Oklahoma ETF: Worth A Close Look

by on December 7, 2009 | ETFs Mentioned:

Last month, Geary Advisors made its entrance into the ETF industry with the launch of the Oklahoma Exchange-Traded Fund (OOK), the first state-specific ETF available to U.S. investors. While the unique investment strategy of this ETF may have caught investors’ eyes initially, the truly interesting part of OOK is its risk and return profile. With a long history of outperformance of broad U.S. equity markets, the index underlying OOK might be worth a good look when making asset allocation decisions.

Vital Stats

Oklahoma CityWhen constructing the domestic equity portion of portfolios, most investors and advisors focus on allocations by sector and market capitalization. Geographic segmentation generally stops at the country or region level, making OOK one of the first investment vehicles to go beyond this step.

OOK tracks the SPADE Oklahoma Index, a market capitalization-weighted benchmark that seeks to measure the performance of publicly-traded companies with either corporate headquarters or significant operations in Oklahoma. The index underlying OOK includes about 30 companies, with exposure spread across small, mid, and large cap firms. Not surprisingly, almost three quarters of the Oklahoma Index is allocated to energy companies, with utilities and financials making up the second and third largest sectors.

OOK’s largest holdings include major players in the oil and gas industry, including ONEOK Partners (natural gas pipeline operator), Magellan Midstream Partners (owner of petroleum products terminals and pipelines), and The Williams Cos. (natural gas production, exploration, and pipeline firm). But it isn’t just pipeline companies that are headquartered in Oklahoma. Sonic Corp., Pre-Paid Legal Services, and Southwest Bancorp are some of the other major components of the fund.

OOK charges an expense ratio of only 20 basis points, making it one of the cheapest ways to gain exposure to the U.S. energy sector. OOK’s expense ratio is slightly less than that of the energy SPDR (XLE), which charges 0.21%, and only a third of the 0.60% charged by the First Trust ISE-Revere Natural Gas ETF (FCG).

The Case For OOK

OOK will likely be popular with proud residents of the Sooner State, but it isn’t meant only for those living in Oklahoma. This ETF is anything but a gimmick, based around an investment thesis that companies headquartered in Oklahoma have a good chance to outperform broad U.S. markets. The state’s economy is based on energy, but is expanding to include several other sectors. In October, CNN/Money named Oklahoma City the best place in the U.S. to launch a business. “Stable and affordable, Oklahoma City is a haven for entrepreneurial risk takers,” read the write-up. “It boasts the second lowest foreclosure rate among large U.S. metro areas, along with the second lowest median rent.” According to the Tax Foundation, Oklahoma has the nation’s 18th most favorable tax climate for businesses in 2009 (the top spots were filled by sparsely-populated Wyoming and South Dakota)

Between 2000 and 2008, Oklahoma’s GDP increased by a whopping 63% according to the Bureau of Economic Analysis, making it one of the fastest-growing economies in not only the U.S., but in the developed world. Three members of Fortune magazine’s list of the 25 fastest-growing companies in the U.S. are based in Oklahoma.

So how does this type of environment translate to the benchmark’s performance? Quite well, actually. Using a “blind back test” methodology, the performance of the SPADE Oklahoma Index over the last nine plus years is remarkable compared to the S&P 500:

Year OKLAH Index S&P 500 Excess Return
2000 47.77% -10.14% 57.91%
2001 -11.48% -13.04% 1.56%
2002 -8.85% -23.37% 14.52%
2003 29.98% 26.38% 3.60%
2004 30.01% 8.99% 21.02%
2005 34.64% 3.00% 31.64%
2006 19.48% 13.62% 5.86%
2007 17.44% 3.53% 13.91%
2008 -39.43% -38.49% -0.94%
1H ’09 11.06% 1.78% 9.28%
Source: spadeindexes.com

It isn’t the least bit surprising to see that the Oklahoma Index outperformed the S&P 500 when energy prices were soaring. But the consistency of the out-performance, particularly in years during which oil and gas prices slumped, is certainly compelling. For example, natural gas prices have plummeted in 2009, but the Oklahoma Index has performed relatively well.

Potential Uses

With its tilt towards the U.S. energy industry, including major weights in several limited partnerships in the natural gas space, OOK may not be appropriate for every portfolio. But there are a number of ways to potentially include this ETF to enhance returns. For those looking to overweight the energy sector, this ETF is one of the cheapest options available. For investors bullish on the long-term outlook for natural gas, OOK is certainly worth a look, as it offers exposure to companies engaged in the production and transfer of the gas while avoiding the potential pitfalls of UNG.

Finally, OOK may be worth a look for anyone seeking to generate alpha. Obviously the past performance of the index doesn’t predict its future returns, but the benchmark’s impressive track record is hard to ignore.

Disclosure: No positions at time of writing.