Stocks: Get Ready for TARP ETFs

Leave it to Wall Street to squeeze even more bounty from the bailout. Last week saw the launch of the Nasdaq OMX Government Relief Index, which tracks 24 companies that have received at least $1 billion from the Troubled Asset Relief Program. According to Nasdaq OMX Group (NDAQ) Chief Marketing Officer John Jacobs, an option, ETF, and structured note ("or two") are currently in the works.

The idea is that a product based on this index would offer investors the opportunity to get in on, and track the performance of, the mixed basket of downtrodden companies in which the government is "investing,", including Citigroup (C), General Motors (GM), and American International Group (AIG).

While there's no way to invest in the Government Relief Index yet, if and when the option, ETF, and structured notes launch, investors should certainly be wary: Since Jan. 6, 2009, the index is down 13.7%, vs. the S&P 500's 6.7% loss.

One-Stop TARP Shop?

Jacobs says one goal of this equal-weighted index is to measure whether TARP is an effective use of taxpayer dollars. But will the public buy it? "On the surface [a TARP ETF] sounds like another dumb idea, but in reality it may be heavily considered," says Gary Gordon of "Everyone was saying I'd like to be doing what the government is doing. Do you know of some other way to get [TARP companies] in one place? You'd have to do it piecemeal."

In his latest investment outlook, Pimco's Bill Gross suggests that following the government's lead may be a good strategy—if done correctly. "Buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; AAA asset-backed securities such as credit-card, student loan, and auto receivables," Gross wrote.

No word yet as to which ETF player will offer the first retail product. Barclays Global Investors (BCS) and State Street Global Advisors (STT), the two largest providers, with more than 85% of total ETF assets between them, both declined to comment. Gus Sauter, chief investment officer at the No. 3-ranking Vanguard Group, said the Valley Forge (Pa.)-based fund shop has no plans to offer a TARP-themed ETF, noting, "It seems like more of a marketing opportunity than an investment opportunity."

In the case that this index really takes off, Jacobs points out that more than 120 U.S. companies have taken TARP money, so "there's always room for other versions." And as the relief programs expand both in the U.S. and abroad, Nasdaq plans to launch a series of Government Relief Indexes that are sector and/or region specific, he says.

Before it's here, it's on the Bloomberg Terminal.