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.
Source: focusshares.com

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.

I have no position in Wal-Mart and have no plans to buy the stock, but it is a safe bet that at some point Wal-Mart will outperform the suppliers index. The way I view these sorts of things, the index's past outperformance and any future performance vs. Wal-Mart will not be the important thing. The important thing is what role this fund could play in a diversified portfolio.

The fund, not surprisingly, is most heavily weighted toward consumer staples stocks, at roughly 48%, followed by consumer discretionary stocks, at 20% and then technology stocks (think video games) at 17%.

I was not able to find market-cap information on the FocusShares website, so by my rough calculation the average market cap is $3.3 billion, with six companies below $500 million. WSI, as a proxy for consumer stocks, is obviously going to capture the smaller part of the sector.

The fund's sales literature compares its benchmark index to the S&P Retail Index, which is composed of stores like Wal-Mart, CVS Caremark ( CVS)and Target ( TGT).

Measuring Up
WSI's benchmark index (WMX) has had a low correlation to the S&P Retail Index.
Click here for larger image.
Source: focusshares.com

WSI's benchmark index has had a low correlation to the S&P Retail Index, but I don't think it is a good comparison. Since WSI is mostly consumer stocks, it makes sense to compare the fund with the Staples Sector SPDR ( XLP), which also owns a lot of companies that make products sold in Wal-Mart -- and to Wal-Mart's competitors.

I couldn't find a chart comparing XLP to WSI, but there are data. WSI's benchmark index was up 2.28% for the year through Sept. 30, up 13.45% for the 12 months ended Sept. 30 and up a cumulative 23.52% for the three years ended Sept. 30.

By comparison, XLP is up 8.4% for the year-to-date through Sept. 30, up 12.0% for the 12 months ended Sept. 30 and up a cumulative 36.48% for three years ended Sept. 30.

WSI's three-year return is a bit of a surprise, considering how well smaller companies have done through most of the current stock market cycle. If there is a fundamental explanation for this, it might be Wal-Mart's ability to squeeze its suppliers.

We're always hearing that Wal-Mart's size allows it to demand better pricing. Consider the plight of Cal-Maine Foods ( CALM): It gets 36% of its revenue from Wal-Mart, so if Wal-Mart tells the company to lower its prices by 3%, it might be very difficult to say no.

It strikes me that the relationship between Wal-Mart and its suppliers could be testy at times. Too much reliance on a single customer is often cited as a reason to sell a stock, not buy it. WSI may turn out to be a great product, but for now I am very skeptical.

At the time of publication, a client of Nusbaum's was long TGT, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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