Nashville ETF: Pros And Cons Of One-City Grouping

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Despite the failure of state ETFs and the demise of numerous others with sound strategies, LocalShares, an ETF start-up, has rolled out the first ETF to group companies headquartered in a city.

Nashville Area ETF ( NASH ) is the brainchild of three Nashville business owners: Elizabeth Seigenthaler Courtney, CEO of Seigenthaler Public Relations; William Decker, CEO of Decker Wealth Management; and Michael Shmerling, chairman of XMi Holdings.

The 24-stock portfolio includes 10 health-care companies, three health-care real estate investment trusts and an assortment of retailers, industrials and financials. The best-known holdings areHCA Holdings ( HCA ), the largest publicly traded hospital chain;Cracker Barrel ( CBRL ), a restaurant chain; andDollar General ( DG ), a discount retailer.

"Business-oriented cities create an ecosystem that's conducive to the success of the companies located there, such as tax structure," said Decker.

In a press release, LocalShares boasted that Tennessee's second-largest city offers low taxes, a strategic location and a state where people have the right to work.

It enjoyed the fastest job growth in 2012, and maintains a high quality of life for a productive and energized workforce, LocalShares wrote. And LocalShares believes that the area's 18 colleges and universities offer a rich environment of research and ideas.

Known as America's health-care hub, it is home to more than 300 health-care companies, according to Council Capital, a Nashville-based business development firm.

Forbes ranked Nashville and the surrounding area No. 5 for the best places for business and careers. Tennessee's state corporate tax rate of 6.5% ranks 11th lowest among all states.

But Nashville's combined sales-tax rate of 9.25% (7.5% for state and 2.25% local) ranks seventh highest in the country, according to the Tax Foundation.

Despite the positives, several factors seem aligned against this fund. Here are four:

1. Institutional investors don't place much weight on company headquarters when considering whether to buy and sell.

"We've never used an ETF or a company's headquarters location as a factor in making investment decisions and we're not about to start," Ron DeLegge, editor of ETFGuide.com , said in an email. "While a local ETF might be good for companies within the index to increase investment and raise their profile, whether it will turn out to be a good investment for ETF shareholders is a big unknown."

2.If Nashville's business friendliness had a big impact on corporate success, more companies would be based there.

3. NASH lacks the diversification that ETF investors want.

NASH holds only 24 stocks, 13 of which are health-care related. It could be considered an industry bet as much as a geographic one.

"A natural disaster (albeit unlikely) could seriously ding a narrow state-based ETF," Simon Maierhofer, founder of iSPYETF.com, wrote.

4. Investors have no interest in state ETFs, so why would they want one that dices geography even smaller?

For example, Oklahoma-based Geary Advisors closed its two state ETFs --Texas Large Companies ETF (TXF) and theOklahoma ETF (OOK) -- in 2010 after less than a year on the market and left the ETF industry altogether because those funds failed to attract money.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: CBRL , DG , HCA , NASH

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