FocusShares Rides Again

They're back.  Many of you reading this column have probably never heard of FocusShares, the firm that introduced four “focused” ETFs in November 2007 and closed them down less than eleven months later.  However, even as a defunct ETF sponsor, there was value in the firm's exemptive relief filing.  Scottrade recognized that value and acquired FocusShares in 2010.

Yes, they're back, but in name only.  The new “FocusShares” is mostly devoid of any ties to the past.  The new FocusShares is now a brand of Scottrade, the successful discount broker, and the products enjoy the benefits of that affiliation.  The sponsor has also teamed up with Morningstar to provide the underlying indexes and to help improve brand recognition.

FocusShares yesterday (3/30/2011) announced its new family of 15 exchange-traded funds (ETFs).  They are all based on indexes from Morningstar, all sport very aggressive industry-leading pricing, and all trade commission-free for customers of Scottrade.  The entire lineup is listed below.

Two of the ETFs, the broad market (FMU) and large cap (FLG) funds, have expense ratios capped at 0.05%.  Three have expenses capped at 0.12%:  mid cap (FMM), small cap (FOS), and real estate (FRL).  The remaining 10 sector ETFs all have expense ratios capped at 0.19%.  According to FocusShares, these are the lowest ETF expenses available to investors (within each of their respective categories).

Each underlying Morningstar index is a rules based, modified capitalization weighted, float adjusted index intended to give investors a means of tracking the overall performance of the designated publicly traded companies.

The 15 new FocusShares ETFs:

1. Focus Morningstar US Market Index ETF (FMU) (summary page)
2. Focus Morningstar Large Cap Index ETF (FLG) (summary page)
3. Focus Morningstar Mid Cap Index ETF (FMM) (summary page)
4. Focus Morningstar Small Cap Index ETF (FOS) (summary page)
5. Focus Morningstar Basic Materials Index ETF (FBM) (summary page)
6. Focus Morningstar Communication Services Index ETF (FCQ) (summary page)
7. Focus Morningstar Consumer Cyclical Index ETF (FCL) (summary page)
8. Focus Morningstar Consumer Defensive Index ETF (FCD) (summary page)
9. Focus Morningstar Energy Index ETF (FEG) (summary page)
10. Focus Morningstar Financial Services Index ETF (FFL) (summary page)
11. Focus Morningstar Health Care Index ETF (FHC) (summary page)
12. Focus Morningstar Industrials Index ETF (FIL) (summary page)
13. Focus Morningstar Real Estate Index ETF (FRL) (summary page)
14. Focus Morningstar Technology Index ETF (FTQ) (summary page)
15. Focus Morningstar Utilities Index ETF (FUI) (summary page)

There is a single prospectus covering all 15 new Focus Morningstar ETFs (pdf) and a new FocusShares website to house all the fund data.

Success for the new FocusShares is far from guaranteed, as the brand faces numerous obstacles.  First and foremost is the formidable entrenched competition of the other major commission-free ETF offerings:

• Vanguard and its extensive low cost ETF lineup
• Schwab and its house brand of ETFs
• Fidelity and its partnership with numerous iShares ETFs
• Ameritrade's ETF Supermarket with more than 100 name brand ETFs

Second, Morningstar may be a recognizable name, but not in the indexing world.  Three former Claymore Morningstar SuperSector ETFs were closed in December 2009.  Additionally, there are 12 existing ETPs based on Morningstar indexes that are struggling to attract investor attention (and assets).

Third, FocusShares must overcome the stigma of having closed up shop once before.  As reported in ETF Deathwatch for November 2008, FocusShares ISE CCM Homeland Security (former ticker = MYP), FocusShares ISE Homebuilders (former ticker = SAW), FocusShares ISE SINdex Fund (former ticker = PUF), and FocusShares ISE-REVERE WalMart Suppliers (former ticker = WSI) are no longer with us.

Fourth, the new flagship Focus Morningstar US Market Index ETF (FMU) is encountering difficulties today, its second day of trading.  About a half hour after the market opened this morning, FMU was trading at $25.37.  Three minutes later, an apparent sell order of just a few hundred shares, momentarily took the price all the way down to $22.88.  That poor seller was robbed of about 10% of his proceeds because the market maker apparently had no depth on his bid.

The same problems were visible in the charts of FLG, FBM, FCQ, FCD, FFL, FHC, FIL, FRL, and FUI.  The five ETFs that escaped a similar fate were likely unscathed due to trading levels too light to trigger these problems.  If you feel inclined to step into these new ETFs, be sure to use a limit order.

FocusShares rides again, but only time will tell if this ride is more successful than the first.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.