Last week, a company called XShares Advisors launched the first five of what will be many more ETFs focused on narrow subsectors within the health care sector. The product line is aptly called HealthShares.The first five:
I believe investing in these funds becomes a difficult task that requires more work than picking other sector funds. Take Emerging Cancer as an example. Of the 22 stocks in the fund, I have heard of four of them and only know about one -- and really only a little bit at that. A concern for me would be if some of the stocks held win at the expense of some of the other stocks held. If so, there could be some offset within the fund that could mute its performance. To be clear, I don't know the answer, but I would want to have an opinion on this before buying any of the funds. XShares has said that these funds provide access to real medical innovation without single-stock risk. This is absolutely true, but that is not an excuse to buy in without learning what these funds own. These are as narrow as I have seen in any line of ETFs, which is not a bad thing at all, but it is different. Also different is the almost micro-cap nature of the funds. Something like the Semiconductor HOLDRs ( SMH) is probably narrower in terms of stock weightings, but the bigger holdings in SMH are much larger and much less volatile than the majority of the names in the HealthShares. This, again, is neither bad nor good -- it just is. A few months from now when you read an article from Morningstar or someone else dismissing the HealthShares, one point of criticism will be the 0.75% expense ratio. You may or may not be OK with what seems like an expensive fund, but the expense of rebalancing these funds will be much more than most other funds. These funds hold a lot of very low-priced stocks; the fact is, these are more expensive to trade. If these funds turn out to efficiently isolate the subsectors they are supposed to, it could be worth the extra basis points that holders will have to pay. For now, as is usually the case, I would want to give these a few months to season, and I would want to see how they trade day to day. I think they would be quite volatile, but there is no way to know after only a couple of days. The folks at XShares think that more of their funds will start trading in mid-February; I will follow up then.