Knowing When to Enter a New ETF Investment

As I shared with you a few weeks ago, the exchange-traded fund (ETF) market has become increasingly creative in its offerings. At one time, ETFs simply mimicked the various market indices. But over time, we’ve seen the rise of designer ETFs, such as PureFunds ISE Cyber Security ETF (NYSE: HACK), which, you guessed it, invests in cybersecurity stocks; PureFunds ISE Mobile Payments ETF (NYSE: IPAY), which invests in companies in and around the mobile payments space; and the U.S. Global Jets ETF (NYSE: JETS), which invests in airline operators and manufacturers all over the world. Those are just a few examples, with many more with new ones cropping up every so often.

As part of my trading service, Power ETF Trader, which combines investing in ETFs with call options on those ETFs, I tend to keep abreast of new and upcoming ones and zero in on them if they happen to overlap or reflect an aspect or two of one of my PowerTrends. For example, the PureFunds ISE Cyber Security ETF (HACK) that I mentioned above sits in the middle of my Safety & Security PowerTrend, while the PureFunds ISE Mobile Payments ETF (NYSE: IPAY) addresses one aspect of my Cashless Consumption PowerTrend. And for those of you who are wondering, yes, both of these ETFs are in my Power ETF Trader service.

Recently, I read about a new ETF — the Restaurant ETF, which carries a rather interesting ticker symbol, BITE. The fund tracks the Bite Index created by Kevin Carter, founder and CEO of Big Tree Capital, an investment advisory firm in Lafayette, California. The Bite Index is composed of 45 companies that are a “Who’s Who” of the restaurant world and range from quick-serve restaurants (QSR) and fast casual to casual dining and fine dining. Top holdings, as of Nov. 3, include McDonald’s (NYSE: MCD), Starbucks (NASDAQ: SBUX), Carrols Restaurant Group (NASDAQ: TAST), Dave & Busters (NASDAQ: PLAY), Chuy’s Holdings (NASDAQ: CHUY) and Restaurant Brands (NYSE: QSR). For those who are unfamiliar with Carrols, it’s a Burger King franchise. Another unfamiliar one, Restaurant Brands, is the company behind Tim Horton’s and Burger King. Lastly, Chuy’s is a Mexican and Tex-Mex food restaurant.

As someone who likes to eat out, I can see the allure of such an ETF, and, in many respects, it can be rather relatable. But just like evaluating a stock, we need to make sure an ETF is more than just a good idea. That means checking the fundamentals, as well as the liquidity and other qualifiers around the security itself. As evidenced in the chart below, oil prices have dropped considerably year over year but, even so, retail sales of food have been sluggish during the last few months.

The National Restaurant Association — yes, it seems there is a trade association for almost everything — is a good source of monthly data on the restaurant industry. In this case, I find its Restaurant Performance Index, which is a monthly survey of restaurant operators nationwide, to be rather helpful. Inside the September 2015 reading, the most recent one published, 51% of respondents reported same-store sales increases compared to September 2014. Only 35% expected higher sales in the coming six months, and just 16% expect the economy to improve in the coming six months. With higher minimum wage levels set to hit in the coming months, I have some concerns about restaurant earnings expectations for 2016.

Even if we could get comfortable with the fundamental outlook, we still have to look at the market cap and average trading volume for BITE to make sure it passes muster. As of Nov. 3, BITE has $2.5 million in assets with just 100,000 shares outstanding and an average daily trading volume of 6,737 shares. No matter how you look at those metrics, BITE is a rather illiquid security.

For those interested in investing in the food and beverage industry, a more liquid ETF to consider would be the PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ), which has an average daily volume of roughly 115,000 shares and net assets of more than $190 million. Those figures don’t make PBJ the largest or the most liquid ETF ever, but if you’re looking for exposure to Kroger (NYSE: KR), Starbucks (NASDAQ: SBUX), PepsiCo (NYSE: PEP), General Mills (NYSE: GIS), Mondelez International (NASDAQ: MDLZ) and other companies in the food and beverage space, PBJ could be one to roll up your sleeves and bite into.

In case you missed it, I encourage you to read my e-letter column from last week about the unexpected benefits of earnings misses. I also invite you to comment in the space provided below.