With the exchange traded fund market over-saturated, sellers are churning out scads of new theme products that target every conceivable interest group. Examples include the JETS Dow Jones Islamic Market International Index, Global X Fishing Industry Fund, Global X Farming ETF, Global X Fertilizer Fund, et cetera. Investors should be skeptical about such offerings and consider a number of risks that sellers typically do not explain, according to Penelope Wang’s CNNMoney article entitled “Don’t be lured in by niche ETFs.”
The risks include the following:
- Overconcentration ? Niche stock funds should be treated like an investment in a single stock, and should not make up a significant percentage of an investor’s overall portfolio. Individual investors are generally better off buying broadly diversified funds which would usually include the themes that interest them, but as an appropriate proportion of their overall portfolio. Whether intentionally or not, sellers of niche exchange traded funds invite investors to speculate on supposedly hot trends rather than construct a balanced and diversified portfolio.
- Illiquidity ? Niche exchange traded funds are usually thinly traded. This means they are not only harder to sell, but they are also subject to greater price volatility and even potential market manipulation.
- Lower Likelihood of Survival ? Exchange traded funds that track a narrow theme or industry are often short-lived. More than 50 exchange traded funds have been liquidated since January 2010 while 140 exchange traded funds have shut down since the beginning of 2008. The exchange traded funds that have been closed were typically funds that did not attract enough capital to make it profitable for the managers. When an exchange traded fund closes, shareholders can wind up sustaining large losses, paying new commissions and fees for a new investment to replace the closed fund, as well as paying taxes on any shares worth more than they initially paid.
- Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in exchange traded fund (ETF) matters. For further information, please contact us.