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This summer, the U.S. stock market is on fire. This is especially true as the S&P 500 and the Nasdaq Composite index are hitting multiple highs. While rounds of certain economic data have disappointed recently, the overall economy is on a solid path courtesy of an impressive labor market, increase in wages, rise in inflation and increasing consumer spending. Additionally, revision to first-quarter GDP growth spurred confidence in the health of the economy.

With the broad-based rally, some ETFs that focus on ‘niche’ strategies have been outstanding performers this year compared with their traditional counterparts generating alpha (higher return) with high income prospects and more tax efficiency. While these carry more risk, they have garnered immense investor interest. Notably, niche funds track a basket of stocks that are aimed at a single industry or theme.

Given this, investors could smartly ride out the current trends through a number of niche ETFs. For them, we have narrowed down the list of ETFs by using the Zacks ETF Rank. This system looks to take into account a variety of factors, such as industry outlook and expert surveys, and then apply ETF-specific factors (like expense ratios and bid/ask spreads) to find the best funds in each segment. Using this system, we have found a handful of ETFs that have a Zacks ETF Rank of 1 or ‘Strong Buy’, and are thus poised to outperform in the months to come (see: Our Zacks ETF Rank Guide).

In fact, several niche funds in their respective sectors have seen their Zacks Rank moving to the top hierarchy from #3 (Hold) that could make great summer picks.

iShares North American Tech-Software ETF (IGV - Free Report)

The emergence and adoption of disruptive technologies such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality devices, and artificial intelligence (AI) have set the stage for explosive growth for the software industry. With the global economy gathering momentum, these companies are likely to outperform and are less susceptible to interest rates or deregulation (read: 5 ETFs & Stocks to Ride the Tech Mania).

The only ETF targeting the industry is IGV, which tracks the S&P North American Technology-Software Index. The fund holds a basket of 55 securities, with each holding less than 9.1% share. It is quite popular with AUM of $1 billion and trades in good average daily volume of nearly 127,000 shares. The product charges 47 bps in annual fees and has gained 27.3% so far this year.

VanEck Vectors Gaming ETF (BJK - Free Report)

The battered global gaming industry has made an impressive comeback with a recovering casino business in Macau – the world’s largest casino gaming destination – as well as stronger earnings reports. Gambling revenue in Macau has increased for the ninth consecutive quarter in April by 16.3% year over year. This has resulted in a gain of 17.3% so far this year for BJK, which is the lone ETF providing investors with global exposure to the casino gaming market (read: Time to Buy Casino ETF on Earnings?).

This product follows the MVIS Global Gaming Index, holding 41 securities in its basket. It is moderately concentrated across components with each holding less than 8% of assets. In terms of country exposure, U.S. takes the top spot at 36.7%, followed by Australia (15.3%) and China (11.5%). It has often been overlooked by investors as depicted by AUM of $27.7 million and average daily volume of roughly 7,000 shares. This ensures additional cost in the form of a wide bid/ask spread beyond the expense ratio of 0.67%.

Global X Social Media ETF (SOCL - Free Report)

Social media is a thriving industry in the current changing technology landscape. This is largely thanks to growing usage of messaging apps, live streaming video, and the craze for augmented reality and artificial intelligence. Additionally, a greater number of millennials are now focused on the Internet rather than traditional sources like TV, newspaper or radio.

That said, SOCL deserve a special attention and are the major beneficiary of this trend. The fund provides access to social media companies around the world by tracking the Solactive Social Media Total Return Index. It holds 35 securities in its basket with nearly double-digit concentration on the top three firms while other firms hold less than 5.8% share. In terms of country exposure, U.S. firms take about half of the portfolio, followed by China (30%) and Russia (7%). The fund has $128.2 million in AUM and average daily volume of about 61,000 shares. It charges 0.65% in expense ratio and has surged 33.8% this year (read: 6 Hot ETF Charts of Q1 Earnings Season).
 

Bottom Line

These ETFs have emerged leaders in the broad market rally and accounted for huge gains so far this year. Given that the bullish trend for these sectors will likely prevail in summer, investors should definitely look at these ETFs or some other niche funds that have recently seen their Rank surging to the #1 rung.

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