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State ETFs Fall Short

Don Dion

NEW YORK (TheStreet) -- State-focused ETFs are an interesting idea, but the recently launched Texas and Oklahoma funds have fallen short of the mark.

The idea of offering investors a way to profit from differences in state economies, regulations and taxes, is compelling. The Oklahoma Exchange Traded Fund(OOK Quote) and TXF Large Companies ETF(TXF Quote), however, contain large companies that offer little exposure to the economies of the states.

The launch of Texas-focused TXF this week and OOK last week show that, although ETFs have sliced the market thinly, there are still plenty of niches waiting to be filled.

On Wednesday, the TXF Large Companies ETF(TXF Quote) began actively trading. TXF's index is made up of some of the largest companies headquartered in the Lone Star State. The instrument's underlying index, the SPADE Texas Index, boasts big names such as ConocoPhillips(COP Quote), Schlumberger(SLB Quote), and AT&T(T Quote).

In looking at the sector breakdown, it is evident that this fund is a strong play on the oil and gas industry. The firms in these sectors comprise over 63% of the index's holdings. Technology is the next largest industry in the index, accounting for a little less than 9%.

In order to gain access to the SPADE Texas index, firms must meet a number of specific criteria. Besides being headquartered in Texas, companies need to be on the NYSE or the NASDAQ, have a minimum $100 million market valuation, a minimum daily sale price of $5 and be able to maintain liquidity.

OOK can also be considered primarily an energy play. According to the fund's Website, "initially, a large percentage of the Fund's assets may be invested in companies in the energy business." The fund tracks the SPADE Oklahoma Index, which consists of companies that are publicly traded and that have their headquarters or principal place of business in Oklahoma.

Top holdings in OOK include Chesapeake Energy(CHK Quote), Devon Energy(DVN Quote) and Continental Resources(CLR Quote). Both OOK and TXF have 0.85% expense ratios, which are reasonable for a focused fund, but high for a U.S.-based equity strategy.

State-focused strategies could be a hard sell for investors accustomed to using ETFs to access specific portions of the market or long-term strategies. Rather than buying a gold or large- cap fund, where you can be reasonably certain about what it will hold over time, holdings in a state-focused fund could change dramatically depending on the local landscape.

Both ETFs donate a portion of management fees to charity. No less than 10% of the TXF's management fees for both funds will be donated to Aaron's Bridge, a foundation aimed at facilitating access to more treatment options for Oklahoma youth with developmental disorders including autism.

I like the idea ETFs that offer unique baskets that takes time and research for an individual unfamiliar with that market to assemble, but in the case of a state, the companies should derive their revenue from the state, not just their headquarters. Investors who want to find securities that reflect the economy of Texas will still have to do some digging, though the list of components in TXF may provide a starting point.

Regional ETFs would seem to make the most sense in this space due to the larger size of the economy. A Southeast-themed fund or Pacific Northwest ETF may make more sense for the long term. There are plenty of REITs, retailers, restaurants, insurers, etc., with regional footprints.

-- Written by Don Dion in Williamstown, Mass.

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