As the ETF industry expands the number of funds pinpointed on specific niches, it was only a matter of time before someone developed a product focused on restaurants. That time is now with today’s launch of the Restaurant ETF, which carries a catchy ticker symbol (BITE) and centers on an industry everyone can readily identify with.
The fund tracks the Bite Index composed of 45 companies that are a Who’s Who of the restaurant world and operate across various restaurant formats from quick serve and fast casual to casual dining and fine dining. The index was created by Kevin Carter, founder and CEO of Big Tree Capital, an investment advisory firm in Lafayette, Calif., that built the index for EMQQ The Emerging Markets Internet & Ecommerce ETF (EMQQ), which launched last year.
Carter says his focus has long been on emerging markets and China. But his daily encounters with the food service industry––coffee every day at Starbucks, chowing down burgers and fries with his kids at The Habit, the sheer ubiquitousness and marketing power of food chains––coupled with a number of high-profile initial public offerings from restaurant companies in recent years, sparked his interest in creating a restaurant-focused ETF.
When he didn’t find one on the market, he decided to create an index and find somebody to turn his idea into an exchange-traded product. “This is a category that people care about,” Carter explains. “Since I knew how to make an ETF, as a businessman I thought, ‘Why wouldn’t I do this?’”
He partnered with ETF Managers Group, a Summit, N.J.-based provider of private label services to help create and market ETF products.
BITE tracks a rules-based, equal-weighted index of U.S. publicly traded restaurant companies with market caps of at least $200 million and $1 million of daily average turnover. It is rebalanced semi-annually in June and December, and Carter says the equal-weight methodology will tend to give the ETF a small- and mid-cap tilt, ensuring that McDonalds and other industry giants don’t hog the limelight.
As of September 30, the index’s top five holdings were Buffalo Wild Wings, Chipotle Mexican Grill, Carrols Restaurant Group, Panera Bread and Starbucks (ranging from 3.05 percent to 2.62 percent of the portfolio). McDonalds was the sixth-biggest holding. The fund’s expense ratio is 0.75 percent, which is high for a passive ETF but in line with a number of other niche-focused ETFs.
When the EMQQ fund that employs Carter’s index debuted last November one day after the launch of the PureFunds ISE Cyber Security ETF (HACK), Carter says he predicted the former would gather more assets. And while he readily admits being very wrong about that (HACK has garnered roughly $1.1 billion in assets versus $11 million for EMQQ), he says the lesson learned is that there’s great value in a ticker symbol and the brand equity it can create.
“In the ETF world, it’s all about being first to market with an asset class people care about, and hopefully a really good ticker symbol that matches up with what you’re trying to do,” he says. “And the ticker becomes the brand.”
Carter says he conjured potential ticker symbols such as CHOW, MEAL and FOOD for the Restaurant ETF, but BITE was the one that grabbed him.
Compelling Chart
Carter points to a very long-term secular trend of people increasingly spending more money on food away from home. The Restaurant ETF’s fact sheet includes a chart that sources the U.S. Department of Agriculture showing the percentage of income that Americans spend on food outside the home has steadily grown over the past 150 years due to increased mobility provided by modern transportation, along with perceptions of convenience, quality and value provided by modern restaurants.
According to USDA, spending on food at home versus away from home was split 50-50 in 2013, which is a long way from 1869 when the trend was about 95 percent versus 5 percent in favor of in-home food.
But while the BITE fund is loaded with companies that are among the most recognizable in the world, the restaurant industry isn’t impervious to economic hard times.
“For sure, this is an industry that will be effected by economic downturns," Carter acknowledges. "But I don’t agree with conventional wisdom that says you save money by making food at home. This long-term trend [of eating away from home] has gone through all sorts of economic conditions.”
Carter posits that while people might cut back on dinners at, say, Ruth’s Chris Steak House when times get tough, they’ll still go out to eat and to cut costs might order more items from MickyD’s dollar menu. Basically, he says, the BITE index has a range of price points, some of which could benefit during economic downturns.
Time will tell, of course, but the brand recognition of leading restaurant chains and the fact that people like to eat could make this an ETF that investors might want to––and yes, this is an obvious pun that ranks low on the creativity scale––sink their teeth into.