New ETF Tracks ... a City?

NEW YORK ( TheStreet) -- One criticism of the ETF industry is that it creates gimmicky funds that have little apparent investment merit.

Some of the gimmicky funds do find a market, but many do not.

Thus, It will be interesting to see how the recently listed Nashville Area ETF ( NASH) from new fund provider LocalShares fares.

As the name suggests, the ETF's holdings are all headquartered in or near Nashville, Tenn.

The idea of a geographic ETF might ring a bell. A few years ago there was an Oklahoma ETF that was a proxy for small-cap energy stocks and a Texas ETF that which was a broader, mega-cap ETF tilted toward the technology sector. Neither fund survived.

The Nashville ETF is a proxy for small-cap stocks in the health care sector. Of the fund's 24 holdings, 12 are health care-related. The ETF's prospectus says the health care exposure is 32%, but my review of the holdings published on the fund's Web site shows the exposure to be 45%. The prospectus notes that the fund could be vulnerable to the Affordable Care Act, otherwise known as "Obamacare."

Beyond the health care stocks there are some interesting names in the fund including Tractor Supply ( TSCO), which has a 6.1% weighting; Cracker Barrel ( CBRL), which has a 5.6% weighting; and for-profit prison company Corrections Corp. of American ( CXW), which has a 4.6% weighting. The largest company in the fund is Delek Holdings ( DK), an energy company, which has a 7.2% weighting.

Company selection and weighting in the fund is based on a proprietary model that uses momentum, valuation and positive earnings trends.

In an interview with IndexUniverse, LocalShares CEO Elizabeth Seigenthaler Courtney discussed the model underlying NASH. It focuses on cities that derive economic benefits from the collection of locally headquartered public companies. Other cities or counties where a lot of jobs are created and perhaps a lot of tax revenue is generated from public companies could be the basis for future similar ETFs.

I'll be candid: I'm not sure what the purpose of this fund is. Civic pride could certainly attract assets to the fund, and assets could come if the fund performs well. There is also an argument to make that other city or state funds might be more useful in a diversified portfolio. For example, Minnesota has a lot of diverse companies that would make for a broader fund.

The now-defunct Oklahoma ETF had a much more compelling investment thesis, because it tracked shale-related companies, but NASH in its current weighting boils down to a bet on small-cap hospitals and longer-term care facilities, and that is likely to be a tough sell.

That a fund might be gimmicky is not a reason that it should not exist.

LocalShares is taking entrepreneurial risk based on research it has conducted and it could be right in believing there will be demand.

However, if an ETF like the Global X Social Media Fund ( SOCL), which owns very popular stocks like FaceBook ( FB) and LinkedIn ( LNKD) and is up 35% year to date, can only attract $12 million in assets, then it makes sense to wonder whether NASH can do much better.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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