The ETF Universe Is Deep And Diverse, And Opportunity Is Everywhere – A Look At Some Of The Most Interesting Niche Ideas Out There

The biggest development in capital markets over the course of the last decade has been the explosion of indexing and passive and active investing through ETFs. In many ways, the ETF Universe has become so significant that it has become the tail that often wags the dog – meaning ETF fund flows and re-balancing are frequently a driver of the entire market and price action in hundreds of major U.S. equities. 

The space has become so deep – and in many ways complex – that it is difficult for retail investors to have a clear picture of the ever-changing landscape. For this reason, sticking to large, highly-liquid, well-known ETF issues is oftentimes the casual investor’s best bet. With this being the case, however, there are bound to be opportunities and inefficiencies in smaller, more obscure funds. 

What does this look like in a practical sense? First, many ETFs can be purchased at a discount to their net asset value. The theory behind this strategy is basically that you can sometimes buy a basket of assets that have a market value of $1.00 for $0.90 or even $0.80. These are very attractive opportunities and they occur quite often. It is not free money, however, as oftentimes discounts to NAV can persist for long periods of time due to a variety of factors. 

Additional edges that investors can look to exploit in the ETF ecosystem include emerging, alpha-creating managers in the active space, niche strategies that have significant upside potential, concentrated portfolios and/or sector- or strategy-specific allocations that are likely to outperform, ETFs that run covered-call strategies to create income, among others. It is hard to understate the diversity of ETFs in 2023.

Let’s take a look at some of the more niche-specific funds that are trading today. The first crop of funds is offered by Adaptive Investments and a number of the firm’s ETFs stick out for two reasons – the portfolios are either entirely or mostly made up of other ETFs and a number of these vehicles have very attractive long-term performance records. 

The Adaptive Alpha Opportunities ETF AGOX seeks capital appreciation, using ETFs and equities, and also may access fixed-income securities for diversification purposes. It is actively managed, with the goal of creating risk-adjusted alpha. The fund provides tremendous diversification - top current holdings include cash, the Invesco DB Agriculture ETF DBA, the Technology Select Sector SPDR ETF XLK, iShares MSCI EAFE ETF EFA, which holds international equities, the Invesco DB Commodity Index Tracking Fund DBC and many other popular liquid ETFs. 

The ability to deploy capital in a tactical fashion and the fund’s diversification have led to some solid returns over the last decade – just under 10%. Two other ETFs that certainly fit the niche and unique parameters of this article are from Roundhill Investments, which has a large portfolio of funds. The firm’s two largest ETFs, however, are probably the most interesting. 

The Roundhill Ball Metaverse ETF METV has been a relative hit with investors as AUM stands at roughly $460 million. The fund is currently trading mostly in line with NAV. As of its most recent quarterly filing, the ETF’s top holdings were Apple AAPL, NVIDIA Corporation NVDA, ROBLOX RBLX, Microsoft Corporation MSFT and Meta Platforms META. 

Not surprisingly, the fund got killed over the last 52 weeks, falling 25%. In 2023, however, shares have climbed 31% after last year’s drubbing. Investors should look at this fund as a mix of big-cap and mid-cap tech with a slant toward metaverse exposure. Currently, this is a fairly contrarian space. On a longer-term horizon, however, this fund would certainly seem to have a real opportunity to outperform. It appears to be an elegant, diversified, high-risk investment vehicle that could make an attractive portfolio addition over a 5- to 10-year investment horizon. 

The other Roundhill issue that is quite interesting is the Roundhill Sports Betting & iGaming ETF BETZ, which currently has assets well over $100 million. This is a niche product that seeks to ride the global wave in gambling and gaming. One of the distinguishing aspects of this fund is its international diversity – more than 15% of assets are in Australia, 10% in Malta, Britain has 8%, and Sweden, Ireland, and Gibraltar are also home to portfolio companies. 

A third of BETZ’s AUM is invested in the United States. Top Holdings include Kindred Group PLC KIND, Tabcorp Holdings Ltd. TACBY, and Entain PLC GMVHY. The ETF had 35% of its assets in Sportsbooks, 24% in iGaming, 21% in tech, and 18% in casinos as of the last reporting period. Given market conditions, it is of little surprise that BETZ has seen a 22% decline over the last year, but since the ETF’s 2020 inception, it is essentially flat. 

This is a product that investors may want to look at if the NASDAQ starts to percolate again in the coming months. Its international footprint, niche technology and gambling and gaming focus, and relatively small AUM among other factors also make this an interesting trading vehicle if and when the heady days of the NASDAQ return. 

The final ETF that has an attention-grabbing and very interesting strategy is Constrained Capital’s ESG Orphans ETF ORFN. In terms of the application of unique, contrarian thinking, in the pursuit of alpha, ORFN might just deserve an A! 

The Constrained Capital ESG Orphans ETF seeks to track the performance of the Constrained Capital ESG Orphans’ Index, which is comprised of US equity securities of publicly traded mid and large-cap US-listed companies in the fossil fuel, nuclear energy, weapons and munitions, tobacco, alcohol, and gaming sectors. 

The fund is based on the thesis that ESG investing has created price distortions (i.e. value) in non-ESG sectors. It’s an elegant idea. In addition to energy companies, defense companies, etc., ORFN also has a heavy tilt towards vice stocks in the alcohol, tobacco, and gaming industries. Oftentimes, this is sticky revenue that is not highly dependent on broader economic trends. 

Familiar names that show up in ORFN’s portfolio iniclude Exxon Mobil Copr XOM, Philip Morris PM, Lockheed-Martin LMT, Diageo Plc DEO and Anheuser-Busch Inbev SA BUD. The other feature of this ETF that can be seen in its 52-week and YTD returns is its low-beta, which is to be expected. Over the last year, ORFN has climbed better than 4% in a tough market environment while remaining largely unchanged in 2023 vs. a 7% rise for the S&P 500.

Bringing things full circle, part of the strategy and thesis for ORFN, is to make contrarian bets against the ESG space, specifically because of the large, passive, capital in-flows that ESG has seen in recent years. It could very well be a perfect example of how ETFs have and will continue to wag the tail of the dog, triggering both market price distortions and opportunity! 

Featured photo by Wance Paleri on Unsplash