ETFs aren’t always the simple index funds people think they are.
Sometimes they behave like hedge funds. Now a Northern California investment manager wants to turn them into private equity portfolios.
USCF Advisers LLC of Oakland, California is readying two exchange-traded funds that use a theory devised by a Harvard professor in an attempt to mimic the outsized returns typically reserved for private equity investors, according to a filing.
The USCF SummerHaven SHPEI Index ETF, which will go by the symbol BUY, and the USCF SummerHaven SHPEN Index fund, ticker BUYN, will pick companies that trade “cheaply” relative to the market, making them likely targets for private equity takeovers. BUY will equal weight U.S. companies with market capitalizations between $100 million and $10 billion, while BUYN will invest exclusively in natural resources firms.
At 95 basis points a year, they’re a bargain compared with what Apollo Global Management LLC or Blackstone Group LP charge. The question is whether these funds will be able to replicate the complex work those firms do in selecting their investments.
“It’s definitely tempting to try and democratize every single frontier that’s under the sun, but this is a bit of a stretch,” said Eric Balchunas, a Bloomberg Intelligence analyst. “It’s an attempt to ETF-ize something that can probably never be ETF-ized. Private equity is private and real assets are illiquid.”
The funds get around this problem by limiting themselves to investing in publicly-traded companies. The methodology behind them suggests that sticking to public companies may not be a barrier to earning private equity-like payouts. Of course, this remains to be seen.
Investors can “reproduce private equity returns by carefully choosing a portfolio of publicly-traded equities with specific characteristics,” according to the index sponsor’s website. The ETFs look for firms with a low “enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio.”
Harvard Economist