With many of the broad and basic indexes pretty much covered, exchange-traded fund (ETFs) issuers have basically two options when it comes to launching new products. They can use various screens and other weighting criteria to create so-called smart-beta indexes in an attempt to beat the standard indexes.
Or they can get “nichey.”
The number of products tracking sectors, subsectors or other themes has grown by leaps and bounds in recent years. Some, like the Industrial Select Sector SPDR Fund (XLI ) are pretty straightforward in their construction and mandate. But many of the newest products to hit the market are very nichey indeed. Subsectors of subsectors and very specific themes are now available for investors to buy.
With that in mind, here are seven of the most niche ETFs.
The KraneShares CSI China Internet ETF
We tend to take the Internet for granted here in the modern world. But for China, the online boom is just beginning. Only about 50% of the nation’s population has access to the Internet (though that’s still 668 million people). With more and more citizens logging on, the Internet economy and sector in China is expected to grow by leaps and bounds.
Enter the KraneShares CSI China Internet ETF (KWEB ). KWEB tracks a basket of Chinese Internet stocks that provide online shopping, social media, gaming, commerce, you name it. Basically, all the Facebook’s (FB) and Amazon’s (AMZN) of the nation. It’s about as nichey as they come. But given the potential of the Chinese online market, KWEB could be one very specific ETF that pays off.
Market Vectors Rare Earth/Strategic Metals ETF
There are plenty of natural resource and commodity-based ETFs, but most of them are pretty broad in their focus. The Market Vectors Rare Earth/Strategic Metals ETF (REMX ) takes the opposite approach and focuses on miners of 49 distinct minerals and metals.
Dubbed the “rare earth” metals, elements such as Terbium and Scandium aren’t exactly well-known, but they form the backbone of our modern economy and find their way into everything from flat panel TVs to wind turbines. The problem is that mining them is a very specialized process and REMX is a very specialized fund.
The ETF tracks a global basket of these miners and rare earth processors, the bulk of which are located in China. REMX has been a volatile fund over the course of its history as rare earth prices have been on a roller coaster ride. But for investors looking for a niche commodity play, this is about as specialized as they come.
Global X MSCI Nigeria ETF
There are plenty of reasons to like Africa. The continent is in the very beginning stages of its economic revolution. Think of it as China, 20 or 30 years ago. But given the frontier aspect of investing there (sans South Africa) most African ETFs either focus on the entire region or the most major economies.
The Global X MSCI Nigeria ETF (NGE ) bets on one of the riskier nations in the region. Nigeria has a huge young population as well as vast commodity wealth. As a result, the nation has been dubbed one of the “Next 11” bloc of superstar countries. NGE tracks the largest and most liquid firms in the nation or those that derive the bulk of their revenues from it. It’s a very niche play on one of the biggest long-term stories.
PureFunds Drone Economy Strategy ETF
Drones and other small unmanned aircraft are quickly moving beyond just toys for enthusiasts. Sales and usage of drones are set to spike as a variety of industries begin using them for the real-time analysis of everything from crop fields to pipeline maintenance.
The niche PureFunds Drone Economy Strategy ETF (IFLY ) tracks a basket of companies that work to develop, research, or utilize drones as a major part of their business model. That includes big-time defense contractors that make drones for military purposes as well as smaller personal “fun” drone makers such as GoPro (GPRO). The fund is roughly split between domestic and international drone players. All in all, IFLY makes for a very specific play on one of the hottest areas in tech. If you’d like to find out more, read our recent Q&A with the CEO of PureFunds Andrew Chanin.
iShares Global Timber & Forestry ETF
Timber could be one of the most boring investment niches on the planet. Watching trees grow is as boring as watching paint dry. But the global timber industry is a multibillion dollar market segment and has historically been a great performer. Many institutional investors and endowments now count timberland holdings among their assets.
The iShares Global Timber & Forestry ETF (WOOD ) and its cute ticker target a basket of global forestry stocks. This includes timber REITs and land owners, pulp and paper producers, forestry management firms and those who produce wood products. The ETF is broken into a 40/60 split between the U.S. and intentional timber stocks. And at $186 million in assets, it may be niche, but it is popular.
The PowerShares CEF Income Composite Portfolio
Closed-end funds are weird creatures on their own. The fund type, which trades on exchanges either below or above their net asset values, are pretty much ignored by most investors. However, under the right discount to NAV, they can provide big-time income and dividend opportunities.
The PowerShares CEF Income Composite Portfolio (PCEF ) makes owning these CEFs easy. The niche ETF tracks a basket of closed-end funds that focus on bonds and funds that provide equity income through options underwriting. These are the main varieties of CEFs, along with municipal bonds. PCEF will skirt its portfolio towards those CEFs that trade at discounts to their real values. That helps provide a cushion as well as boost the fund’s yield. All in all, PCEF is a niche ETF tackling a pretty niche market place.
SPDR SSGA Gender Diversity Index ETF
Traditionally, socially responsible funds have focused on a broad set of metrics when determining their portfolios. With more investors looking to align their holdings with specific sets of ESG rules, the products continue to get more specialized. Case in point: the SPDR SSGA Gender Diversity Index ETF (SHE ).
SHE tracks a basket of large-cap U.S. stocks that are considered gender-diverse. That means SHE’s underlying portfolio of stocks will have greater gender diversity in their senior leadership positions. Basically, there’s more women and transgender people sitting in their boardrooms. While that may seem ad hoc at first, there is some academic evidence that female-run companies or those that have more women in leadership roles perform better than those that are male-dominated. With the fund being new, SHE hasn’t had time to deliver on that promise yet. But with over $200 million in assets, investors are believing in the niche fund.
The Bottom Line
The number of niche ETFs continues to grow as sponsors tackle more and more themes and subsectors of industries. The preceding list offered just some of the examples of niche ETFs out there.