Can cities be publicly traded?
The city of Nashville can now be bought and sold on the New York Stock Exchange. Well, that is an overstatement. More accurately, as of the opening bell on August 1st, the Nashville Area ETF (Exchange-Traded Fund) was listed on the New York Stock Exchange as NASH for about $25 a share. This is the first time that a city-based ETF has been developed.
But what is an ETF? ETFs are investment funds that can be bought and sold on an exchange like a stock. Typically these funds are designed to track a particular market index such as the S&P500. Buying shares of these ETFs is a bit like buying shares in each of the constituent securities in order to replicate the performance of the index. Traditionally, ETFs have been designed to track a particular industry sector or commodity, but geographically targeted ETFs such as NASH include a number of companies that are located in a particular region. State specific ETFs have been tried before; a few years ago, a pair of ETFs targeting companies in Oklahoma and Texas respectively were unsuccessful in attracting investors, despite high expectations and strong performance.
About a year and half ago, a group of local Nashville area companies decided to establish the Nashville ETF in order to offer a locally focused investment option. All the 24 companies included in the ETF portfolio have headquarters in and around Nashville. All the companies have market capitalizations of more than $100 million and their average daily volume of traded stock exceeds 50,000 shares. This investment option enables the people of Nashville (or anyone else) to invest in the city's local economy. The portfolio manager for NASH claims that Nashville and its companies are "poised to seek long-term prosperity." The company also claims that investors will benefit from Nashville's "dynamic and diversified base of publicly-traded companies" with just one product. So the city's investment climate is good, both for the companies and for the potential investors.
Now, I put on my urban planner hat: why Nashville? According to the ETF management website: location, location, location. Twenty-three states are located within a 500-mile radius of Nashville. In addition, Nashville is connected to three major interstate highways. Other positives are low tax base, diverse economy, high quality workers, higher education institutions, and low cost of living.
This may or may not be a very good idea for a city. But it is certainly an American one. According to one of the CEOs behind the fund, the idea came from the fact that "every city's economy functions as its own ecosystem with unique resources, legislation and demographics inextricably interwoven." The community reacted to the news differently when the NPR story came out. One reader wrote: "It strikes me as a pretty bad idea to index your local economy into a fund." While another one appreciated the idea that "you can invest locally in a general way. When local economies are independent and strong, it makes the overall economy more resilient, investing locally make sense on all levels." While this idea is just a geographically targeted investment tool and cannot really be sold as the "local" agenda, it makes me wonder if it can be used as a municipal finance tool or as an instrument for Local Economic Development.
Well, the CEO quoted above is right. American cities are run as independent economic ecosystems (or corporations?); one city can declare bankruptcy while the other one's local economy is traded on the stock market. American cities have long competed to bring large companies in, offering them all sorts of tax-based and non-tax based incentives, in exchange for potential jobs. In this environment, does the successful mayor act as a CEO, running the city as a business? How could the spillover effects be leveraged to strengthen social programs and provide public services? Just wondering.
Investments in infrastructure and education have made Nashville "worth" what it is today. When the stock price dips, will business leaders call for more of the above or less regulation and taxation? Unfortunately, it will be the latter. The ETF will become just another indicator to justify a race to the bottom.
It is interesting to look at how the ETF fund will itself invest. Based on the link to the actual announcement provided above, it appears that the intention is to invest Nashville ETF fund assets mostly into small-cap companies. In other words, the fund is essentially converting funds targeting the performance of the largest Middle Tennessee companies into investments in promising smaller ones. This seems a highly interesting model for MSME access to finance in developing countries, where only the largest companies attract any financial investor interest.