The financial markets have been inundated with a flood of new and innovative ETFs vying for your investment dollars. These new funds provide interesting opportunities for those wishing to make specialty investments. However, these niche products also pose new risks for investors. (For more, check out our special feature, Exchange Traded Funds.)

In Pictures: 20 Tools For Building Up Your Portfolio

China Sector Funds
In the past, if you wanted to invest in China, you had few choices but to invest in a broad-based fund covering a wide range of Chinese companies. However, in the last couple of years financial firms have worked to introduce a number of sector-specific China ETFs. These ETFs allow investors to make more precise bets on specific sectors of the world's second-largest economy.

Currently there are China sector ETFs focused on the tech, energy, materials, industrials, consumer, infrastructure and financial sectors. Investors should be careful when considering these funds. In addition to the sovereign risk of investing in China, some of the sector ETFs also have considerable concentration within a few large firms in their sectors, and often portfolios include only about 20 to 30 names in total. However, for investors who want a very specific exposure to Chinese companies, these funds are a good choice. (For related reading, check out Investing In China.)

Lithium
Lithium is a metal which is taking on increasing importance as the demand for rechargeable lithium batteries grows. Currently, lithium batteries are most popular in portable electronics, and are also used in electric vehicles like the Tesla Roadster.

It is not possible to invest in lithium directly because futures contracts on the metal do not trade on any exchange. Rather, lithium ETFs invest primarily in lithium miners and battery makers. This method is imperfect since investors are exposed to many other risks unrelated to the price of lithium. Still, if you want to invest in lithium as the commodity of the future, a lithium ETF is a good option.

IPO Market
While IPOs had traditionally been the bastion of highly experienced and skillful investors, a new line of IPO ETFs now allows everyone to get a piece of the action. Proponents of IPO ETFs claim that IPOs offer a chance for higher returns than the broader market. IPOs also come with significantly higher risk. Since the valuations of the stock are untested in the market, wide swings in price are common within the first few weeks of secondary market trading.

You still will not get in on the most wild price movements of the first few days though. Rather, the funds buy recent IPOs in the secondary market several days after the IPO. After making the initial investment, a stock is then held by the ETF only up to a maximum time period, possibly up to a few years, before it is sold. This means the portfolio is constantly holding relatively new stock issues.

Contrarian Investing
In late 2008, Dow Jones created a new stock index, the U.S. Contrarian Opportunities Index. The Contrarian Opportunities Index is interesting because it applies an objective methodology to selecting contrarian stocks. Normally, contrarian investing relies more heavily on the judgment of a fund manager. So far, there is only one ETF tracking this new index, the JETS Contrarian Opportunities Index ETF (NYSE:JCO).

Contrarian investors believe in buying stocks which have currently fallen out of favor, but which appear to have strong fundamentals to make a turn-around at some point in the future. Typically it is thought that skilled judgment must be used to distinguish those stocks that are simply out of fashion from those that have poor business prospects. (Contrarian investors find value in the worst market conditions. Read more in our related article Buy When There's Blood In The Streets.)

Technical Analysis
Investors who believe in the technical analysis method of stock selection will be interested to find that there is a new ETF, the PowerShares DWA Technical Leaders Portfolio (NYSE:PDP). This ETF seeks to invest more than 90% of its assets in a manner replicating the Dorsey Wright Technical Leaders Index. This index is selected using a set of technical analysis indicators.

While the fund literature seems to indicate that the selection methodology focuses on relative strength, a more detailed description of the selection methodology could not be found. For investors interested in using technical analysis in their stock selection this ETF may be worthy of further investigation.

The Bottom Line
These new ETFs are great for highly skilled investors looking for a cost effective way to implement sophisticated investment strategies. However, they are specialty products that are not suitable for everyone.

Catch up on your financial news; read Water Cooler Finance: Google Gains, Taxpayers Pay.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Nasdaq Biotechnology

    Find out information about the ProShares Ultra Nasdaq Biotechnology exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  2. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  3. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  7. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  8. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Lion economies

    A nickname given to Africa's growing economies.
  4. Foreign remittance

  5. Sponsored ADR

    An American depositary receipt (ADR) issued by a bank on behalf ...
  6. Factor Investing

    An investment strategy in which securities are chosen based on ...
RELATED FAQS
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  6. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!