State-Specific ETFs: Texas and Oklahoma First Up

by on July 7, 2009

They say everything is bigger in Texas. TXF Funds Inc. is apparently hoping the old saying applies to the ETF industry as well. The Oklahoma City-based firm has filed to take targeted ETF investing to a new level, requesting permission from the SEC to launch the TXF Large Companies ETF, a fund that would attempt to track the SPADE Texas Index. In an amendment to its initial filing, TXF Funds is also requesting permission to launch an ETF tracking the SPADE Oklahoma Index. These ETFs would be the first state-specific funds to hit the market, and would be the latest in a wave of specialized ETFs that have washed over the ETF industry in the last year. 

SPADE Indexes are no stranger to the ETF industry: the SPADE Defense Index is the benchmark tracked by PowerShares Aerospace & Defense ETF (PPA). Now TXF Funds is considering licensing additional SPADE indexes for state-specific funds, an area that is as of yet untapped by the major ETF issuers. In addition to its proposed Texas and Oklahoma ETFs, TXF Funds clearly indicates that it intends to launch additional state-specific funds, noting in its filing that it is “considering offering TXF shares in two additional funds, TXF Mid Companies and TXF Small Companies, each of which will invest in separate portfolios of securities that substantially replicate benchmark indexes consisting of medium and small Texas-based companies that are publicly traded.”

The SPADE Oklahoma Index is currently comprised of 30 companies, the majority of which are (not surprisingly) involved in the energy industry in some fashion. ONEOK Partners LP, one of the country’s largest natural gas distributors, is the largest component, comprising approximately 8% of the index, while ONEOK Inc. (a related entity) and Williams Cos. (a global energy and communications company) comprise about 7.5% and 7.4% of the index, respectively.

The Next Trend In ETF Investing?

The concept of a state-specific ETF is certainly intriguing, as the current economic crisis has proved that the fortunes of various states of the union can diverge wildly, particularly during trying economic times. Michigan and California are facing extreme budget crises and skyrocketing unemployment, while Arizona and Florida have been hit hard by the real estate bust. On the other hand, some states, such as Alaska and Montana, have been relatively resilient during the downturn, with only minor increases in unemployment. For this reason, state-specific ETFs hold some promise, as their risk and return characteristics could vary significantly from more broad-based equity funds.

My concern, however, is that the Texas and Oklahoma ETFs will essentially be energy funds, a highly competitive sector of the ETF market already. And the potential for other state-specific ETFs to essentially align themselves into a single industry is evident as well. A California-only ETF would be dominated by technology firms. A Nevada fund would be essentially track a gaming index (similar to BJK), while Michigan would focus on manufacturing and New York on financials (you get the point…). While red-blooded Americans with a particular fondness for their state (i.e., Texans) may line up to purchase these niche funds, I’m concerned that they won’t distinguish themselves sufficiently from the countless sector-specific funds on the market to attract a more broad-based following. At the same time, I wouldn’t be surprised if these ETFs were tremendously popular, sparking a race to offer exposure to additional states or regions of the U.S. The TXF funds are the latest in a series of the extremely interesting niche ETFs to launch this year that major ETF issuers are likely keeping a close eye on.

Disclosure: No positions at time of writing.