ETF of Closed End Funds – good opportunity?

Filed in Asset Management

On Friday, the first ETF consisting solely of Closed-End Funds started trading. It is the “PowerShares CEF Income Composite Portfolio” (PCEF), managed by Invesco PowerShares and is based on the S-Network Composite Closed-End Fund Index. Is this a good opportunity for the largest investment managers to support and market their Closed-End Funds?

Background:

PowerShares launched the Closed-End Fund ETF (PCEF) which will provide a means for those who want to invest into Closed-End Funds an easier way to do so. I believe it may also offer investment managers an opportunity to further support and market their funds that make the cut.

In order to make it into the index, a Closed-End Fund must meet a number of criteria:

Must be in one of three income categories:

Taxable investment grade fixed-income.

Taxable high yield fixed-income.

Equity option writing.

Must pass additional quality filters:

The Closed-End Fund must trade on a recognized North American stock exchange that provides a last closing price.

Minimum market capitalization of $100 million.

Average daily trading volume of more than $500,000 a day for the three months prior to the rebalancing date.

The Closed-End Fund trades at less than a 20% NAV premium.

Total expense ratio amounts to less than 2%.

The Opportunity:

70 Closed-End Funds passed the criteria filters and were included at launch. Some of the largest and most successful investment managers made the cut, with the top four managers including:

Blackrock – 14 Closed-end Funds
EatonVance – 10 Closed-end Funds
Nuveen – 9 Closed-end Funds
Western Asset – 7 Closed-end Funds

As a result of possessing funds that meet the quality filters, PowerShares has taken some of the guess work out of investing into Closed-End Funds, increased the underlying Closed-End Fund liquidity and provided an implied level of quality that the investment managers who made the cut can leverage in their marketing and product development. There should be a way to co-market the ETF and Closed-End Fund if one of these investment managers partners up with Invesco PowerShares.