ETF Idea: U.S. Financial Exchanges

Roger Nusbaum submits: In an article in Barron's there was a reference to the CBOE Exchange Index [EXQ]. The index is comprised of the public exchanges traded on U.S. markets. The press release I found on the CBOE website said there are six index constituents.

I got to wondering why there is no ETF for this index. There are plenty of very small sub-sectors (oil sands is one that comes to mind) that investors might want to isolate with just pure play products.

Obviously an investable product with five to ten holdings assumes much more risk than any other sector product I can think of off the top of my head.

My take on this is that plenty of people might want access to oil sands, but not be comfortable selecting an individual stock. For what its worth I am a fan of the oil sands theme. I have owned an individual stock for most clients in this area for quite a while.

Invariably, if it existed, there would be people who misuse this type of fund, but a do-it-yourselfer with a 12% weight to the energy sector overall (a modest overweight) with a quarter of his energy exposure in an oil sands ETF is not being reckless. He is probably adding volatility -- but he is not being reckless.

I think a similar example also fits with an exchange ETF, if it existed. An investor with an equal weight 20% exposure to financials with a 4% allocation to the exchanges, I would say, is simply adding volatility without being crazy.

There are a couple of capital markets ETFs out there, but they are heavy enough in the big cap investment banks that it really isn't much of an investment in the exchange stocks.

If ETFs like this ever did come, Morningstar and USA Today would crap all over them, but plenty of people allocate 5% to individual stocks like Chicago Mercantile Exchange (CME) or NYSE Group (NYX) so I don't really understand the argument that very narrow funds are bad products.

They may not be useful or appropriate for a lot of folks, but that is a different matter, and the market will either "approve" of products like this if they come or it won't.

Comments

[User 5045:]

Roger,
Clear Indexes LLC has a global index of exchanges, brokers and asset managers (roughly one third of each exposure) publishing today; the index ticker is (CGE).

Claymore Securities is launching an ETF licensed from this index during May, the filling was around 90 days ago. Feel free to contact me for details.

Andrew Corn
Clear Indexes LLC
[e-mail]

2007 Apr 30 03:29 PM