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ETF News And Commentary

Sanghamitra Saha

BITE vs MENU : Will the War Whet ETF Investors' Appetite?

PBJ MENU BITE

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The restaurant sector is not investors’ top choice right now, with the Zacks Industry Rank being in the bottom 33% segment at the time of writing. But with more and more restaurants going public in last few years, the sector’s size and appeal to investors has surely broadened.

Agreed, Moody’s Investors Service pointed out that higher car loans, rents, medical bills and affordable groceries curbed consumers’ tendency to eat away from home lately. But the present upheaval may be seen as a short-term blip.

Investors should note that “the percentage of income that Americans spend on food outside home has been steadily growing over the last 150 years", if we go by the factsheet of The Restaurant ETF (BITE - Free Report) issued on October 13, 2016 (read: 10 ETFs to Watch Today and After The Election).

Also, the present slowdown can definitely offer up a ‘buy-on-the-dip’ situation as the industry has been displaying sluggish trends after an extended upturn. Surely, the operational fundamentals are going against the sector at this moment, but things will likely be better off once the threats ease.

Finally, the economy has been steadily growing with the strengthening of the job market. And with oil prices still low, consumers continue to save up at the gas stations.

As per restaurant.org, the Current Situation Index, which gives an indication of the current trends in same-store sales, traffic, labor and business spending, was 101.0 in September, up 2.5% from August. The Expectations Index was 100.7 in September – the same as in August. Though the reading slipped below 101 for four months in a row, it was still in the growing zone at above 100.

Even issuers’ enthusiasm in rolling out restaurant ETFs is still intact. This is because lately, USCF ETF Trust launched a restaurant ETF, namely USCF Restaurant Leaders Fund (MENU - Free Report) . With this, the industry has two pureplay restaurant ETFs. Below we detail these two funds and highlight their key differences (read: How Does Q3 Earnings Taste to Restaurant ETF?):

MENU in Focus

The fund looks to track the Restaurant Leaders INDXX Index and charges 65 bps per year for its exposure. The passive fund will likely invest in all the securities on the index and apply almost the same weight as the underlying index, per the filing.

The index takes into consideration the common stocks of the U.S. and international restaurant companies. It has a tilt toward Quick Service Restaurants (QSR) with about 70% focus. There are more than 30 stocks in the index. No stock occupies more than 3.35% of the index, at the time of writing. This fund has a tilt toward small-cap stocks (read: Confident About Trump Rally? Play These Small-Cap Blend ETFs).

BITE in Focus

The fund offers exposure to 41 restaurants spreading across variety of categories. Del Taco Restaurants Inc (3.47%), Dominos Pizza Inc (3.09%) and Papa Johns International Inc (3.10%) are the top three holdings of the fund. It charges 75 bps in fees. The fund also has heavy focus on small-cap stocks.

Bottom Line

As per the structure of the fund, both products do not have much of a difference. Both focus more on the smaller-cap U.S. restaurant stocks, have low company-specific concentration risks and have solid exposure to growth stocks.

MENU hit the market this month while BITE entered the ETF world at October-end 2015. BITE has amassed about $2.71 million in assets so far. However, MENU may outperform BITE in terms of asset growth as the former charges a lot lower than the latter. This could turn out to be a key deferential in the long run.

Investors should also note that apart from BITE, another ETF PowerShares Dynamic Food & Beverage Portfolio (PBJ - Free Report) may also give MENU some competition albeit feeble as the duo do not hail from exactly the same industry (see all consumer discretionary ETFs here).

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