News Analysis date published New: 
Thursday, July 9, 2009 - 16:47
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Tuesday, June 4, 2013 - 15:39
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Thursday, July 9, 2009 - 16:47

The Lone Star ETF Proposal

Thursday, July 9, 2009 - 4:47pm

The $582 billion exchange-traded fund (ETF) universe is about to expand even further. Oklahoma City-based TXF Funds has filed a proposal with the Securities and Exchange Commission (SEC) that would create the first ETF focused exclusively on companies headquartered in a specific state. The filing calls for the creation of the TXF Large Companies Fund, which would hold a selection of the largest companies in Texas.

The fund would track the SPADE Texas Large Companies Index and trade under the ticker symbol "TXF" on the NYSE Arca exchange, according to the June 23rd SEC filing. Its holdings would be required to trade on the NYSE or Nasdaq, maintain a minimum $5 share price, have at least $100 million in market cap and sport minimum trading volume of at least 50,000 shares per day. The fund will charge a management expense ratio of 0.85%.

Other Texas funds are in the works. TXF Funds is considering offering shares in two others, one focused on small companies and one on medium-sized companies. The firm also aims for other state-focused ETFs. An Oklahoma fund is also planned.

ETFs with a spotlight on specific states aren't new. XShares Advisors has registered 21 StateShares ETFs with the SEC, though none have reached the market.

The market downturn has had a major impact on new ETF issues this year. Only 379 new funds have been issued, a -19% drop from the 469 funds that had been launched at this point in 2008.

When the first Standard & Poor's Deposit Receipt or "Spider" fund was launched in 1993, subsequent ETFs continued to focus on mirroring the performance of major indices. But since there are only a few dozen major indices, ETFs began to track less common ones. Now, the fact than an ETF concept doesn't exist for a particular sector or investing concept seems to be sufficient enough of a reason to propose a new ETF. Bottom line -- the proliferation of ETFs into new categories with questionable benefit -- like state-specific ETFs -- seems like overkill to me.

It's not clear whether the TXF fund will be approved, but the advent of state-specific ETFs would be another harbinger of a market increasingly catering to niche interests. Perhaps the market for new niche ETFs will finally reach its saturation point once StateShares issues a Puerto Rican Small-Cap Value fund.

Nathan Slaughter, editor of The ETF Authority, a leading ETF newsletter, recommends staying away from funds that are too closely focused on niche markets. They tend to trade on light volume and sometimes run the risk of being recalled if demand for the shares is light. He says funds like TXF are usually geared toward pension funds and make little sense for individual investors in most cases. Adding to that, regional economic conditions (think California's budget crisis) could have an adverse effect on these funds.

And according to Nathan, there are much better alternatives out there. For example, investors wanting to profit from Texas oil companies would be better off with a fund focused exclusively on oil and gas, such as ProShares Ultra Oil & Gas (NYSE: DIG) or individual companies such as ExxonMobil (NYSE: XOM). And those wanting to own Texas-based tech companies such as Dell (Nasdaq: DELL) or Texas Instruments (NYSE: TXN) should consider a broader technology fund such as the Technology Select Sector SPDR Fund (NYSE: XLK) or simply the individual shares.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.