Lower Fees Are Not Enough for State ETFs

Geary Advisors, the mastermind behind the first state-specific exchange-traded funds, is already making changes to its flagship instruments. The alterations come one day after the TXF Large Companies ETF (TXF - commentary - Trade Now) celebrated the completion of its second week of active trading. The Oklahoma Exchange Traded Fund (OOK - commentary - Trade Now) has been in existence for only a week longer.

In my initial assessment of the funds, I commended the idea of state-specific exchange traded funds. However I saw immediate issues with execution. I continue to advise investors to stay away from these funds until the internal kinks have been worked out.

In an effort to increase the funds' competitiveness in the ETF realm, Geary has begun the process of decreasing its expense ratios. When TXF and OOK initially launched, they carried a high, 0.85% expense ratio. Geary is aiming to reduce the fees to 0.20%.

Although they suffer from extremely low volumes, the state-specific ETFs have remained in the positive since they began actively trading. Since Oct. 29, OOK, with an average volume of 8,300, is up 0.61% through Nov. 17. From Nov. 4 to 17, the TXF, with an average volume of 1,600, is up nearly 4%.

Geary Advisors sees its funds as good ways to invest in Oklahoma and Texas companies. I, on the other hand, consider TXF and OOK to be starting points for what could eventually turn into a respectable opportunity for investors looking for access to different regions of the U.S. Although fee reductions are a good place to start, without any considerable alterations to their underlying strategies, I don't see much of a future for these funds.

At the time of publication, Dion had no positions in securities mentioned.

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Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.