Eric Dutram: In a continuation of the ETF expansion trend, it appears as though more niche players are getting involved in the industry. While this first started with companies like Arrow and Huntington jumping into the fray, it looks to continue with latest newcomer, LocalShares.
This Nashville, TN-based firm recently filed for its first ETF, looking to hopefully start its time in the exchange-traded world with an intensely domestic fund. In fact, the SEC document called for a product that only holds companies based in LocalShares’ home city of Nashville.
While the technique is certainly hyper-targeted, investors should note that it isn’t the first time that a firm has taken this approach. In fact, a few years ago Geary tried a similar approach with Texas and Oklahoma ETFs, although these were shut down after a relatively short time on the market.
Still, LocalShares could be a ways off from debuting the product onto the market as all the key details were not initially available in the filing. With that being said, a few key aspects of the proposed fund were released, which we have highlighted below:
The filing indicates that the fund will hold companies based in the greater Nashville region for its portfolio. Not only does this consist of firms based in the city, but it also allows for those companies that are based in the surrounding six counties as well (read Buy American with these Three Commodity ETFs).
This looks to be done by tracking the LocalShares Nashville Index which is a benchmark of these firms which charges investors 49 basis points a year in fees, after waivers. It should also be noted that the fund looks to go beyond market cap weighting and use several publicly available factors, including data related to earnings, sales, profitability, price and yield of the components,according to Index Universe.
Furthermore, the proposed ETF looks to track companies that are listed on a major American exchange that have at least $100 million in market cap, and average volume of at least 50,000 shares for the preceding three months (read the Comprehensive Guide to Total Market ETFs).
While a list of the top components was not made available at this time, a look at some of the biggest firms in Nashville could offer up some clues. Companies based in the city include; Louisiana-Pacific (NYSE:LPX), and Vanguard Health Systems (NYSE:VHS), while Tractor Supply Company (NASDAQ:TSCO) and Cracker Barrel (NASDAQ:CBRL) could be suburban representatives.
Clearly, the lineup of firms that are based in or around Nashville might be a little stronger and more diversified than what investors outside of the area may have initially expected. Still, the laser like focus of the product may be too much for some, and it may prevent the fund from garnering a decent level of assets (see ETF Shocker: Russell to Close 25 Funds).
LocalShares has admitted as much in its filing, highlighting several risks related to low volume levels and lack of investor interest. In fact, the company stated in the filing that ‘there can be no assurance that it will grow to or maintain an economically viable size’ and it also highlighted concerns over a high bid ask spread in illiquid products (read Ten Best New ETFs of 2011).
Given these issues and the incredibly targeted nature of the product from LocalShares, the proposed Nashville ETF is by no means guaranteed to be a success. However, it will be interesting to see if the fund can survive and prosper, potentially paving the way for a new lineup of city-specific ETFs to investors.
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