For all of you fans of Schoolhouse Rock, you understand the magic number. Things begin to happen once you use it, or in the case of ETFs achieve it.
There is a check list used by analysts, traders, financial advisors and others who influence the industry to determine when a fund is ready for serious consideration.
The magic number is 100. It is defined as 100,000 shares on average traded per day and the real magic: $100 million in assets in the ETF.
Countless articles and blog posts have been written about the death watch that all ETFs face which have not achieved the magic numbers. Yet the bulk of all ETF products have not yet achieved these elusive goals. The industry is still young. Issuers are investing in strong investment themes, analysts are trying to perform wheat/chaff separation on hundreds of funds and investors are seeking the winners.
Claymore/Beacon Global Timber Index (NYSEArca: CUT) has recently jumped over these hurdles and is proof of two very important things for analysts and investors to consider.
The first thing I have learned from this experience is that it can take over two years to gain real traction. The index (which my firm designed, maintains, researches and publishes, originally as Clear Indexes and now Beacon Indexes) was launched in the fall of 2007 and the ETF that tracks it soon followed.
Our index is based on a time proven investment concept that has several differentiating characteristics. That stated; this investment thesis is not plain vanilla and requires education by the issuer in partnership with its index provider. Although this index is an equity synthetic and not a fund owning timberland on a global basis, the equities that comprise the index fit the desired description. Each public company either owns and manages timberland as its primary business or owns and manages timberland as a primary source of raw materials. These companies are global and in fact our weighting of each security is more focused on where timberland is owned and managed than where each firm is domiciled or its market cap. This is still misunderstood by some analysts.
Packaging remains the number one use of timber when harvested and owning the land under it provides additional revenue ranging from recreation, to extracting additional natural resources when the trees are harvested. Carbon credits may be a revenue source in the near future. I have more fully explained many of these concepts (bio fuel, furniture, wood pellets, non-perishable natural resource) on this blog and have received many calls and emails from interested analysts and advisors who want to dig deeper into the investment thesis and the specifics of index construction and individual securities. We welcome the discussions.
The second thing I learned from this experience is that timing and performance (live and back-tested) are important. The live index (and ETF) doubled the return of the S&P 500 with a lower beta from the market bottom of 3/9/09 through 12/31/09. Performance counts, but we are still in the red from the first publishing of the index and when I purchased the ETF in 2007.
Reaching the magic number is an important milestone; to acknowledge and to step up the due diligence process with a wider group of analysts and advisers. Clearly it is just a milestone. A strong return for our investors and $1 billion AUM, then we will call it success.
Disclosure: Mr. Corn is the Chief Investment Officer - Equities of Beacon Trust Company. He directs index design, research and maintenance as well as the firm’s active equity strategies. He is long CUT.