Niche or specialty exchange traded funds that target a specific area of the market are gaining traction as traders utilize the strategies for tactical, short-term exposure.
“The ETF industry has proved that if you can actually deliver strategies that investors want, you can be very successful,” Jeremy Held, senior vice-president and director of research at Alps, said, Ignites reports. But those strategies “don’t necessarily have to be mainstream.”
For instance, smaller fund providers like First Trust, Global X and Alps have been building assets through specialty ETFs. Each of the three providers have attracted over $1 billion in assets year-to-date.
However, with all the cracks being filled in ETF industry, there are less opportunities for further product development.
“People aren’t seeking to be niche-y or specialty as much as that’s where they are being led,” Bill Belden, head of ETF product development and management at Guggenheim Investments, said in the Ignites article. “White spaces are fewer and farther between, and where they are, are smaller than they have been in the past.”
In the end, these targeted ETFs should address a specific investment goal that is missing from the market in either tactical or strategic client portfolios.
“What’s key about innovation is that it centers around client needs,” Bruno del Ama, chief executive of Global X, said.
While Global X has experienced its fair share of flops over the years, a number of strategies have stuck around. For instance, the Global X Uranium ETF (NYSEArca: URA), which tracks uranium producers, has built up $216.5 million in assets and the Global X Guru Index ETF (NYSEArca: GURU), which tracks top hedge fund picks, has garnered $425.9 million in assets.
Some strategies could also sit at low assets for years before becoming a popular trade. A recovering Eurozone has propelled interest in the Global X FTSE Greece 20 ETF (NYSEArca: GREK) as a tactical, short-term trade. GREK now has $153.4 million in assets and trades with an average daily volume of 340,743 shares. [Eurozone ETFs to Watch Ahead of Stress-Test Results]
Additionally, as more investors try to diversify away from traditional asset classes to diminish portfolio volatility, alternative investments have also gained in popularity. For example, master limited partnership ETFs are moving into the mainstream. The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), an exchange traded note that tracks the Alerian MLP Index, holds $6.5 billion in assets under management and Alerian MP ETF (NYSEArca: AMLP), the largest MLP ETF, has $9.4 billion in assets. [Sell-Off in MLP ETFs May Be Buying Opportunity]
Looking ahead, the industry is crafting ETF strategies that generate more creative and precise ways to achieve targeted outcomes. For instance, Guggenheim has been expanding its line up with smart-beta and bond ETF offerings.
“You’re going to start to see an increased level of granularity in trying to capture investment themes,” Held added.
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Max Chen contributed to this article.