The ETF industry has grown tremendously over the past few years with a host of ETFs targeting a number of interesting niches hitting the market. While there has definitely been a bit of a sector focus lately, geographic targeting—or holding a series of companies based in a particular area—has also seen a burst of interest lately.
While this trend has been focused in on exotic emerging markets, it appears as if it is cycling back closer to home for now. At least that is the trend that could take place based on a recent launch from newcomer LocalShares which just had the debut for a Nashville ETF (NASH).
City-Specific ETF in Focus
The new product takes geographic targeting to the next level, focusing on companies based in the Nashville metro area for exposure. This is done by following the LocalShares Nashville Index, and charging investors 49 basis points a year in fees (also read A Primer on ETF Investing).
NASH thus marks the first time that a city-specific investment strategy has been tried in the U.S. market, giving investors access to companies that are based in Nashville’s Davidson county, as well as the six contiguous counties around Davidson. This concentrated portfolio will focus on about two dozen companies, all of which trade in average volumes of at least 50,000 shares a day, and have a market cap of at least $100 million.
In terms of the fund’s holdings, the portfolio appears as though it will be skewed towards mid and small caps, with a big focus on health care. The current top three holdings are Acadia Healthcare (ACHC), Amsurg (AMSG), and Brookdale Senior Living (BKD).
None of these firms account for more than 4% of assets though, so the portfolio could be well spread out from an individual security perspective. Plus, the underlying index is weighted on several factors—such as volatility, momentum, return, valuation, and yield—so this will definitely not be another market cap weighted ETF (see Alternative ETF Weighting Methodologies 101).
It is obviously impossible to find a direct competitor for the Nashville ETF, although it is worth noting that state-specific funds were attempted a few years ago. Products targeting companies in Oklahoma and Texas were trading for a while, though they saw limited levels of interest, even with their relatively large markets and high levels of state pride.
In terms of competitors based on the holdings though, health care ETFs are likely to be the biggest. In this segment, investors have a multitude of options including the ultra-popular XLV, although the more ‘active’ FXH or the small cap centric PSCH could be more apt in terms of comparisons (read 3 Impressive Biotech ETFs Crushing the Market).
However, these ETFs all have at least $100 million in assets and are all concentrated on health care and thus may make more sense from an investing standpoint. So if NASH is going to succeed, it will need an enormous level of local investor support, and belief in the general Nashville story as well.
This has already taken place to some extent, as the city’s mayor, Karl Dean, has been trying to get investor interest in the product. “I am just bullish on Nashville, and I think everybody ought to be” said the mayor.
Still, one has to ask if a series of mid caps companies which do business across the country are really the best representation of the positive trends in the Nashville area’s economy. If you believe this is the case—or if you are a big fan of Nashville—this fund might be for you. But otherwise, most investors would probably be better served by staying away from this somewhat odd, but certainly unique, city-specific ETF.
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