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Do you need designer ETFs?

Posted by Jill Boynton  July 20, 2010 10:21 AM

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The Wall Street Journal reported yesterday on a new exchange-traded fund soon to be launched that will invest in lithium-related companies. This is just one of dozens of new ETFs to hit the market this year. Many of these are quite specific, such as the Global X Brazilian Consumer ETF which invests in consumer-sector Brazilian companies, while others are broader such as the Mars Hill Global Relative Value ETF, which looks to generate positive returns through investments in companies of any size around the world.

Before jumping into a new ETF (or any ETF) consider a few things first: Is this new fund a response to demand for a particularly hot sector or area of the market? Platinum and palladium prices have skyrocketed in recent years – but is this the right time to invest (maybe yes, maybe no – I’m not calling it either way.) Buying in at the top of the hype is just chasing returns. If the fund is an index fund, what index is it tracking? What companies are in the index? The Wall St. Journal reports that some analysts are leery of the excitement around lithium; around 50 companies have cropped up to develop lithium in the past two years but odds are that most of them will never come into production. Finally does this type of fund really belong in your portfolio? If you already own mutual funds, it is possible your current funds already own some of the type of company you are interested in. Adding niche-type funds to your portfolio requires the same due diligence and research you should be giving to every other fund in your portfolio.

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