN, EMCB and some other narrowly focused bond ETFs have proven popular with investors. Expect that trend to continue as income investors look for alternatives beyond low interest rate Treasuries.
For more on niche ETFs, click here.
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