In The News
New ETFs Aim to Beat Benchmarks
Closer to Active Managing, 26 PowerShares Funds Track 'Intelligent' Indexes
8/16/2004
BY TARA SIEGEL BERNARD
Dow Jones Newswires
PowerShares Capital Management LLC is seeking to launch 26 exchange-traded funds, most of which will attempt to beat market indexes rather than match them.
These exchange-traded funds appear to be the closest thing in the ETF world, at the moment, to actively managed funds. Right now, ETFs resemble index-tracking mutual funds but trade on an exchange like a stock. Actively managed ETFs, which are still being developed, would reflect the whims of a professional asset manager, rather than the relatively static holdings within an index. Though some firms are trying to launch active ETFs, they have taken years to develop because their structure is more complex.
PowerShares, based in Wheaton, Ill., has come up with something in the middle. It launched two such ETFs in May 2003 and is now seeking approval for 21 more, according to a July filing with the Securities and Exchange Commission. The remaining five to be launched will track various other indexes.
PowerShares' inaugural ETFs track "enhanced" or "intelligent" indexes -- created by the American Stock Exchange and called Intellidex Indexes -- that attempt to outperform their respective market-segment benchmarks rather than merely represent a market segment. Each index evaluates companies across a variety of categories, including fundamentals, valuation and risk. The indexes rebalance quarterly and resemble a quantitative mutual fund.
"What the indexes are designed to do is to have representation of a market sector, but then what they attempt to do is give you that exposure by owning the highest quality stocks or those with the greatest investment merit," said Bruce Bond, president of PowerShares. Essentially, it attempts to achieve "outperformance with less risk."
While the costs of the new ETFs have yet to be disclosed, PowerShares' existing products are pricier than most: PowerShares Dynamic Market Portfolio and PowerShares Dynamic OTC Portfolio both carry expense ratios of 0.6 percentage point of assets. That's much higher than the average domestic stock ETF, which charges 0.36 percentage point, according to Morningstar Inc. The cheapest ETF, the iShares S&P 500, charges 0.09 percentage point and the popular Nasdaq-100 Index Tracking Stock, known by its trading symbol QQQ, charges 0.18 percentage point.
The new ETFs also will carry a sales charge of 2%, something ETF investors aren't accustomed to. In fact, one of ETFs' biggest draws is the fact that they are so inexpensive. But "by having the 2% load on there," Mr. Bond said, "it allows us to introduce the product using the syndication process, which will introduce it quickly, more like a closed-end fund or an initial public offering of a company." (Closed-end funds also trade on exchanges.)
By incorporating the sales charge, PowerShares hopes to create an incentive for financial advisers and brokers to sell the product. The charge applies to buyers during the initial subscription offering only. After that period is up, investors will have to pay only the applicable brokerage commissions and expenses to which all ETF investors are subject.
Mr. Bond says the SEC requires that initial investors must receive some sort of benefit. In this case, he says small investors might spend less paying the 2% rather than paying full-service brokerage commissions. However, with the low cost of trades at many discount brokers, Christopher Traulsen, a senior analyst at Morningstar, isn't so sure.
The question becomes "one, 'do you want to invest in a family that is brand new?' and I'd say the answer is no, and second, 'do you want to pay 2% upfront for the privilege?' and again I'd say the answer is no," Mr. Traulsen said. (His firm has licensed its style-based indexes to Barclays Global Investors, which offers ETFs that track them.)
It's hard to judge a fund with less than a three-year history. Nevertheless, PowerShares' existing ETFs have done well so far: Its Dynamic Market Portfolio is up 18.02% over the past 12 months through Wednesday, compared with 7.34% for the Standard & Poor's 500-stock index, while its Dynamic OTC Portfolio has risen 11.96% over the period, compared with a 3% gain for the Nasdaq Composite Index.
Twenty-one of PowerShares' new ETFs will track the Intellidex indexes, including the PowerShares Dynamic Large Cap Growth and PowerShares Dynamic Large Cap Value Portfolios, as well as ETFs dedicated to midcap growth, midcap value, small-cap growth and small-cap value. Several others will track sectors ranging from biotechnology and genomes to pharmaceuticals, telecommunications, media and semiconductors.
The ETFs also will mimic indexes created by other parties, the SEC filing said, including PowerShares Halter Golden Dragon China Portfolio. It will seek to track the Halter USX China Index, comprised of U.S. exchange-listed stocks of companies that derive a majority of their revenue from mainland China.
|
|