More Narrow ETFs On The Way?

by: Roger Nusbaum

Roger Nusbaum submits: I stumbled across this article on IndexUniverse about some new ETFs that have been filed for by a company called Ferghana-Wellspring:

FW Autoimmune-Inflammation Index Fund
FW Cardiology Index Fund
FW Central Nervous System Index Fund
FW Derma And Wound Care Index Fund
FW Diagnostics Index Fund
FW Gastrointestinal/Genitourinary/Gender Health Index Fund
FW Infectious Disease Index Fund
FW Metabolic-Endocrine Disorders Index Fund
FW Ophthalmology Index Fund
FW Respiratory/Pulmonary Index Fund
FW M-Cancer Index Fund
FW T-Cancer Index Fund

That is some pretty narrow action. According to the article, each of the ETFs would have twenty stocks and be equal weighted. I'm not sure I could name twenty ophthalmology stocks but I assume that Ferghana-Wellspring has found that many.

I forget who, maybe State Street, is going to have a medical device ETF which I can see -- most of my clients own a device stock but do most folks need a wound care ETF? I don't know.

One issue I see with these would be that the diversification could actually create more risk than owning one company. I imagine that in the endocrine ETF there would be one or two huge winners and a lot of stocks that end up struggling. This is not an impossible scenario and I could see it repeating in several of the ETFs, if not the endocrine ETF.

Narrow -- to a point -- can be useful but for now I am skeptical on the utility of these proposed funds.

UPDATE: The WSJ has a similar article (sub req'd) on narrow ETFs, although the Journal did not mention the proposed Ferghana-Wellspring funds.

At the end of the article there was a quote from someone at Barclays who said the bank is exploring an Eastern European and Indian ETF. Something along either of these lines would be more useful than a gastrointestinal ETF (no offense to my client who is in that field).

The article questioned whether PowerShares was offering funds that are too narrow. I was amused by a quote from a planner in Scottsdale who said that he stays away from them -- the article implied this guy leaves the specialized ETFs for the bigger institutional investors.

While my initial reaction to the ETFs I wrote about this morning was negative, I will still check them out. It is possible that the names of the fund will be narrower than the actual holdings in the funds. For example, a company like Pfizer might reasonably have a footprint every sub ETF proposed by Ferghana-Wellspring. We may see bigger more familiar names showing up in several funds. I don't know but I am willing to wait and see.

Perhaps most interesting in this article was that Gus Sauter said that Vanguard is closer to the end than the beginning of its rollout of ETFs. This is interesting because they were slow to get in, may not have gained the traction they were looking for and seem to be discounting the future of ETFs.