Private-Equity ETF Poses Some Problems

When it debuted in late October, the PowerShares Listed Private Equity Portfolio (PSP) generated a lot of excitement.

That's because it was the first exchange-traded fund to give investors exposure to stocks whose main business is to invest in or lend money to privately held companies. Everyone seems to have a strong opinion as to whether this is a good idea.

So when one of the ETF's holdings, Utek (UTK), plummeted almost 40% on Oct. 26, just days after the ETF launched, industry observers took note. But it wasn't because the stock's decline had a big impact on the ETF. In fact, Utek accounted for only about 0.75% of PSP's portfolio at the time, and the ETF managed to close higher that day.

It was a bit of wake-up call though, reminding investors that they need to check what securities underpin an ETF before plunging in. Many say this is particularly true with the private-equity ETF, as there are some other questionable holdings and the ETF may not be exactly what it claims to be.

"Any ETF has the risk of having one of its components blow up like that," says J.D. Steinhilber, founder of AgileInvesting.com, an investment advisory subscription service that provides advice on managing portfolios with ETFs. However, he says the private-equity ETF, which has just 34 holdings, is more concentrated than most. That makes it more susceptible to a big decline in an individual stock.