Putting Private Equity On Your Side With An ETF

Private equity is often thought of as territory reserved for endowments, pension plans and other institutional and high net worth investors.

Some exchange traded funds make the private equity universe more accessible to ordinary investors. That group includes the Invesco Global Listed Private Equity ETF PSP.

What To Know

As is the case with any ETF, the Invesco Global Listed Private Equity ETF has its pros and its cons. Notably, the fund charges 2.03 percent per year, the equivalent of $203 on a $10,000 investment. That's well above average for a passively managed ETF.

Additionally, publicly traded private equity companies reside in the financial services sector, meaning the group is coming off a brutal 2018. PSP lost 15.1 percent last year, meaning it was 210 basis points worse than the Financial Select Sector SPDR XLF.

Why It's Important

Historically, private equity has performed well when broader equity benchmarks declined.

“Private equity tends to outperform in periods of falling public equity prices, having done so in 19 of the 20 quarters since 2001 in which public equities registered negative returns,” said Morningstar in a recent note.

PSP holds 62 stocks with an average market capitalization of $12.75 billion. The ETF targets the Red Rocks Global Listed Private Equity Index. That index includes “business development companies, master limited partnerships and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies (collectively, listed private equity companies),” according to Invesco.

“Since 2001, PE funds have outperformed the S&P 500 in 19 of the 20 quarters in which public equity returns were negative,” said Morningstar. “Skeptics will claim that PE firms are simply being overly optimistic (or even naive) during these public market drawdowns, but we find a hesitance by PE funds to aggressively mark to market regardless of the direction of the change. Indeed, in the 20 quarters since 2001 when public equity returns exceeded 5%, PE returns have trailed 15 times.”

One challenge facing PSP over the near-term is an approximately 40 percent weight to growth stocks, an investment factor that's out of favor right now. Additionally, PSP has a 12-month distribution rate of 6.68 percent, meaning it's a high-yielding asset that could be vulnerable to more interest rate increases.

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