Texas ETF Launches: Will Investors Flinch Over Fees?

by on November 5, 2009 | ETFs Mentioned:

OOK Advisors announced the launch of its second exchange-traded fund on Wednesday as the TXF Large Companies Exchange-Traded Fund (TXF) began trading on the NYSE Arca Exchange. The new fund will track the SPADE Texas Index, a benchmark designed to measure the performance of the largest companies headquartered in the state. The index is up about 30% year-to-date, and has outperformed broader market indexes in recent years.

Big Tex Applauds the New Texas ETFThe Texas Index includes about 85 stocks that represent 90% of the market capitalization of companies headquartered in Texas. Not surprisingly, energy companies have a big allocation in the portfolio, including firms such as ConocoPhillips (5.5%), Exxon Mobil (5.0%), and Schlumberger (5.3%). But there is a lot more to the index and the ETF than just energy firms. Other holdings include Southwest, Burlington Northern, Whole Foods, AT&T, Dell, and DR Horton.

TXF joins the OOK Oklahoma ETF (OOK) as the only state-specific ETFs available to investors. Similar to OOK, TXF will donate 10% of its management fees to Aaron’s Bridge, an organization with the goal of facilitating access to more treatment options in Oklahoma and Texas for children with developmental disabilities.

There is a case to be made for investments focusing exclusively on Texas-based companies. If the state were its own country, it would have the 12th largest GDP in the world, just behind Brazil and Russia. And the Lone Star State is generally regarded as a business-friendly environment. But the Texas ETF faces some strong headwinds, one of which relates to expenses.

The old saying that everything is bigger in Texas apparently applies to expense ratios as well. TXF charges 85 basis points, more than ten times the fees charged by the cheapest ETF options for exposure to large cap equities (two of Schwab’s new ETFs offer expense ratios of 8 basis points). For investors looking to overweight their portfolio in energy companies, there are also much cheaper options. The Energy SPDR (XLE) charges only 0.21%, while Vanguard’s Energy ETF (VDE) charges 0.25%. The impact of these differences in costs on bottom line returns can be material, particularly when compounded over several years. For a look at the cheapest ETF options available to investors, see our list of the 25 lowest cost ETFs. And for ongoing coverage of the ETF industry and actionable ETF investment ideas, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.