Wait for This Closed-End ETF to Prove ItselfPosted 02/19/2009 12:09 p.m. EST Today, PowerShares launched the first exchange-traded fund of closed-end funds (CEFs), the PowerShares CEF Income Composite Portfolio ETF ( PCEF). On paper, PCEF looks like an innovative, tax-efficient income option for investors looking to gain exposure to a broad spectrum of CEFs. Where the rubber hits the road, however, this fund may not have the goods to appeal to ETF investors. Since CEF's have "pass-through" tax structures, like open-end mutual funds, they do not pay taxes at the fund level on amounts distributed to investors. The taxation is said to "pass through" to the shareholders. Shareholders of PCEF will receive this income and tax benefit in the form of dividends. PCEF consists of CEFs across three income categories: taxable investment-grade fixed-income, taxable high-yield fixed-income and equity option writing (selling). PCEF's methodology is also designed to screen and weight funds according to their discount to NAV. Funds trading at a discount have a higher potential for yield. > > Bull or Bear? Vote in Our Poll The top five holdings in PCEF are currently the Eaton Vance Limited Duration Income Fund ( EVV), NFJ Dividend & Premium Strategy Fund ( NFJ), AllianceBernstein Income Fund ( ACG), Eaton Vance Tax-Managed Diversified Equity Income Fund ( ETY) and the BlackRock Global Opportunities Equity Trust ( BOE). Sounds good, right?
- Fees: Since PCEF is a fund of funds, investors have to pay both the ETF expense ratio (0.50%) as well as "acquired fund fees and expenses" (1.31%) due to the underlying CEFs. So, rather than buying a low-cost portfolio, investors have to choke down total annual operating expenses of 1.81% for PCEF.
- Transparency: While a list of underlying components is readily available on the PowerShares Web site, this is just one level of transparency. Since PCEF is a fund of funds, and the underlying CEF's are actively managed, ETF investors can't see all the way to the bottom of the well. PCEF's performance is dictated not just by how well the ETF itself tracks its net asset value but by the fluctuations in NAV of the underlying components. This adds an additional level of complexity.
- Liquidity: This measure of success is yet to be determined, but prospective investors should pay close attention.