Exchange-traded funds—the nimble cousins to index mutual funds—can be a cheap and easy way to invest in an index (like the S&P 500). But your options can get as narrow as your smartphone (FONE). And while many of these funds are capitalizing on a seemingly hot trend—solar! (TAN)—they might not be right for your portfolio.
“For the vast majority of investors, these funds are not very useful,” says Michael Johnston, Senior Analyst at ETF Database. “They are not a portfolio building block.”
Often called “pure play” ETFs, these super-niche investments can be very volatile.
So you don’t want to bet the farm on, say, an agribusiness ETF (MOO). At most, you might invest just 5% of an otherwise well-diversified portfolio. And even then, you may be better off hand-picking a stock or two that you really believe in, rather than buying into a narrow index, which may include some duds.
Narrow your focus: Would you consider a niche ETF for your portfolio?