ETFs: Welcome to the world of the niche...

Alex Macaskill reveals some of the more niche exposures available to your clients through ETFs.

If you are looking for an ETF that ventures outside the usual equity benchmarks, then why not try the Teucrium Corn fund or the Global X Fishing Industry ETF? Welcome to the world of niche ETFs.

After all, with more than 2,825 such vehicles in operation today (according to BlackRock) they cannot all be linked to traditional indices.

Defining ‘niche’

Niche is a term that can apply to a whole range of ETFs. Commodity and emerging market ETFs have crept into the limelight in recent years and though there are now many in existence, they are often categorised as niche.

This demonstrates the thin line which divides traditional and non-traditional products.

“A niche ETF provides a different investment perspective or angle which certain investors may be looking for,” says Manooj Mistry, head of db X-trackers UK at Deutsche Bank.

“I would put in this category ethical ETFs, those done on religious lines, or those that contribute to charity. You could also put in emerging market ETFs, but I would consider many of these mainstream now.”

The iShares MCSI Emerging Markets ETF listed on the London Stock Exchange is a prominent example of this transition from niche to mainstream.

While any emerging market-related product could be described as non-traditional, since inception in November 2005, it has accrued more than $6bn in assets.

Commodities also supply opportunities for ETF providers. Gold and oil-linked funds, while non-traditional, are very much in the mainstream; in mid-August the SPDR Gold Shares ETF overtook the SPDR S&P 500 ETF to become the world’s largest ETF.

Investors are increasingly using funds that track futures contracts. The ETFS Grains DJ-UBSCI, for instance, tracks an index of soybeans, corn and wheat futures contracts, and has almost €60m in assets.

In the past six months, the fund has returned 28% as a result of a near doubling in the price of wheat and corn in the past year, while soybeans have also seen significant increases in price.

What is the attraction?

However, there are many more niche exposures available through ETFs, so what is the attraction to such products?

“There’s a desire to have total liquidity all the time,” says Ian Morley, director at Wentworth Hall, who is critical of some of the ETFs on offer in today’s market.