The alternative ETF’s performance, not its fees, should make investors look twice.
Private equity funds, which are used by wealthy investors to access takeover deals, are having a banner year on the deal-making front, thanks to the Federal Reserve’s continuing easy money policies, and some ETFs that offer retail investors access to these funds are riding their coattails to strong gains.
ETFs such as the $433.5 million PowerShares Global Listed Private Equity Portfolio ETF (PSP | D-62), which tracks an index of 40 to 60 publicly listed private equity firms, is up 24.21 percent year-to-date, according to data compiled by IndexUniverse.
Courtesy of StockCharts.com
PSP has also experienced inflows of $84.77 million in assets year-to-date. Its much smaller competitor, the $4.4 million ProShares Global Listed Private Equity fund (PEX | F-49), which launched in February, has returned 7.0 percent in the past three months.
A total of 666 private-equity-backed buyout deals with total aggregate value of $60 billion were announced in the third quarter, representing a 19 percent increase over than the same year-earlier period, according to Preqin, a firm that does research on private equity, hedge funds and real estate.
The Fed’s recent decision not to begin “tapering” its quantitative easing definitely helped private equity shops, because most of them finance their deals with debt. Moreover, it looks likely that the Fed will keep its ultra-loose monetary policy in place for longer than expected, given fresh uncertainty in the macro outlook caused by the budget-related standoff in Washington, D.C.
“Certainly, private equity firms benefit from low-interest-rate environments and have definitely taken on a lot of debt,” said Spencer Bogart, an ETF analyst at IndexUniverse. “If rates go up, that would present head winds for the private equity business.”
Private Equity On The ‘Cheap’
While ETF investors aren’t paying the usual 1.5 percent management fee and 20 percent performance fee to access private equity deals, they are nonetheless paying 2.19 percent, or $219 for every $10,000 invested, for PSP, and 3.13 percent, or $313 for every $10,000 invested, for PEX, making them two of the most expensive ETFs on the market.
But their fees pale in comparison to the $21 million Market Vectors BDC Income ETF (BIZD | B-0), which launched in February and sports an insanely high expense ratio of 8.33 percent, or $833 for every $10,000 invested. That earns it the dubious honor of having the highest expense ratio of any U.S.-listed ETF.
The fund’s fees can be attributed to acquired fund fees of 7.93 percent that are links to costs related to the underlying private equity funds that the ETF owns. Those costs are passed on to the ETF which, in turn, are passed on to the investors.
“This ETF is currently buying into 26 private equity funds, but if the ETF moves from 26 to 30 holdings, these could adjust the expense ratios,” warned Bogart.