PowerShares has listed a first of its kind for the exchange traded fund (ETF) industry: it’s made up of a portfolio of closed-end funds (CEFs).
The PowerShares CEF Income Composite Portfolio (NYSEArca: PCEF) is based on a recently created index from S-Network Global Indexes LLC, The S-Network Composite Closed-End Fund Index (Ticker: CEFX), which tracks the performance of yield-oriented, CEFs. The index holds 71 CEFs traded in the United States that range from $100 million to $2 billion in market capitalization, with expense ratios below 2%.
Owning a basket of CEFs has some clear benefits. “Most people who own CEFs don’t own enough, and you can get hurt by owning one that falls out of favor,” says Paul Mazzilli, senior advisor and member of the index committee at S-Network Global Indexes. PCEF is broadly diversified across a range of CEFs that hold a variety of debt types.
Twenty-seven of the CEFs held in the fund invest primarily in taxable, investment-grade fixed-income securities; 15 invest in high-yield fixed-income and 29 primarily use an equity option writing strategy. The fund issues monthly distributions and will rebalance quarterly. The yield on the ETF is currently above 8%.
Another issue with CEFs is that advisors lose a lot of time doing research, Mazzilli says. The advantage of an ETF that holds CEFs is that the managers will take care of that for investors.
CEFs have a set number of shares and do not issue more shares as demand grows. Prices are driven by demand, not the NAV.
Joesph LaCorte, President of S-Network, stated that “CEFX is the first index to track the performance of U.S. closed-end funds whose principal investment objectives are to produce taxable and tax advantage yields.”
According to Closed End Fund Index, the Index covers three main CEF sectors:
- Investment-Grade Fixed-Income. CEFs that invest in government securities, corporate bonds, agency bonds and foreign debt securities rated BBB or higher.
- High-Yield Fixed Income. CEFs that invest in corporate, emerging market debt and bank debt rated BBB or lower.
- Option Income. CEFs that invest in equities and write call options on equities and equity indexes.
For more information on new ETFs, visit our new ETF category.
Max Chen contributed to this article.