Published October 22, 2012
Not all ETFs can have a broad, easy-to-comprehend objective such as the SPDR S&P 500 (SPY) or the PowerShares QQQ (QQQ). Those ETFs, and many like them, track widely followed indexes and usually do so at fair price points and without alarming tracking error.
Thing is the market can only handle a finite amount of ETFs that resemble SPY and QQQ. Knowing this, ETF sponsors have tried their hands at more narrowly focused, or "niche" ETFs. Some industry observers and so-called experts seem to imply that the more narrow an ETF's focus, the more risk investors are exposed to. In other words, these pundits are saying some niche ETFs are bad.
Some are bad, but there are plenty that are worth evaluating. A lot of the argument depends on what one's definition is niche is. Some would say there is not much difference between the iPath Dow Jones-UBS Aluminum Subindex Total Return ETF (JJU) and a product that tracks precious metals futures.
Dig deeper and it is clear that aluminum futures do not trade in the robust fashion that gold or silver futures. As a result, JJU is pricey with an expense ratio of 0.75 percent per and a wide bid/ask sperad. Then there is the FactorShares 2X: Oil Bull/S&P500 Bear (FOL). This is a leveraged play that gives investors long oil/short equities exposure. Indeed, this is an example of a risky niche product. There are some niche ETFs, however, that share two pivotal traits in common. These funds are not overly complex and are home to rising assets under management totals.
First Trust NASDAQ Technology Dividend Index Fund (TDIV) The soaring popularity of dividend ETFs is not surprising. It is merely the result of a low interest rate environment that has forced many investors out of money market accounts and U.S. Treasuries. However, there is only so much room in the market for broad dividend funds such as SPDR S&P Dividend ETF (SDY) and the Vanguard Dividend Appreciation ETF (VIG).
Given that, it is possible that dividend ETFs with narrower focuses could be the next frontier for fund sponsors looking to capture the hearts and assets of income investors. The First Trust NASDAQ Technology Dividend Index Fund is a good starting point.
Though the focus on technology sector dividend payers is narrow, TDIV is by no means complex or opaque. If anything, the timing of this new fund (August debut) is excellent as the tech sector is now the biggest dividend payer of any industry group in the U.S..
In just two months of trading, TDIV has managed to attract $30.4 million in AUM and that is without Apple (AAPL) being part of its lineup. TDIV is index is rebalanced quarterly, so Apple could be included following that next rebalancing.
Market Vectors Morningstar Wide Moat Research ETF (MOAT) MOAT is not a run-of-the-mill broad-based equity ETF. Rather, the ETF devotes its allocations to the stocks of companies deemed to have deep competitive advantages over rivals. Admittedly, that is a "nichey" concept for an ETF, but MOAT has proven viable by accumulating almost $69 million in AUM since its April debut.
Global X FTSE Andean 40 ETF (AND) The caveat regarding the Global X FTSE Andean 40 ETF's asset growth is that the fund's AUM total is still quite low at $8.7 million. That compares to just under $7 million a year ago, so on a percentage basis, AND's AUM growth has been good in the past 12 months.
As is the case with the other ETFs on this list, the niche AND fills is not complex. Rather, the fund can be viewed as the only credible multi-country alternative for investors looking to get exposure to Latin America without excessive weights to Brazil and Mexico. AND is devoted to Chile, Colombia and Peru. That is it.
The good thing about that particular niche is that AND has easily outperformed more familiar multi-country plays on this region this year. The SPDR S&P Emerging Latin America ETF (GML) and the iShares S&P Latin America 40 Index Fund (ILF) are up 4.9 percent and 1.4 percent, respectively, this year. AND has surged 15.4 percent.
For more on niche ETFs, click here.
(c) 2012 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.