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November 7, 2014

Let’s Go Back to Nashville and See If We Want to Buy It

Let’s Go Back to Nashville and See If We Want to Buy It
by Eric Balchunas | Bloomberg | Nov 07, 2014
Sometimes it takes a second trip to see a place in a new light.

The Nashville Area ETF (NASH) was pretty much put into the gimmick category by many analysts and news media when it launched one year ago. Its attempt to turn local pride into profit by holding stocks of companies based in and around Nashville, Tennessee, sounded a bit too cute. The ETF has attracted just $9 million in assets.

So it was a surprise to see that it ran circles around the broader stock market this summer. It has returned 12 percent since Memorial Day, while the S&P 500 Index has returned 6 percent. One good run doesn’t make a gimmicky ETF any less gimmicky. But when you pull the thread to see where the outperformance came from, it reveals that this fund — the first-ever city ETF — has some unique things going for it.

Hospital City

NASH, which charges 0.49 percent in annual fees, has the most exposure of any ETF to hospital operators, at about 20 percent. Seven of the top 10 hospital operators in the U.S. are based in the Nashville area and collectively account for about 80 percent of the nation’s for-profit hospitals. Hospitals happen to be one of the hottest industries now, thanks to strong earnings and increasing optimism over millions of new potential paying customers via Obamacare, according to Jason McGorman of Bloomberg Intelligence.

Hospital exposure wouldn’t be such a big deal if the popular health-care ETFs had any significant exposure to this sub-sector. The two biggest health-care ETFs, the Health Care Select Sector SPDR Fund (XLV) and the Vanguard Health Care ETF (VHT), have less than a 2 percent weighting in hospitals, combined.

That’s because many of the stocks fall into the no man’s land between large mid-caps and very small large-caps. The largest, HCA Holdings, has a market cap of $30 billion, which is dwarfed by that of health-care giants such as Johnson & Johnson and Pfizer Inc., with market caps of $293 billion and $186 billion, respectively. Thus, hospitals get minuscule weightings in the large-cap health-care ETFs. There are no mid-cap health-care ETFs.

NASH’s summer outperformance came from big weightings in for-profit hospital operators such as HCA (HCA), Lifepoint Hospitals, Inc. (LPNT) and Community Health Systems, Inc. (CYH). The stocks had 3-month returns of 30 percent, 23 percent and 29 percent, respectively. With the help of more paying customers from Obamacare, this hospital exposure could act like a piston firing away inside NASH.

Why are all of these hospitals based in Nashville? Not to mention some other big corporations with over $100 million in market cap, such as Dollar General Corp. (DG) and Noranda Aluminum Holding Corp. (NOR).

Cost of Doing Business

While Nashville is the 25th-largest U.S. city by population, it is the seventh fastest-growing, according to the Census Bureau. In a recent KPMG study of the most business-friendly cities it ranked second, with strong cost advantages for labor, facility leases, expenses and property taxes. HCA came to Nashville in 2012 thanks to a $66 million tax incentive deal offered by the metro council. Tennessee is also one of the few states that levy no personal income tax.

Not to say all this drives up a company’s stock price, but it may provide a tailwind. Perhaps one day an ETF will track companies with the sweetest tax incentive deals, regardless of what city they are in. Nashville is hardly the only city doling out big incentives, but it is one of the most aggressive.

So, buy NASH? Maybe, maybe not. But a year after its launch, it does warrant a second visit.

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