ETFs Continue To Slice Market Thinner

April 20, 2016

Should Investors Consider These?

The underlying question is whether these thin slices of the market are something investors should consider, or if it is more akin to the stock picking that flies in the face of passive investing.

“Narrow niche funds are poor substitutes for big broad equity ETFs like SPY, or even for the pure-play-sector ETFs within the related sector, like XLK [the Technology Select SPDR (A-94)],” said Paul Britt, senior ETF analyst at FactSet.

“Part of the reason for this is that the best pure-play index ETFs are incredibly good at what they do—cheap, tax-efficient exposure that’s likely to beat active management in the same space,” he added.

However, Britt says there is merit in owning a group of companies focused on one area rather than trying to pick the individual winners in those businesses.

Alternative To Stock Picking

“Instead, the niche plays are worth considering as an alternative to owning single names outright—for example, to buy a handful of gaming stocks using GAMR rather than just Nintendo. If you’re not interested in Nintendo in the first place, than GAMR probably isn’t for you either,” he said.

We don’t expect ETF product innovation to slow down or even stall going forward. There are countless other market niches to be exploited, and some will follow the successful footsteps of the $715 million PureFunds ISE Cyber Security ETF (HACK | C-32).

That said, these niche types of ETFs have an uphill battle in gathering assets. HACK was an exception to the pack. There’s no question that a lot of this ETF spaghetti will not stick to the wall, so investors beware.

Drew Voros is the editor-in-chief of ETF.com. He can be reached at [email protected].

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