Invesco launches first ETF targeting closed-end-fund index

Invesco PowerShares Capital Management LLC today unveiled the first exchange-traded fund to invest in an index of closed-end funds. The PowerShares CEF Income Composite Portfolio (PCEF) is based on the S-Network Composite Closed-End Fund Index, developed by S-Network Global Indexes LLC and Paul Mazzilli. Mr. Mazzilli is an industry consultant who was formerly an executive director and director of ETF Research at Morgan Stanley. “We came up with the idea of doing a closed-end ETF about a year ago when so many closed-end funds were distressed,” he said, referring to the deep discount to net asset value at which many of the funds were trading. “We started looking at ways to come up with a rules-based index that would take advantage of that.” The index is designed to track the overall performance of closed-end funds. Currently, it includes 71 such funds. Of those, 27 invest primarily in taxable investment-grade fixed-income securities, 15 invest primarily in high-yield fixed-income securities, and 29 primarily use an equity-option-writing strategy. The weighting methodology gives a preference to those funds trading at larger discounts. It also excludes funds with expense ratios in excess of 2%. The current dividend yield of the index is approximately 8.5% per annum, and the weighted-share-price discount to net asset value is 4.5%. The ETF has an expense ratio of 0.50%.