Eric Dutram: After an early year lull, ETF issuers are back on the product development trail with a series of new launches. While most of these have been innovative-option focused funds, we have also seen some expansion in the equity world as well.
The latest ETF on this front is from ProShares, a company that is arguably best known for its leveraged and inverse ETFs. However, the company is slowing branching out beyond these geared products, and its latest beachhead in the unleveraged ETF world comes to us in the form of their brand new Global Listed Private Equity ETF (NYSEARCA:PEX).
PEX in Focus
This ETF looks to track the LPX Direct Listed Private Equity index, before fees and expenses. This approach looks to give the fund wide exposure to the world of private equity, albeit just those firms that are listed on public exchanges around the globe.
These companies include firms that have the economic characteristics of private equity, but are easily tradable on exchanges. This approach gives investors exposure to a wide swath of companies, allowing for an incredible level ofdiversification across not only geographies, but also investment and financing styles as well.
In terms of holdings, firms like American Capital Corp and Ares Capital dominate for U.S. companies, while companies like Onex and 3I Group lead the international charge. In total, the ETF consists of about 30 securities, with a definite focus on mid and small cap firms.
Investors should note though, that fees are rather high in this product thanks to a heavy acquired fund fee. The total expense ratio comes in at 2.54%, due to 1.94% in acquired fees, 1.00% in investment advisory fees, and then a fee waiver to get the total at 254 basis points a year.
Obviously, this makes PEX somewhat pricey by traditional ETF standards, and thus might not be a great choice for those seeking a low cost avenue. However, it may be one of the only ways to target global private equity in exchange-traded form, so somewhat of a premium should be expected (also see Who Says iShares ETFs Aren’t Cheap?).
How Does It Fit In A Portfolio?
This ETF could be appropriate for those looking for a liquid global choice to play the private equity market. Investors clearly have plenty of cash on hand, and with asset prices soaring, these professional investors could have an easy time of increasing shareholder value.
These private equity firms may also help to diversify a portfolio, not only from a geographic, but also an investment perspective as well. That is because these firms engage in a variety of strategies—buyouts, growth, etc.—via a number of styles—taking equity stakes or debt positions—that are not always available to the everyday investor.
It is true that the ETF is a relatively high cost choice in the space though. The expense ratio over 2.5% is likely to be prohibitive to many cost-focused investors. Bid ask spreads could also be relatively wide—at least initially—depending on how popular the ETF is, and how easy it is to trade the international shares.
Still, this new ETF is one of the only options available in the space, and acquired fund fees do appear to be the norm in the segment (also see Are Analyst Recommendation ETFs Worth the Cost?).
Can It Succeed?
This private equity fund faces a very rocky road to success. The ETF faces stiff competition from a heavily entrenched, and similar, competitor, the PowerShares Global Listed Private Equity Portfolio (NYSEARCA:PSP).
This ETF has been around since 2006 and it holds a robust portfolio of over 60 stocks. It also charges investors a high expense ratio of 2.32%, but this is obviously less than what investors see in PEX (read 11 Great Dividend ETFs).
Given this expense differential and the higher volume of PSP, it may be somewhat difficult for PEX to accumulate assets initially. Instead, the new ProShares fund will have to rely on some solid outperformance and fresh private equity ETF demand in order to power this product to prominence in what is likely to be a very tough corner of the ETF market.