NEW YORK, Aug 7 (Reuters) - Early last Friday, Nashville resident Ralph Schulz and his wife rushed to open a Charles Schwab Corp account, in a hurry to grab some shares of their hometown’s first exchange-traded fund - the Nashville Area ETF.
Still, Schulz, 60, was a day late to join the historic launch of the first city-based ETF, which began trading Aug. 1 on the New York Stock Exchange. As his broker’s firm wasn’t able to process the order, Schulz and his wife were quick to jump in another way.
“I wish I could’ve been there on Thursday,” Schulz said. “I wanted to be in it from the start, at 8:30 a.m.”
For investors like Schulz, the ETF offers a new avenue for investing in a broad swath of his community, though the fund, launched by local financial newcomer LocalShares, is unable to hold two privately-held local notables - Dolly Parton’s Dollywood and the Grand Ole Opry.
Instead, it holds 24 locally headquartered firms - like Cracker Barrel and Dollar General - and leans heavily on healthcare, with one of its biggest components being HCA Holdings Inc, the largest publicly traded hospital chain in the country.
Some analysts, and history itself, suggest the fund’s narrow focus could present a risky strategy for investors and the fund’s backers.
“I think it’s mostly a marketing tool,” said Dave Nadig, president of San Francisco-based IndexUniverse LLC’s ETF Analytics. “It’s not like the local Nashville economy is immune to what goes on in the rest of the country.”
While some say there are benefits to investing locally, others warn that putting one’s portfolios where one lives and works can hurt the investor’s ability to stay diversified.
Indeed, the precedent set by regionally focused traditional stock mutual funds has been uninspiring, says Jeff Tjornehoj, head of Lipper Americas Research, a Thomson Reuters company.
About two decades ago, a handful of mutual funds - like the IAI Regional fund focused on Minnesota and Wisconsin firms, which folded in 2000 - sprung up and later stopped.
More recently, in late 2010, two state-focused ETFs (one on Texas and one on Oklahoma) also folded. Unlike traditional mutual funds, exchange-traded funds trade in real time.
“Regionally-focused funds have never fared that well,” Tjornehoj said, noting that besides municipal bond funds, which allow investors to take advantage of local tax breaks, “nothing else really stuck.”
LocalShares, the firm that launched the Nashville ETF, is currently looking into other cities where it could replicate the Nashville model, its Chief Executive Officer Beth Courtney told Reuters. She envisions as many as 25 similar funds in the future.
“We have done a lot of research on what cities have the most dynamic ecosystems,” Courtney said.
Some other cities with robust economic themes include Houston, with a strong commodities market, Orlando, with tourism, and Silicon Valley and its technology companies.
“There is a proclivity to invest locally,” said Courtney, who formed LocalShares in 2010 after about ten years of thought on how to create a fund to invest in what she considered a strong economic story.
But this first fund could require some heavy lifting to pave the way.
“If the Nashville ETF can capture a robust amount of assets, if it hits $100 million bucks,” it will support the notion that growth in city-based ETFs can have great merit, said Reggie Browne, New York-based managing director at Knight Capital Group, who co-heads the firm’s global ETF institutional sales and business initiatives.
The Nashville ETF, which opened at $25.35 on Aug. 1, closed Tuesday at $25.06.
Like most ETFs, the Nashville fund tracks an index, the LocalShares Nashville Index, which requires its component companies to have a market capitalization of at least $100 million and an average daily volume of at least 50,000 shares - in addition to being headquartered in the Nashville region.
“Most of these companies operate facilities all over the place, but their headquarters and brain trusts are here, and their leading jobs are here,” Courtney said, pointing to what she referred to as strong workforce development and taxation policies in the region, as well as three interstate highways that go through the city and a “very active airport” this serves as a gateway for ample business.
And Nashville resident, Schulz, is sure to have company.
“People like to know what they own,” says Nashville-based financial adviser Lee Vaughan of COVA Wealth Management, an independent firm affiliated with Raymond James, who has received a few client inquiries about the ETF since its launch last week.
Tom Lydon, president of Global Trend Investments, a registered investment adviser and editor of ETFTrends.com, can see the appeal.
“For people who have money in the area, who know the local economy and like the local companies and know them better than they know other publicly-traded companies, it might make sense.”
“If there’s demand, you’ll see it,” he said. “Investors vote with their feet.”