Much like niche restaurants that come and go, niche investments come into and out of favor, as well. Just as everyone had to be the first to try out that new donut or cupcake shop on the corner, the new craze to hit the investment world is the narrowly-focused exchange-traded fund.

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ETFs are designed to track the performance of a diversified mix of stocks, like the S&P 500, but unlike mutual funds, they trade on an exchange and can be bought or sold throughout the day.

The idea behind niche ETF investments is that, unlike more traditional index ETFs, these niche funds track a basket of stocks that are aimed at a single industry or theme.

A couple of prominent examples include the Whiskey & Spirits ETF, which trades under the ticker symbol WSKY, or the PureFunds Video Game Tech ETF (GAMR). Other ETFs that have debuted recently include the SPDR SSGA Gender Diversity Index ETF (SHE), the Global X Social Media Index ETF (SOCL) and the 3D Printing ETF (PRNT).

These investments have garnered a lot of interest from investors lately — more than 2,000 of them have been launched in the past 10 years or so, because they are easy to relate to and understand. If you like to drink whiskey, for example, you might want to find a way to invest in the industry.

If used properly, ETFs can help diversify a portfolio, and these investments are likely much more diverse than investing in a single company's stock. ETFs can also offer other advantages over their mutual fund counterparts, such as cost and tax efficiency.

But a word of caution: While these niche ETFs can add some interesting spice to your portfolio, they should not be one of the largest ingredients in your mix.

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.

This same lesson could be true with companies in the emerging 3D-printing business. The printing companies themselves may not be the key to a profitable investment as much as, say, how a company such as General Electric is using them to design, test and print parts for its jet engines and power plants.

Sometimes the niche offering you're interested in is actually part of a much larger company. Take the example of The Cybersecurity ETF (HACK), which owns Cisco Systems as part of its fund. But for Cisco, which develops, manufactures and sells networking hardware, telecommunications equipment and other high-technology services and products, cybersecurity is only a portion of its revenue and business. That means your investment might not track exactly with your expectations of how the industry is doing.

The point is that smart investors look to diversify their portfolios at every opportunity. While niche ETFs can certainly play a role in that strategy, it's wise to move cautiously and with as much information about the investment as possible. After all, if doughnuts and cupcakes can go out of favor, so can your favorite ETF.

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Author's Bio: 

Barry Glassman is the founder and president of Glassman Wealth Services®, LLC. His vision for starting GWS was to deliver investment strategies and wealth management services typically available at the highest levels of wealth. Today, clients benefit from these sophisticated financial services targeted to meet their unique needs.

Along with the firm’s Chief Investment Officer, Barry leads a team of investment specialists that create asset allocation strategies for high-net worth families. They seek out the most attractive and appropriate investment ingredients, and then construct portfolios to meet our clients’ goals from capital preservation and income generation to tax-efficiency and growth.

Barry has been honored with Top Advisor awards from Barron’s, Washingtonian, Washington Business Journal, Financial Times, Reuters, Investment News, Institutional Investor, Virginia Business and Registered Rep to name a few.

His thought-leadership is driven by his desire to find new and interesting ways to educate investors. He has created interesting infographics and visuals to help explain complex financial concepts and shares these through his columns at Investment News and

Barry also provides financial commentary to the media. He has appeared in The Wall Street Journal, Washington Post, Money, Business Week, Smart Money, Kiplinger’s Personal Finance, The Associated Press, Bloomberg, National Review, The International Herald Tribune, and USA Today. He has also appeared on several national television programs to include Wall Street Week with Louis Rukeyser, World News Tonight with Peter Jennings, CNBC and Bloomberg News.

A graduate of George Washington University, Barry has, in post graduate work through the College for Financial Planning, achieved his status as a CERTIFIED FINANCIAL PLANNER™ practitioner. He has also earned the Certified Funds Specialist designation. He is an Investment Advisor Representative and has retained the 65 securities registration.

Additionally, Barry is past-Chairman of the National Financial Planning Association’s Tax Sub-Committee and past-president and Chairman of the Financial Planning Association’s National Capital Area Chapter. He served on the Board of Directors of the International Association for Financial Planning for a total of six years.