How to Invest in the Restaurant Industry Using an ETF

Markets Motley Fool

The restaurant industry has been a lucrative investment over the years. The Dow Jones Restaurant and Bar Index, made up of the biggest U.S. companies in the industry, has doubled three times in the last decade. Check out the graph below.

Continue Reading Below

Despite that performance, the industry has been difficult to invest in outside of buying individual stocks. Most exchange-traded funds (ETFs) in the space -- which let investors easily put money into a bucket of stocks -- focus on the consumer discretionary sector in general, lumping restaurants in with retailers, entertainment companies, and the like. As of last November, though, a new "pure play" option in USCF Restaurant Leaders (NYSEMKT: MENU) ETF is available for trading.

A new way to invest in restaurants

USCF Restaurant Leaders is not the first ETF specific to the industry. Before it was The Restaurant ETF, which closed in December with less than $1.5 million in assets and after only a year of existence. Restaurant Leaders is part of the USCF (United States Commodity Funds) family, famous for funds like the $2.9 billion in management United States Oil Fund.

Restaurant Leaders is a "smart beta"-driven ETF that uses "a four-step selection process that includes two quantitative screens and two dynamic screens." Seventy percent of the underlying index is made up of fast-food chains like McDonald's and fast-casual restaurants like Chipotle, and 30% is made up of full-service restaurants like Texas Roadhouse and Cheesecake Factory. The fund is rebalanced quarterly and has 31 stocks in it as of this writing.

The ETF is still small, having accumulated about $1.8 million in assets since inception, so investors who buy should consider limit orders -- which let you set the price at which you want to buy -- as shares are still thinly traded. That being said, it could be a good option for investors who want to buy into the industry without doing homework on which individual restaurants to own.

Continue Reading Below

A changing industry

The industry has been suffering for over a year from what has been dubbed the "restaurant recession." You can read more about that here, but in short the number of restaurants opened has exceeded growth in demand from diners. That has hit same-store sales figures, an important metric restaurant chains use to judge growth at individual locations.

Sales and profitability growth are the ultimate concern for investors in any business, and the challenges facing restaurants in that regard have been a concern. Things are changing, though, as technology and consumer preferences are altering what ultimately leads to business success.

On the technology front, mobile ordering, payment using apps and kiosks, and delivery scheduling are gaining in popularity. Younger generations of diners are also changing the composition of restaurant menus, from the near-ubiquity of Sriracha hot sauce to the inclusion of foods that seem more natural.

Activist investors are also getting involved with chains such as Buffalo Wild Wings, pushing for management there to offload operations to franchisees. That has the potential to shift the risk of operating a store away from the company and increase profitability for shareholders, but raises other concerns like finding qualified franchisees and food quality control.

The bottom line

It's a difficult but exciting time for the restaurant industry. While the landscape is changing, one thing is not: American's love of having someone else do the cooking. According to the National Restaurant Association, 90% of consumers say they enjoy eating out and 40% say that restaurants play an essential part of their lifestyle. That's backed up with data from the U.S. Census Bureau, which showed spending on eating out has gone up 2.7% so far this year, and has been steadily increasing since 2009.

The restaurant industry is fickle and volatile, and individual restaurant stocks can often times be no different. But with consumer reliance on food services steadily on the rise, investing in the industry as a whole could hold some long-term value. Restaurant Leaders' fee of 0.65% is higher than a passive ETF like the Vanguard Consumer Discretionary ETF, which charges 0.1%, but restaurants make up only 10% of the fund. For an actively managed fund, the 0.65% from Restaurant Leaders is well below the 1.1% average charge for active strategies according to Morningstar.

For investors wanting to bet on the future of eating out, but also wanting to minimize the risk or avoiding the homework involved in picking individual companies, USCF Restaurant Leaders could be a an option worth doing some research on.

10 stocks we like better than USCF Restaurant Leaders Fund
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and USCF Restaurant Leaders Fund wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of July 6, 2017

Nicholas Rossolillo owns shares of USCF Restaurant Leaders, Buffalo Wild Wings and Texas Roadhouse. The Motley Fool owns shares of and recommends Buffalo Wild Wings, Chipotle Mexican Grill, and Texas Roadhouse. The Motley Fool has a disclosure policy.