Powershares' Private Equity ETF Component Hit By ShareSleuth Report

That was quick. The much bally-hooed Powershares Listed Private Equity ETF (PSP) launched on Tuesday Oct. 24. Two days later, one of its components – UTEK Corp (UTK) – blew up, dropping as much as 40 percent on Thursday, Oct. 26, after the Mark Cuban-financed ShareSleuth.com published a detailed investigative article questioning numerous aspects of the company’s business. Two lessons:

• The benefits of a diversified portfolio. UTEK accounted for just 0.75 percent of PSP’s benchmark, the Red Rocks Listed Private Equity Index, on Sep. 30 (although that was down to just 0.44 percent on Friday, Oct. 27). Consequently, the impact of the stumble on PSP’s investors was at the low end of de minimis.
• The need for ETF investors to look closely at products based on new indexes, developed by companies that hardly anybody’s ever heard of, and with virtually no real-time performance record.

And that second lesson was reinforced over the weekend when Barron’s published a report raising what might most kindly be characterized as governance issues involving the Halter USX China index, benchmark for the $250 million Powershares Golden Dragon ETF (PGJ). Run, don’t walk, to Leslie P. Norton’s story (free summary)… and if you’re holding PGJ you might want to think about swapping it out for the iShares/FTSE Xinhua 25 (FXI) which, apart from its substantial out-performance, doesn’t feature any Chinese stocks listed on US markets by virtue of the always on the up-and-up reverse merger process.

In my CNBC appearance on Tuesday, ostensibly to discuss PSP, anchor Erin Burnett asked whether I thought there was anything nefarious about the rush to create indexes specifically for the purpose of flogging ETFs to the unwashed (I paraphrase). My answer - some inconsequential burble about the creativity of the financial markets and the need for investors to do their homework or words to that effect - stands, but might have been somewhat more heavily qualified had Norton’s story run a week earlier.

Comments

[David Fry:]

Greg is succint and correct. So many new ETFs based on seductive sounding indexes many of which come with limited historical data.

2006 Oct 31 12:53 PM