PowerShares' New Loaded (C) ETF

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News

Written by Journal of Indexes Staff

Monday, 01 October 2007 00:00

The issue of how to attach a load charge to an exchange-traded fund (ETF) has bedeviled some of the best minds in the industry for years. If we could only charge loads, thought many an ETF entrepreneur, we could more easily sell these funds through advisors and grow our assets quickly. And yet, no one has figured out how to practically do it.

Until now. In a clever filing that hit the Securities and Exchange Commission (SEC) in April (but has been largely unreported in the media), PowerShares filed for a novel closed-end fund (CEF) that is designed to convert automatically to an open-end ETF if the fund trades at a meaningful discount to its net asset value (NAV).

CEFs have been sold with loads for years, and regularly raise huge amounts of money in the public markets. Like ETFs, they can be traded like stocks. But CEFs suffer from a unique problem: If demand for the fund ebbs, its shares can trade at a significant discount to their underlying NAV. This discount can be quite large, varying from just a small percentage to as much as 15 or 20 percent.

With the new PowerShares CEF, however, after 180 days of trading, the fund will automatically convert into an open-end ETF if it trades at a median 3 percent discount to its NAV for 30 consecutive trading days.

The fund is called the Powershares ACCE Global Listed Private Equity Fund, tracking a Red Rocks Capital Partners index of global private equity funds. Under the CEF format, the fund manager has some discretion to deviate from the index. If it converts to an ETF, it will become a traditional, passive index fund.

PowerShares likely wants the fund to convert. After all, CEFs can’t attract new assets. But should it convert to an ETF, new money can roll in.