This Restaurant ETF Has Endured Chipotle's Slump
Chipotle Mexican Grill Inc.'s (NYSE: CMG) fall from grace at the hands of a worsening E. coli scare has been staggering. In October, shares of Chipotle spent some time trading north of $750. On Tuesday, the stock closed at $494.61.
That precipitous slide for Chipotle has been a bit of a drag on the The Restaurant ETF (NYSE: BITE). BITE, which debuted in late October, bringing to life an idea that was born in this space, came to market just as Chipotle's share price losses were accelerating. Obviously, the stock's slide is continuing as highlighted by Tuesday's entry into the 52-week low club.
As Benzinga reported yesterday, “Initially, the E.coli scare was limited to the Pacific Northwest, with 43 stores being closed despite only 11 of them having actually been associated with the infections. The problem then spread across 9 states and 47 cases were confirmed to be Chipotle-related, although within a narrow time frame of October 19 to November 13.”
Analysts at JPMorgan, which downgraded shares of Chipotle to a neutral with a $555 price target, said, “At this point, even rational and informed consumers could potentially be given reason to pause when choosing Chipotle over the plethora of fast casual competition in the marketplace.”
While none of this good news for the limited amount of ETFs holding shares of Chipotle, BITE has held up relatively well thanks to the equal-weight methodology used by the new ETF. Over the past month, Chipotle is off about 11.6 percent while the Consumer Discretionary Select Sector SPDR (NYSE: XLY) is lower by four percent. BITE is down just 0.77 percent over the same period.
BITE “tracks The BITE Index, an equal-weighted index of all restaurants that are publicly traded in the United States with a market cap of $200 million or greater and $1 million of daily average turnover. It is rebalanced semi-annually in June and December and is currently comprised of 50 companies,” according to a statement.
As a weighting methodology, equal weight has recently received increased attention, because it is generally seen as one of the forefathers of the now ultra-hot smart or strategic beta phenomenon. It is a good thing BITE is an equal-weight ETF.
If the Restaurant ETF adhered to traditional market cap weighting, Chipotle would likely be the ETF's fourth-largest holding behind McDonald's Corp. (NYSE: MCD), Starbucks Corp. (NASDAQ: SBUX) and Yum! Brands Inc. (NYSE: YUM). And if that was how BITE was built, an educated guess says Chipotle would command a weight of eight percent or more in the ETF, meaning BITE's Chipotle-induced losses would be far more severe than they are.
Currently, BITE holds 41 stocks with Chipotle occupying the 36th spot and the ETF's investors ought to be pleased the fast-casual burrito giant is relegated to such status.
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