Improving growth prospects at home and signs of recovery overseas brought bullish momentum into full force in 2013, allowing major U.S. equity indexes to climb into record high territory. The S&P 500 gained more than 28% during the year, while the Dow Jones Industrial Average logged in a 27% gain – its best year since 1995. Not surprisingly, some of the more “high risk” equity ETFs turned out to be 2013′s top performers: solar, biotechnology, and internet ETFs managed to log in double- and triple-digit returns [see The Best Performing ETFs of 2013].
One particular corner of the market, however, has been flying under the radar for many ETF investors: private equity. According to analysts, investors in private-equity funds are expected to receive a record amount of cash in 2013.
The appeal of private equity exposure is two-fold; first and foremost, this asset class has historically been uncorrelated to broad equity markets, making it a worthy diversifying agent for any portfolio. Second, this corner of the market provides investors with a basket of opportunities that may include owning the next revolutionary company before it debuts on a public stock exchange. Historically, having a stake in private equity was reserved only for the wealthy. Now, however, ETF investors are able to make a play in several ways.
Currently there only two funds that offer targeted exposure to private equity: PowerShares’ Global Listed Private Equity Fund Portfolio (PSP, A-) and ProShares’ Global Listed Private Equity ETF (PEX, C). PSP is the most popular option with nearly $500 million in AUM and an average daily trading volume of just under 300,000.
The fund tracks an index that consists of securities, ADRs and GDRs of 40 to 75 private equity companies, including business development companies (BDCs), master limited partnerships (MLPs) and other vehicles whose principal business is to invest in, lend capital to, or provide services to privately held companies. In 2013, PSP gained just over 37% and the fund currently yields 20.95% [see Periodic Table of ETFs: What Popped and What Dropped in 2013].
Business Development Company ETFs offer another opportunity for investors looking for an indirect play, as these funds invest in firms that lend money to small and mid-sized companies, often establishing equity stakes in the companies as well. As such, BDC ETFs effectively offer exposure to a wide array of privately held companies through the broad-based portfolios of the component companies. There are currently three ETFs that offer exposure to BDCs:
- ETRACS 2X Leveraged Long Wells Fargo Business Development Company Index (BDCL, A)
- E-TRACS Linked to the Wells Fargo Business Development Company Index (BDCS, B)
- Market Vectors BDC Income ETF (BIZD, C+)
Next year, analysts expect private equity players to be very active dealmakers, making the more accessible ETF options outlined above a compelling play for the year.
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Disclosure: No positions at time of writing.