When & How To Use Niche ETFs

May 16, 2017

News of a massive worldwide cyberattack involving Windows pushed the PureFunds ISE Cyber Security ETF (HACK) and the First Trust Nasdaq Cybersecurity ETF (CIBR) sharply higher Monday. Both funds, which focus on cybersecurity firms, were on the frontline of action following the latest news.

That’s a great example of what niche investing is all about.

The Wannacrypt ransomware attack late last week caused the appeal of cybersecurity ETFs soar this week. HACK and CIBR rallied some 3% on Monday, putting year-to-date gains at 16% and 13.5%, respectively. 

Chart courtesy of StockCharts.com

HACK and CIBR are considered “niche” funds because of their narrow focus on a specific corner of the market. But the definition of niche can vary from investor to investor.

Niche can be a small segment of the market, as narrow as a subsegment of a specific sector—cybersecurity or robotics as a subsector of technology, for instance. It can also be a thematic area of investment that goes across different sectors.

Another example is a fund like the Global X Millennials Thematic ETF (MILN), which is niche for its underlying theme that connects the companies it owns across various sectors—they all make money off of millennials’ spending habits.

Any way you define it, niche ETFs can be used in different ways.

For some, they are merely tactical, short-term tools to express a view on a pocket of the market. For others, a niche can be a long-term play that takes time to come to fruition—like millennials or, say, solar energy. As such, these ETFs would belong in the strategic bucket of the portfolio. There’s no one way to do it.

We talked to ETF strategist Grant Engelbart, who’s a portfolio manager at CLS Investments, for his road map to using niche effectively. Here’s what he had to say ...

 

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