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New Restaurant ETF in the Offing: Will It See Success?

Sanghamitra Saha

The restaurant industry may have fallen out of favor recently as evident by the Zacks industry rank which is in the bottom 25% segment at the time of writing. But issuers’ enthusiasm in rolling out restaurant ETFs seems still intact.

This is because USCF ETF Trust recently filed for a restaurant ETF, namely The USCF Restaurant Leaders Fund. The ticker code is yet to be disclosed. Below we highlight the fund in detail.

Proposed Fund in Focus

The fund looks to track the Restaurant Leaders INDXX Index and charges 65 bps per year for its exposure. The passive fund will likely invest in all the securities on the index and apply almost the same weight as the underlying index, per the filing.

The index takes into consideration the common stock of U.S. and international restaurant companies. It gives exposure to all-cap companies trading on a U.S. Exchange. The fund will likely to add about 30 to 40 restaurant companies.

How Does It Fit in a Portfolio?

Investors should note thatafter several analysts downgraded plenty of restaurant stocks, the sector lost its appeal. Jefferies believes that the “industry has at least 18 months of challenges ahead” given weaker comps and increasing labor costs. On the other hand, Stifel got “bearish on restaurants and adopted an industry-wide recessionary outlook (read: Soft Restaurant Earnings May Take a Bite Out of This ETF).”

But this can definitely offer up a ‘buy-on-the-dip’ situation as the industry has been displaying sluggish trends after a prolonged up phase. Agreed, the operational fundamentals are going against the sector at this moment, but things will likely be better off once the threats settle down.

The present gloom can be temporary in nature as the economy has been steadily growing with the strengthening of the job market. And with oil prices still low, consumers are being able to save up at the gas stations. As per restaurant.org, the Expectations Index was at 100.7 in June, down 0.4% from May. Though the reading was the lowest in six months, it was still in a growing zone at above 100.

Also, the underlying long-term trend is pretty bullish in the sector. Going by the factsheet of Restaurant ETF BITE issued on July 14, 2016, “the percentage of income that Americans spend on food outside the home has been steadily growing over the last 150 year.”

Competition

The proposed fund will face steep competition fromthe sole pure-play ETF on the restaurant industry – BITE. The fund gives exposure to 41 restaurant stocks. Arcos Dorados Holdings, EL Pollo Loco and Dominos Pizza are the top three stocks of the fund. The fund charges 75 bps per year.

Since the planned fund charges lesser than BITE, chances are higher that this newly filed product, if it gets approval, will not face too many hurdles in its path of asset accumulation. Apart from BITE, another ETF PowerShares Dynamic Food & Beverage ETF PBJ may also give the planned fund some competition albeit feeble. Though PBJ charges 58 bps in fees, it is not likely to be a threat to the new restaurant ETF as these two are not direct competitors (see all consumer discretionary ETFs here).

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