First-To-Market Nashville ETF Launches

ETF.com

 

LocalShares, a Nashville, Tenn.-based money management firm, today is rolling out an equities ETF focused solely on companies based in or around Nashville, a city-focused strategy that’s a first for U.S. investors.

The Nashville Area ETF (NYSEArca:NASH) tracks a Solactive index that includes 24 companies headquartered in Davidson County, where Nashville is located, or in an adjacent county. NASH costs 0.49 percent a year, or $49 for every $10,000 invested.

Geography-based strategies aren’t new in the ETF market—there are multiple country and region funds in the space—but state- or city-specific strategies are not common. In the fall of 2009, Geary Advisors launched the first state-based ETF, the Oklahoma ETF (NYSEArca:OOK), and quickly followed it with a second fund:the Texas Large Companies ETF (NYSEArca:TXF). But the two ETFs, which were the first to target individual states, were shuttered less than a year later after failing to attract assets.

“We developed LocalShares after an intense 3 ½-year planning and due diligence phase based on a very important core premise; and that is that there are cities and very specific regional markets that benefit the companies that are located and headquartered there,” Elizabeth Seigenthaler Courtney, CEO of LocalShares, told IndexUniverse.

Those attributes, she said, include things like a city’s diverse economy, strong leadership, transportation access, taxes—all value-add characteristics to businesses.

“We believe that translates into an ecosystem that’s healthy for businesses,” Courtney said. “There are some communities where companies have historically done well, and these companies can have a strategic benefit. That’s our premise. Nashville is one of those communities.”

The Exposure You Get

The methodology behind this ETF requires that a company be headquartered in Davidson County—Nashville’s formal government seat—or one of the six contiguous counties; has a minimum market cap of $100 million; and average daily trading volume of at least 50,000 shares.

Initially, all these companies are assigned an equal weighting in the index. But later, through a seven-factor formula, these weightings will be adjusted quarterly, according to a company’s ranking.

The factors include:

  • Growth, as a measure of year-over-year growth in free cash flow
  • Liquidity, as a measure of combined market cap and average trading volume
  • Low volatility, or a measure of beta.
  • Momentum, as in the weighted performance of three-month and 12-month momentum for the stock price
  • Returns on invested capital
  • Valuation
  • Yield

“We measure each company relative to other companies in the component set,” William Decker, chief investment officer for LocalShares, told IndexUniverse. “Those equal-weighted positions are bumped up and down based on a company’s relative score on those factors.”


 

Limits apply on these rankings, he added.

No company can represent more than twice of what an equal-weighted allocation would have been, and no company can represent less than a quarter of an original equal weight.

As an example, if there are 25 companies in the portfolio, no one stock will be assigned more than an “eight,” and no one stock will be less than a “one,” Decker said. The mix is rebalanced every quarter.

“People tend to own companies that are around them,” he noted. “Around the country, there’s a concentration of ownership in equities that are headquartered near the shareholders. We think that’s a good idea.”

The Nashville Area ETF is the first of what the company hopes will be a growing roster of city-based strategies in the future, although for now, LocalShares said it’s committed to focusing on the success of its initial fund.

“The key characteristics that help a local economy be an especially supportive area of successful companies are not only attributes of Nashville,” Decker said. “In fact, I think you could easily make a compelling case for 24 or 25 other cities, and we are in that space.”

“Nashville falls into the top of that list, but the opportunity to create similar strategies in other cities is something we are interested in down the road,” he added.

 

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