You now can invest in an exchange-traded fund (ETF) that focuses on marijuana businesses. Or an ETF that predicts which companies will benefit from possible changes in the federal tax code. Or even one that invests in official sponsors of the NFL and other professional sports leagues.
Such narrowly focused ETFs may sound more enticing than run-of-the-mill ETFs that track broad stock market indexes. But they can be extremely volatile—and with several dozen very narrowly focused ETFs now available and more popping up, investors should avoid ones that are based on fragile premises.
Example: The Horizons Marijuana Life Sciences ETF, which invests in marijuana producers and distributors, has drawn a lot of attention because of the legalization of medical and/or recreational marijuana in various states, but marijuana still is illegal at the federal level and many financial institutions don’t handle transactions with marijuana businesses.
It’s dangerous to bet heavily on any narrowly focused fund. But if you already have a diversified portfolio and want to invest a small portion of it in a narrow ETF, here are two relatively established ones worth considering…
Global X Lithium & Battery Tech ETF (LIT) provides exposure to lithium technology, which is essential to producing powerful, long-lasting batteries that have become the standard in devices ranging from pacemakers to electric cars. Five-year annualized performance: 8.5%. GlobalXFunds.com
ETFMG Prime Cyber Security ETF (HACK) tracks an index of about 40 small, fast-growing cybersecurity companies. Since its November 2014 inception, it has slightly trailed the S&P 500’s performance, but the fund has great potential. Cybersecurity is a nascent industry with decades of fast growth ahead of it. One-year performance: 11.16%. ETFMgFunds.com