Not All The Good ETF Niches Are Taken
With over 1,400 ETFs and ETNs on the market today, it would appear that logical that all the good ETF ideas have been exhausted. That means new entrants to the game will be forced to copy previously existing concepts, and even if that is done with the promise of lower expense ratios, the first-to-market advantage is often too deep to overcome for many rookie ETFs.
Saying that most, if not all of the good ETF ideas have been used up in the industry's barely two decades of life is one way critics articulate that the pace of new ETF debuts has slowed in 2012.
"Just" 160 new ETFs have debuted to this point in 2012, down from 288 at the same juncture last year, the Wall Street Journal reported citing Lipper data. Clearly that must mean all the good ideas for new ETFs have been used up, right? Wrong. Here are some potentially attractive niches with existing voids ETF sponsors can fill in the years ahead. Just remember: These our ideas, not theirs.
Restaurant ETF Given the size and brand recognition of some publicly traded U.S. restaurant operators, the fact this ETF does not already exist is mind-boggling. There is no excuse because there is even a restaurant index just waiting to be used.
Think this concept would not work? Think again. Figure it this way. Panera Bread (NASDAQ: PNRA) has nearly quadrupled in the past five years. Chipotle (NYSE: CMG) has more than doubled while Buffalo Wild Wings (NASDAQ: BWLD) has jumped over 170 percent. If the restaurant ETF had come along even three years ago, investors likely would have been treated to some stellar gains.
More Country ETFs There is no denying investors love international ETFs, particularly the emerging markets variety. And investors have started to embrace frontier markets as well.
Given the popularity of ETFs tracking Brazil, China and plenty of small emerging markets, one might think the market for global funds is tapped out. Not really. That point can be illustrated in the form of a trivia question. Did you know that 10 of the world's 50 largest economies do not have a U.S.-listed exclusively devoted to them? Sure, that group includes Venezuela and Iran, which probably will not be getting ETFs anytime soon, but it also includes the United Arab Emirates and the Czech Republic, both of which stand as valid options for their own ETFs down the road.
India Bond ETFs Considering that India is the "I" in BRIC and the tenth-largest economy in the world, the country does not issue bonds at pace comparable to that of some other major economies. That coupled with previously tight restrictions on foreign ownership of Indian corporate and sovereign debt has made tapping the Indian bond market difficult, particularly through ETFs.
The WisdomTree Asia Local Debt Fund (NYSE: ALD) offers a 5.6 allocation to India and that is the largest weight to the country among U.S.-listed bond ETFs. Interestingly, India just increased foreign ownership limits on its debt. The country raised the limit on corporate bonds issued by non-infrastructure companies by $5 billion to $25 billion and the total foreign investment allowed in Indian bonds to $75 billion from $65 billion, according to the Wall Street Journal.
It might take a while, but it is not unreasonable to expect the Indian debt market to become attractive to ETF sponsors in the coming years.
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