Exchange traded fund providers have crafted a slew of investment strategies, including more specialized and niche offerings. While some of these ETFs may provide an interesting way to focus on a specific sector, investors should not go overboard with their allocations.
Investors should not solely rely on specialized ETFs to construct a diversified investment portfolio. With specialized ETFs, investors may become overexposed to riskier areas of the market in their attempt to chase after returns.
“(Investors) may think they are diversifying because they have what seems like an unusual asset class or sector, but typically we see diversification suffer when investors are using niche ETFs,” CFP professional Peter Lazaroff, portfolio manager at Acropolis Investment Management, reports Sheyna Steiner for Bankrate.
Specialized ETFs have an extremely narrow focus, targeting a certain industry or country.
Additionally, some “will focus on what is called an investment factor by focusing on small-cap stocks, value stocks, or low-volatility stocks, for example,” CFP professional Jonathan Duong, CFA, founder and president of Wealth Engineers, said in the article.
Some studies have shown that value stocks and small-cap stocks typically outperform the market over time, and investors who are interested in these areas can utilize ETFs to gain market exposure. However, Duong warns that these types of strategies may be more volatile, which could cause some to jump ship prematurely. [Specialized ETFs Too Risky?]