Talking OOK, TXF, And All Things ETF With Keith Geary

by on January 18, 2010 | ETFs Mentioned:

Keith Geary is the chairman, president, and CEO of The Geary Companies, an Oklahoma-based financial services firm. Geary Advisors recently launched the Texas Large Companies Exchange-Traded Fund (TXF) and Oklahoma ETF (OOK), the first state-specific equity ETFs available to U.S. investors. He recently took time out of his busy schedule to talk about his firm’s products with ETF Database.

KDG PicETF Database (ETFdb): Geary Advisors recently launched two ETFs — tell us about how you came up with the idea for OOK and TXF.

Keith Geary (KG): Every year between Thanksgiving and Christmas, Geary Securities runs a program that we call “Give OK Stocks As Gifts.” It started out as a discussion between my wife and I, talking about how so many parents spend $300 on a Nintendo or X-Box for their kids, and five years later  they’re  completely outdated or in the trash. So we thought: if these parents had bought $300 worth of stocks five years ago, what would they be worth now?

So I started looking at Chesapeake, Devon, and other Oklahoma-based stocks to see how they would have done over the previous five to ten years. I started to get a sense for backtesting, trying to figure out if Oklahoma stocks as gifts would make sense economically, and the results were  very impressive. So we made that our promotion and we were swamped, the first year people were coming in all day long, calling and emailing, so it made for an exciting December.

That Christmas Eve, I had a grandfather in my office buying gifts for six grandkids. He was buying five shares of this, ten shares of that, and we were churning out gift certificates for him to put under the tree and said “there has to be an easier way to do this.” And I said, “there is: via an ETF”. So I got to work crunching the numbers again. When I took all the publicly traded companies in Oklahoma and weighted by market cap, Devon became a huge portion of the index, so that wasn’t going to work. So I kept crunching numbers and I finally figured out that if we settled on a maximum amount of 5% to7.5% and only incorporate thirty or so of the largest companies, it would be a practical index.

When I backtested the index to the S&P 500, I was blown away. I decided that no matter how much it costs or how difficult it is to do this, I have got to go forward and make this happen. So I began the process of filing exemptive relief applications with the SEC, and finally we were able to launch in October for OOK and early November for TXF.

It was a long and drawn-out process, particularly with the other issues the SEC was addressing at the time, but obviously I believed in what we were doing and I knew that we had a great product. I had received enough feedback from foundations in Oklahoma who were excited about the product, so I always felt like I was going to be able to make it work even if the rest of the marketplace didn’t catch on to the story. Yet, I have always expected that once people saw the product and recognized that it had a place to fill in a portfolio, and that it could really take off and go. I continue to have high expectations in terms of what it could gather in terms of assets under management.

ETFdb: We’ve primarily talked about the Oklahoma fund up to this point, but you also have the Texas Large Company ETF (TXF). How did that kind of come about and what kind of companies are included in TXF?

KG: When I told our employees in Texas about the idea of an Oklahoma fund they immediately said to me “well what about Texas?” So I looked into Texas and I realized that because the state has such a large GDP and is home to so many publicly traded companies, there was certainly potential to create an index limited to Texas-based companies. In fact, there were enough companies to create large cap, small cap and mid cap indexes.

So the first thing I focused on was the large cap ETF. We tried to follow the same rules as Oklahoma, but ended up narrowing the size restrictions down to 5% for any particular company. That got it down to a group of about 70 companies with no more than 5% in any one firm, and produced backtested numbers that would be a little below Oklahoma’s but still well above the S&P 500. So the index underlying TXF doesn’t quite have the performance of OOK, but the results were very impressive nevertheless.

ETFdb: How have these two ETFs been received by the market?

KG: At first, people outside Oklahoma and Texas have been skeptical, because the concept of a state-specific ETF comes across as gimmicky. But that all changes when they hear about the rationale behind the products and see the historical performance figures relative to the S&P 500. Since inception, both funds have performed very well, and those facts are becoming hard to ignore.

Given its unique composition, there are a lot of potential uses for OOK and TXF. Not surprisingly, both funds have a tilt towards the energy sector. But they’re not pure energy funds — companies like AT&T, Dell, and Southwest are also included in TXF for example — and the diversification they offer is appealing to a lot of the major investors we’ve talked to.

ETFdb: So did you take your research beyond Texas and Oklahoma and try to develop other state specific ETFs that may have delivered superior returns?

KG: Yes, over this past summer we had a couple of our employees crunching numbers on the other 48 states. We began by looking for indexes that may have fared well during the ongoing recession or would be one of the first states to recover once the economy bottoms out. So they approached a potential index in a number of different ways, but ultimately weren’t able to come up with anything that even came close to Oklahoma or Texas. So we came to the decision to focus on the first two ETFs and then start working on the mid-cap and small-cap Texas benchmarks.

We’re not looking to launch “gimmicky” products that don’t have a sound investment philosophy behind them. We’re very proud of the Texas and Oklahoma ETFs, and are excited that they’re now available. I’m anxious to have them grow, and I’ve always felt like they would grow rapidly once the story of their performance gets out and investors realize these products aren’t gimmicks. But we won’t be flooding the market with a line of state-specific funds that don’t present a compelling story.

ETFdb: Geary recently lowered the expense ratio of both OOK and TXF to 20 basis points, making them two of the most-cost efficient ETFs on the market. What drove this decision?

KG: When we first filed our applications in early 2008, and looked around at what expense ratios were, we were kind of at the norm at the time, and didn’t give it too much more thought. Yet, the first thing that I saw when we launched was that a number of people were commenting that the expense ratio was high. So I said “well, we have to change it then.” So we immediately jumped in there lowered the expenses retroactive to the launch.

ETFdb: Any last thoughts on what the future holds for the ETF industry?

Like most people, I think more assets and retirement assets will fall away from mutual funds and go to ETFs. After talking to our customers, I feel that they can understand ETFs more readily than they can mutual funds and they are embracing these products fully.

ETFdb: Certainly some very interesting history and exciting products! Thanks for taking the time to talk with ETF Database.

For more information on these funds, visit the Web sites for the Texas ETF and Oklahoma ETF. To read more on the indexes underlying these products, including historical performance, see the SPADE Oklahoma Index and SPADE Texas Index sites.

Disclosure: No positions at time of writing. Geary Advisors is, or has in the past, placing paid advertisements with ETF Database.