As I peruse the list of over 1,800 exchange-traded products, I am struck by how many new funds are dedicated to niche strategies. Now I’m not talking about a unique value style fund or low volatility strategy with hundreds of underlying holdings spread across multiple sectors. I’m speaking specifically about ETFs that are dedicated to small corners of the investment universe such as restaurants, cancer research, mobile payments, and others.

Many of these unique ETFs have as few as 30 and at most 75 stocks in a specific industry group. They often charge much higher fees than their broad-market peers and can be struck by transient spikes of volume and asset flows. Some debut in the right place or the right time and are able to quickly build a loyal base of investors, while others languish in obscurity until they are virtually forgotten or shut down.

I’m not here to pass judgment on any of these funds. Most of them have been well thought out by a team of investment experts or product managers and designed to meet the needs of a specific investor group. You wouldn’t believe the time and money it takes to not only launch an ETF, but run it on a monthly basis whether investors show up or not.

My goal is to impart wisdom in how to use these funds within your ETF portfolio and what steps should be taken to properly analyze their value proposition.

Example 1: Cyber Security Stocks

The most important step in your due diligence process is fully understanding the structure, costs, and liquidity of the ETFs in this space. As an example, the PureFunds ISE Cyber Security ETF (HACK) has 35 underlying holdings in a market cap weighted asset allocation. This ETF charges an expense ratio of 0.75%, has total assets over $1 billion, and daily average trading volume of over 500,000 shares.

Key points to note in the HACK analysis is that certain larger companies are going to have greater influence on the performance of the fund over time. In addition, this ETF has a solid base of invested capital alongside very regular daily trading volume (i.e. liquidity). It’s also important to note that the expense ratio of this ETF at 0.75% is on the high side when compared to a broad-based growth ETF. However, the unique tactical approach of a select industry group likely warrants a premium in underlying costs.