Niche in the New Year? | BetaShares

Niche in the New Year?

BY betashares | 19 January 2016
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With the January sales in full swing savvy shoppers are looking to get more for their money. Savvy investors, on the other hand, should be aware of the value to be had all year round with ETFs, which I believe are the ultimate low cost diversifier.

Along with the search for value generally, investors may also be looking to take advantage of a singular market segment trend. One of the options for investors looking to do this would be to research companies that stand to benefit from the trend and invest in one, two, or even three of these companies.  This of course takes time, and ultimately money.  Another approach available is to invest in an ETF that provides exposure to a niche area.

Examples of ETFs available overseas that focus on small niches of the market, include those representing areas such as the restaurant sector, social media, companies that benefit from metabolic-endocrine disorders, and even the economic growth of fishing villages.

ETFs that focus on these diversified objectives have opened up many possibilities for investors looking for tactical tilts within their portfolios.

Investors using ETFs that focus on niche areas have the potential for gains, and alternatively losses, in a short amount of time.  This is mainly due to certain sectors being trendy one day and not the next. One example from the U.S. is Guggenheims Solar ETF (NYSE Ticker: TAN) which rose roughly 40% during 2015 through mid-May.  Subsequently, on May 20th, TAN dropped 7.8% in one day.  The reason for the large swing was attributed to TAN’s large holding (~12%) in Hanergy Thin Film Power Group (566.Hong Kong), a sparsely followed stock that surged during the year and subsequently dropped 47% in one hour, resulting in the decline of the ETF.  Guggenheim later removed the stock from the fund.

When it comes to choosing a niche ETF many people will look at its ‘Herfindahl-Hirschman index’, a metric that measures concentration risk. The lower the score indicates lower concentration risk (i.e. a fund made up of a large number of stocks of smaller positions).  And, while it is always important to do your research before investing, it is an interesting question as to whether or not diversification matters in a niche ETF.

Isn’t concentrated exposure the reason to invest in the first place?

 

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