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Beware the Wal-Mart Supplier ETF

In the past few years, the exchange-traded fund industry has produced a lot of different kinds of products -- some great, some clearly worthless and some that can't easily be categorized as either.

Add to that last category the FocusShares ISE Revere Wal-Mart Supplier Index Fund (WSI).

The first sentence on the WSI web page pitching the fund asks if you have ever gone into a Wal-Mart (WMT) and wondered if you could somehow buy the companies that generate most of their sales suppling the retailer.

Personally, I never have and don't know anyone who has, although that does not necessarily make the fund a bad idea. My first inclination is to explore whether the 30 stocks in the fund that "derive a substantial portion of revenue from Wal-mart Stores" could be a proxy for something else.

WMT Supplier Index vs. WMT Stock
Click here for larger image.

A backtest of the fund's performance shows the suppliers have done much better than Wal-Mart's common stock from July 2002 through July 2007. Before jumping to any conclusion about what might happen in the future, however, it is important to understand some of the market dynamics during that period.

We are coming off of a multi-year run in which small-cap stocks have wildly outperformed mega-caps like Wal-Mart. Although mega-caps have generally done better this year, Wal-Mart has struggled as Wall Street tries to sort out just how vulnerable the company is to higher gas prices.
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