ETFs, or exchange-traded funds, are a type of investment that allows investors to buy shares of a group of securities like stocks and bonds. There are various ETFs, all of which are made up of different types of securities, but what about private securities? Can ETFs invest in private companies?
ETFs can invest in private companies. There’s a specific ETF type called private equity ETFs, made up of shares of private companies. These ETFs offer the benefits of investing in private companies without the high costs associated with directly investing in the company.
In this article, I will explain what private equity investments and private equity ETFs are and the benefits and downsides of investing in private equity ETFs. If you’re interested in learning more than the basics, there are also resources about ETFs and private equity included in this article, so keep reading.
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Understanding Private Equity Investments
Private equity investments are essentially the opposite of investing in public companies or markets.
Here is the definition of private equity from Investopedia:
“Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies or that engage in buyouts of public companies, resulting in the delisting of public equity.”
It can be difficult to invest in a private company since they set their barriers to entry, which can be strict and costly. However, you can invest in private equity using a private equity ETF which will be discussed in the next section.
What Are Private Equity ETFs?
ETFs are usually made up of publicly available securities like publicly traded stocks, bonds from governments and public companies, or other commodities that trade on the open market. However, a type of ETF made up of private securities is called a private equity ETF.
Private equity ETFs are non-direct investments funds, allowing investors to invest in private companies. When you invest in an ETF, you don’t buy shares of the companies that the ETF is made up of. Instead, you buy shares of a fund that tracks the performance of the private companies.
Private equity ETFs are a great way to invest in private companies without dealing with them directly or being unable to invest in them as a standard trader. Private companies can pick and choose who can invest in them. However, with an ETF, you’re not subject to any of the companies’ requirements.
Additionally, some companies have minimum investment requirements for those who want to invest in their business. They can also charge high fees that you can avoid investing in a private equity ETF instead.
With private equity ETFs, you still need to pay fees and taxes like you would on other types of ETFs. Private equity firms make their money by charging fees on their investments.
Similar to other ETFs, private equity ETFs trade on an exchange. So, anyone can buy and sell them. The price fluctuates depending on the volume of trades and some other factors like company events and announcements.
Benefits of Private Equity ETFs
The biggest benefit of investing in private equity ETFs is that it’s often the only way to invest in a private company without needing hundreds of thousands of dollars. Usually, you need to pay around $250,000 to have a private company share, but with private equity ETFs, you can buy a share for significantly less than that.
Another benefit of private equity ETFs is that they historically have high returns. First, private companies tend to have continuous growth, so their value on the market increases.
The likelihood of high returns also means investors can get the money paid out to them like dividends. These dividends will vary depending on the companies and their growth, but they benefit from holding shares of a private equity ETF.
Also, private equity ETFs are great for long-term investing. As mentioned, private companies tend to grow consistently, but significant growth, and a big return on investment, can take at least a few years, if not closer to 5 or 10.
To invest in private equity ETFs and see your funds growing, you must be willing to hold your ETF shares for at least several years.
Finally, with an ETF, even if one company doesn’t see growth, the others likely will, minimizing the company’s losses. This benefit comes from the high diversification that ETFs offer, private equity ones included.
You can add private equity ETFs to your investment portfolio to further diversify your portfolio. If you have a mix of investments like stocks, bonds, ETFs, and other investments, you’ll increase your chance of seeing excellent returns.
Downsides of Private Equity ETFs
One problem you may face is lower liquidity. Low liquidity is common with all ETFs, including private equity ETFs. While you can buy and sell ETFs on the market, they don’t trade as fast or as often as stocks do.
Since private equity ETFs are long-term investments, it may be hard to find one to buy since many investors will hold on to their shares for a while.
As for selling, investors looking to buy a private equity ETF must be willing to hold their shares for a long period. Before investing in a private equity ETF, they know that they must commit to the investment for years to come.
That said, the number of buyers and sellers for private equity ETFs can be low, especially in the stock market.
Finally, you also need to pay taxes on the dividends that you receive from your ETFs. The taxes will vary, but you need to pay them each year as part of your income.
There are also fees that you need to pay to the manager of your ETF. The fees for private equity ETFs tend to be higher than fees for other ETFs.
Tips on Learning More About ETFs and Private Equity
If you want to start investing in private equity or ETFs, you need to learn more about them to make informed decisions.
This YouTube video from Bloomberg Quicktake explains what ETFs are and why they’re growing in popularity:
In addition, this video on YouTube from Investopedia explains what private equity is and how private equity funds work:
When you’re ready to go more in-depth with ETFs and private equity, you can read a few books that’ll give you a deeper understanding of how they work and how to invest in them. Both are available on Amazon.com.
- The ETF Handbook by David J. Abner. You’ll learn how to analyze ETFs to find the best ones for you, how you can get the best growth from your ETF portfolio, and some analysis examples for you to study.
- The Myth of Private Equity by Jeffrey Hooke. This book is about private equity. You’ll read about the downsides of private equity and what you need to know before investing. There’s also information about how it affects the general investing world and other controversies surrounding private equity.
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Conclusion
ETFs can invest in private companies using private equity ETFs. Private equity ETFs are great long-term investments that allow you to invest in private companies that you wouldn’t be able to otherwise.
However, there are also relatively high fees that you have to pay to your ETF manager, and it can be hard to buy and sell shares since private equity ETFs have low liquidity.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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