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There are a few key reasons for this:
By their very nature, these investments aren't diverse. That means that if there is a shock to the market that affects that industry, it will have a drastic effect on the value of the ETF. That's certainly part of the reason that some 16 percent of niche ETFs have failed or closed up shop, including ones that focused on sectors such as wound care, fishing and — niche of all niches — a fund that invested only in companies headquartered in Oklahoma. We tell clients that if they are going to own a niche ETF, they should limit their exposure.
Sometimes the technology an ETF focuses on is priceless, but the companies supplying them aren't winners. Rather, it's the users of the technology that make or break its success.
This is where we can learn a lesson from recent history. Think back a few years to the spectacular rise and fall of companies such as WorldCom and AOL. While the value of these companies soared when the internet became mainstream, they ultimately didn't win out among companies such as Google and Facebook, which built their business on the communications backbone WorldCom and AOL built for them.