3 Niche ETFs Advisors Probably Don’t Know, but Should

Financial advisors can show clients their research chops if they mention these relatively unknown funds.

As top-heavy as the most popular stock market indexes are these days, the ETF industry may have it beat. Thanks to a combination of solid product development, innovation and distribution muscle, a relatively small number of ETFs capture a very large percentage of investor dollars.

That can produce some hidden gems, including the following three under-the-radar exchange-traded funds.

The funds will give advisors a way to show their clients the research they’ve done to unearth these funds, because even though these ETFs are readily available, it is unlikely that most investors would find them on their own.

The basic criteria I looked for in choosing this set of ETFs was as follows: 

• Less than $250 million in assets under management 
• At least one year in business. 
• The ETF is the only fund—or one of very few—that invest the way it does. 
• The strategy is timely. That is, it targets a market segment that has underperformed, but could benefit if the markets shift in late 2023 and beyond. 

Three Underappreciated Niche ETFs 

The Arrow Reverse Cap 500 ETF (YPS) has a ticker symbol that is the exact reverse of the SPDR S&P 500 ETF Trust’s (SPY). That is no coincidence. At a time when the S&P 500 is as top-heavy as ever, YPS owns the same stocks as SPY, but in reverse order of weighting. In other words, the iconic stocks that top SPY’s largest holdings are also in YPS. But they are the smallest by weight. It is easy to see why YPS is just a $12 million ETF after nearly six years in business. But should the market cycle turn, it could be in the proverbial catbird’s seat. 

The ProShares Short 7-10 Year Treasury (TBX) simulates a short position on the part of yield curve that contains the bond market’s primary benchmark, the 10-year U.S. Treasury bond. This $29 million ETF has been around since 2011. But because interest rates were stuck at near zero for so long, it was clearly an afterthought. And while its asset base implies that is still the case, its 10.6% year-to-date gain might start to get more attention if inflation re-accelerates and if the Federal Reserve raises rates more. The longer end of the yield curve will have some catching up to T-bill rates in that case. TBX would be in a good position to capitalize on that scenario. 

The Global X Data Center REITs and Digital Infrastructure ETF (VPN) is a $30 million fund that offers a way to own a basket of firms that operate data centers and cell towers. At a time when other types of commercial real estate are facing serious headwinds, real estate tied to the digital economy should have more staying power. VPN, which made its debut in 2020, now holds 24 stocks. Some 70% of the fund is allocated to the U.S., the rest is spread across Australia and Asia. 

Sometimes, innovation in investing comes from not-so-obvious places. These three ETFs and many others may just represent the next frontier for ETF investors, particularly for financial advisors who may be looking to differentiate their practices through investment research and portfolio management.