The former top chief of PowerShares DB has gone missing since the beginning of the year. But he’s about to reappear on the exchange traded fund [ETF] scene with a new fund and a new company.
Kevin Rich, former CEO of DB Commodity Services, is a pioneer in the field pf commodity-based ETFs. Over the years, the company has added and expanded its offerings to include 28 ETFs and ETNs with a total of $10 billion in assets under management, comments Matt Hougan for IndexUniverse. (More stories on commodities).
Earlier this year, Rich resigned his position at DB and went off the radar. What happened? The first clues came last week. Rich has filed for an interesting ETF that will be subadvised by Rich Investment Solutions.
The new product filed with the Securities and Exchange Commission [SEC] will be called the U.S. Equity Reverse Convertible Index Fund. The new fund will seek to reflect the performance of an index that will write “down and in” options each quarter for the 12 most volatile stocks in the S&P 500. As Hougan explains it, reverse convertibles are structured products offered by major banks to investors seeking high income. He uses the following example:
A bank offers a short-term bond linked to a stock. The bank then agrees to pay investors a high yield, say 10% a year. In exchange, the investor will forfeit all upside on the stock itself.
Reverse convertibles are receiving a bad rep with a slew of lawsuits involving uneducated investors and even academic studies that show the product as overpriced. Yet, some believe the enticing high yields are worth it, even if the downside risks are greater.
Rich’s fund will take this strategy, but put it into a transparent, index-based product. The ETF will receive the income from writing the option and take the downside risk if the stock closes below the barrier price. Ultimately, the ETF will seek to yield about 10% each year. The fund itself does not invest in reverse convertibles; the pattern of returns could simply resemble the returns generated in a true reverse convertible strategy.
A synthetic reverse-converts ETF isn’t for everyone; however, the investment vehicle will bring liquidity, transparency and lower prices to an area of the market that has been experiencing huge premiums.
Max Chen contributed to this article.