Private Equity ETF

What is Private Equity ETF?

Private Equity ETF is a type of exchange traded fund that only invests in companies that do not trade on stock exchange and provides an opportunity even for small investors to participate and gain from such exposure.

Explanation

Private Equity ETF

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Source: Private Equity ETF (wallstreetmojo.com)

Example of Private Equity ETFs

PSP – Invesco Global Listed Private Equity ETF is one of the most popular ETFs in this domain. The ETF invests a minimum of 90% of its AUM in around 40 to 75 companies, which form part of the Red Rocks Global Listed Private Equity Index (Index).

Some important fund details are as follows:

Allocation Details

Assets of the funds are mostly allocated in the Financial sector approximating to 70.79% as of 24th December 2019 as per the information published in the Invesco website, and the remaining 30% is spread across close to 9 other sectors, of which the Industrial sector leads at 10.25%

Further, according to the country-wise allocation, as on the same date, the US holds 39.70% of the total AUM, and the UK holds 18.09%

Based on the nature of the investment, as on 23rd December 2019, the ETF had the following percentages:

Private Equity ETF Example

#1 – Performance Overview

As compared to the underlying index, Red Rocks Global Listed Private Equity Index (Index), The ETF has been lagging behind in terms of the growth per $10000 as of 30th September 2019, and this is due to the variation in the securities composing the two. The fund’s growth trajectory follows a similar pattern as that of the underlying index because most of its composition contains the same securities; however, the difference in asset allocation has not been favorable to the ETF.

In absolute terms, the value of $10000 became $27,606 for the underlying index and 24,212 for the ETF. Therefore we can say that the tracking errorTracking ErrorTracking Error Formula measures the divergence arising between the price behaviour of the portfolio and the price behaviour of the respective benchmark. Tracking error = Rp-Ri (Rp = return from the portfolio, Ri = return from the index)read more for this ETF is non zero, and it has not been able to fully replicate the underlying index.

#2 – Risk Overview

The risks involved in investing in this ETF are as follows:

Conclusion

So we can understand that the PE ETF is a way through which the relatively smaller investors can get exposure to privately held companies in order to diversify their portfolio. Although this exposure is possible, investment in ETF can only be made in multiples of creation unit blocks, which is not very small, and therefore we say such an investment is only ‘relatively’ small when compared to a direct investment in the private equity domain.

It is a means for the investment management firms to generate capital that they might invest in such companies in expectations of huge returns; however, the risk of such an investment is higher than investing in any other listed securityListed SecurityListed security refers to a financial instrument such as stocks, bonds, derivatives, etc., registered with and readily tradable on the stock exchanges like NASDAQ and NYSE.read more.

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