Last February, I boldly proclaimed that the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSEARCA:WSKY) was one of the world’s worst ETFs. Seven months later, I did a 180-degree turn and suggested WSKY was one of the niche ETFs worth owning.
Fast forward to 2018 and the most popular niche ETFs are those associated with the weed-like growth of the cannabis industry. On Dec 26, the ETFMG Alternative Harvest ETF (NYSEARCA:MJX) revised its investment objective and strategy to primarily invest in cannabis companies. Since then, the ETF’s assets have swelled to $273 million, making MJX one of the biggest ETF success stories early in 2018.
Many investors use ETF’s as core investments — S&P 500, Russell 2000, etc. — and sprinkle their portfolios with stocks outside the core they feel are going to increase in value. Others choose to invest in a diversified group of stocks with a sprinkling of niche ETFs to capture areas of the economy their stocks can’t get to.
When it comes to niche ETFs, however, it might be hard to know which niche will be successful next.
To that end, here are ten niche ETFs that will make you money in 2018.
Niche ETFs That Will Make You Money In 2018: First Trust Dorsey Wright International Focus 5 ETF (IFV)
Source: Martin Fisch via Flickr
The First Trust Dorsey Wright International Focus 5 ETF (NASDAQ:IFV) tracks the performance of the Dorsey Wright International Focus Five Index. The proprietary index is built by Dorsey, Wright & Associates, which ranks all of First Trust’s international ETFs based on relative strength and then invests on an equal-weighted basis in the top five.
The rankings take place twice a month. If one of the ETFs falls out of favor, First Trust replaces it and rebalances all five ETFs. The ETF’s current holdings include a German ETF, a BICK ETF (Brazil, India, China and South Korea), a China/India ETF, a developed markets excluding the U.S. ETF and a Swiss ETF.
Since its inception in July 2014, IFV has outperformed its benchmark, the MSCI ACWI ex-U.S. index, by 40 basis points — 10.5% vs. 10.1% — despite a relatively high management expense ratio of 1.06%, which includes 0.76% in fees annually from the ETFs acquired for IFV.
If you’re interested in investing outside the U.S., IFV is an excellent niche ETF to cover your bases.
Niche ETFs That Will Make You Money in 2018: WisdomTree DEFA (DWM)
WisdomTree ETFs — probably best known for its Japanese Equity ETF — specializes in fundamental ETFs using criteria such as dividends and earnings to magnify the returns of its ETFs while reducing the risks.
The WisdomTree DEFA (ETF) (NYSEARCA:DWM) tracks the WisdomTree International Equity Index , a group of 2,668 companies, 79% invested in large-cap stocks, with the weighting based on the projected annual dividends to be paid by each company. So, for example, if one company pays $1 in annual dividends and another pays $2, WisdomTree assigns the latter a higher weight.
In DWM, the top five countries by weight are Japan at 18.5%, the UK at 18.4%, France at 11.0%, Germany at 8.3%, and Switzerland at 7.4%. The ETF does not invest in either U.S. or Canadian equities.
On a performance basis over the past three years, DWM has underperformed the IFV by 98 basis points. DWM does however invest directly in stocks. So its management expense ratio of 0.48% is considerably lower than IFV. And it’s possible DWM will outperform IFV in the future.
Niche ETFs That Will Make You Money In 2018: Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC)
The Principal U.S. Mega-Cap Multi-Factor Index ETF (NASDAQ:USMC) is one of the newer ETFs in the markets. It tracks the performance of the Nasdaq U.S. Mega Cap Select Leaders Index which looks to invest in the largest of the stocks in the Nasdaq US 500 Large Cap Index. USMC weighs the components based on volatility. The lower the volatility, the higher the weighting.
The ETF had $813 million in net assests as of January 5, a fantastic number considering it only was launched last October. It has a total of 54 holdings, all in the U.S. The fund’s holdings include a number of household names, such as Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Exxon Mobil Coporation (NYSE:XOM). The top ten holdings account for 29.5% of USMC’s assets and it charges a very reasonable 0.12% annually in fees.
If you can’t handle risk, other than investing in an S&P 500-type ETF, USMC would be the way to go.
Niche ETFs That Will Make You Money In 2018: First Trust Capital Strength ETF (FTCS)
At 0.64%, the First Trust Capital Strength ETF (NASDAQ:FTCS) isn’t cheap. When you can garner five stars from Morningstar over three years, five years, and ten years against a field of 1218 large-cap blend funds, however, you’ve been doing something right and might be worth the money.
FTCS tracks The Capital Strength Index, an index of the 500 largest companies trading on NASDAQ.
FTCS selects the top 50 companies from The Capital Strength Index based on several criteria, including having $1 billion or more in cash or short-term investments, long-term debt that’s 30% of market cap or less, and a return on equity of 15% or higher. A second screen checks for short-term (3-month) and long-term (1-year) volatility. Only those stocks with the lowest combined volatility pass.
Once the selection process is complete, the 50 stocks are equally weighted. No industry accounts for more than 30% of the ETFs $657 million in total assets.
Rebalanced quarterly, FTCS has earned 17.1% on an annualized basis over the past five years.
This is one ETF that won’t keep you up worrying.
Niche ETFs That Will Make You Money In 2018: First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW)
For this article, I’m trying to stay away from some of the more popular indices. I couldn’t resist picking the First Trust NASDAQ-100 EqualWeighted ETF (NASDAQ:QQEW), however. Not too many of the biggest ETFs equal weight their portfolios, and I just happen to be a big fan.
Although QQEW tracks the NASDAQ-100 Equal Weighted Index, the constituents are identical to the traditional NASDAQ-100 Index. The difference between QQEW and NASDAQ-100, however, is that the 100 companies in QQEW start at 1.0%. The holdings are rebalanced back to that original weighting four times a year in March, June, September, and December.
So, as of this writing, the top holding in the QQEW was Segate Technology Plc (NASDAQ:STX) at 1.18%. Meanwhile, the top holding in the PowerShares QQQ Trust (NASDAQ:QQQ) is Apple Inc. (NASDAQ:AAPL) at 11.7% of the ETFs portfolio.
In my opinion, unless you’re big on Apple, this is too large a weighting in one stock for the typical ETF. If you share my opinion, QQEW might be for you.
Niche ETFs That Will Make You Money In 2018: Fidelity MSCI Industrials Index ETF (FIDU)
The Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU) has $500 million in assets under management, charges a small annual fee of 0.08% and invests in companies of all sizes. This ETF is part of series of funds established by Fidelity to compete with the SPDR sector funds.
FIDU tracks the performance of the MSCI USA IMI Industrials Index, a group of 341 stocks with the largest market cap at $166 billion and the lowest at $202 million.
Only around since 2013, FIDUs annualized total return over the past three years is 14.0%, 164 basis points higher than the S&P 500.
If you think Donald Trump is going to create lots of manufacturing jobs in the U.S., this could be the perfect ETF to own.
Niche ETFs That Will Make You Money In 2018: Ark Innovation ETF (ARKK)
Who can resist investing in an ETF whose name is the Ark Innovation ETF (NYSEARCA:ARKK)? I sure can’t.
For an actively-managed ETF, ARKK is relatively inexpensive when it comes to fees at just 0.75% annually. You can pay a lot more than that for a passive ETF.
Launched October 31, 2014, ARKK invests in 40-55 U.S.-listed equities the managers feel are leading innovators in their various industries while providing lower volatility. It’s a winning combination that’s seen ARKK deliver an annualized total return of 21.2% since its inception, about double the S&P 500.
ARKK invests in industries like 3D printing, gene therapy and autonomous vehicles. Interestingly, the second-largest holding in ARKK’s top ten holdings is a 5.1% weighting in the Bitcoin Investment Trust (OTCMKTS:GBTC), one of the most talked about investments on the planet.
If you’re looking to add some diversity to your portfolio — in terms of the people managing your ETF — the CEO and chief investment officer of ARK Investment Management LLC is Catherine Wood. She founded the company in June 2013.
ARKK isn’t for coupon clippers. But if you’re looking for a niche ETF to buy and you like the idea of active management, I’d consider ARKK to be at the top of any investor’s list.
Niche ETFs That Will Make You Money In 2018: SPDR Russell 1000 Yield Focus ETF (ONEY)
If you’re prone to chasing high-yielding stocks because you’re in search of additional income, the SPDR Russell 1000 Yield Focus ETF (NYSEARCA:ONEY) might be the best way to get you off your addiction.
“The Index is designed to reflect the performance of a segment of large-capitalization U.S. equity securities demonstrating a combination of core factors (high value, high quality, and low size characteristics), with a focus factor comprising high yield characteristics.”
Launched a little over two years ago in December 2015, the rules-based ETF has done slightly better than the S&P 500 over the past two calendar years, up 22.1% in 2016 and 15.5% in 2017. Charging just 0.20% annually, ONEY has a 30-day SEC yield of 3.2%.
There is, however, one caveat.
Financial services and consumer discretionary stocks account for 50% of the ETFs $404 million in total assets . When the economy’s going like it is now, there’s nothing to worry about. But if there’s another year like 2008, however, it’s a tad overweight in those two sectors.
Niche ETFs That Will Make You Money In 2018: Oppenheimer Mid Cap Revenue ETF (RWK)
The Oppenheimer Mid Cap Revenue ETF (NYSEARCA:RWK) has 402 holdings that are weighted by revenues opposed to market cap or some other traditional method. Around since February 2008, RWK has delivered an annualized total return of 10.6%.
Considered a value fund, Oppenheimer feels a revenue weighting strategy is a good idea for three reasons:
First, it focuses on a company’s fundamentals rather than its share price. Second, RWK avoids momentum stocks made popular by the latest bull market, but likely to see choppier waters in the future. And finally, the strategy tends to capture more upside while limiting the downside.
Mid-cap ETFs are one category investors tend to ignore — just 8 ETFs out of the 100 largest ETFs are mid-cap focused — despite the fact mid-cap stocks arguably deliver better long-term returns than either small-cap or large-cap stocks.
There are cheaper mid-cap ETFs, but for my money, the RWK is the one that will shine brightest over the next 3-5 years.
Niche ETFs That Will Make You Money In 2018: SPDR SSGA Gender Diversity Index ETF (SHE)
The SPDR SSGA Gender Diversity Index ETF (NYSEARCA:SHE) has a very appropriate ticker symbol and hopefully, in a few years, it will have gained as much notoriety from its performance as its purpose. SHE in an ETF that “seeks to provide exposure to US companies that demonstrate greater gender diversity within senior leadership than other firms in their sector.”
We’re in an era of increased awareness about the lack of women in positions of power. And there are already a lot of profitable companies that have stronger gender diversity in their leadership. Some of SHE’s largest holdings are Pfizer Inc. (NYSE:PFE), The Coca-Cola Co (NYSE:KO) and International Business Machines Corp. (NYSE:IBM).
Launched in March 2016, SHE has delivered reasonable, if not spectacular returns. In 2017, its total return was 19.5%, 230 basis points lower than the S&P 500.
Why invest in SHE if it’s slow out of the gate? I believe it is time investors focused on what’s right and not just what’s most profitable.
But also ample data shows that women-led and gender-diverse companies do better than those led by men.
While just 5.8 of American Companies on the S&P 500 are led by women CEOs, companies with strong female leadership have been found to deliver a return on equity of 10.1%, 260 basis points higher than those without a large cohort of women at the top.
Furthermore, SHE’s fee of 0.20% is lower than all other thematic large-cap U.S. equity ETFs.
Currently, SHE has amassed $369 million in total assets in less than two years. SHE is possibly the most important financial product sold today.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.