How to Tell if a Street Is Public or Private
BOSTON (MarketWatch) -- Bruce Bond really wants to call his firm's exchange-traded funds "actively managed," but he's sure the Securities and Exchange Commission would look askance.
That's because a much-awaited actively run ETF has yet to be filed with the SEC, which closely watches how funds are described.
"We want to give investors a chance to invest in ETFs that try to beat the market, not track it," says Bond, president of PowerShares Capital Management LLC, Wheaton, Ill.-based ETF provider.
PowerShares' ETFs do incorporate elements of active management into traditional index tracking. The funds' benchmarks are designed to outperform popular indexes through stock selection, a process some observers liken to an "enhanced index" strategy.
In this way, PowerShares is looking to muscle larger competitors such as Barclays Global Investors and State Street Global Advisors with ETFs that blur the line between active and passive management.
"We're trying to separate ourselves from other firms that manage indexed ETFs," Bond said. "Our investment philosophy is completely different."
The firm, which manages 11 ETFs with nearly $1 billion in assets, is expanding its lineup with eight new sector funds set to launch June 23, and has applied to introduce three dividend-focused offerings.
PowerShares had intended to levy sales charges on its new ETFs as a way to compensate brokers and financial advisers for selling shares, but that plan has been "pretty much scrapped," Bond said.
The move was seen as a way to overcome the firm's lack of distribution channels relative to its well-heeled competitors.
"We filed the distribution fees three years ago but we're walking away from them because they didn't get SEC approval," Bond said.
Against the grain
The PowerShares ETFs use complex indexes, developed with the American Stock Exchange, that attempt to beat the market by identifying stocks with high capital appreciation potential.
The benchmarks' structure is elaborate, to the point that even Bond concedes that "it's tough to explain how the ETFs work."
Almost all stock indexes used by ETFs rank individual companies by market value to create a basket of stocks that reflects a particular slice of the market. ETFs then aim to deliver market returns while minimizing fees, turnover and taxes.
In contrast, PowerShares indexes overweight "best of breed" companies in a bid to outperform traditional benchmarks, while still providing index-like diversification.
The indexes rate companies on factors such as fundamental growth, valuation and "timeliness." Less-conventional index measures such as trading volume and earnings momentum also are considered.
The indexes rebalance on a quarterly basis and the PowerShares have higher turnover than comparable indexed ETFs. For example, the two oldest PowerShares funds have turnover in the 100% range so far this year, the company said.
Yet Bond notes that these two ETFs haven't distributed capital gains in their two-year history. Because they're uniquely structured as fund shares that trade like stocks, ETFs typically are more tax efficient than mutual funds.
The two original PowerShares have performed well versus their benchmark indexes -- attracting attention from both individual investors and financial advisers.
"When we were brand new, nobody even knew the PowerShares name, but we've come a long way since," Bond said.
"The most difficult part is gaining credibility with the adviser community, and it takes time because they're slow to adopt managers until they become familiar with the funds," he added.
The first PowerShares launched May 1, 2003. Over its first two years the PowerShares Dynamic Market Portfolio PWC,
Meanwhile, the PowerShares Dynamic OTC Portfolio PWO,
Yet the ETFs' investment records are relatively short, and it's not certain if the indexes "will be able to thrive in all market environments," said Dan Culloton, fund analyst at investment research firm Morningstar Inc., in a commentary on the company's Web site.
Although the firm "has proved that it is worth keeping an eye on," he added, the market "has a way of catching up with quantitative models, lessening their effectiveness over time."
New sector, dividend funds
After introducing broad-market and "style box" funds tracking specific areas such as large-cap growth stocks, PowerShares is slicing the U.S. market finer with eight sector ETFs that widens the firm's unique take on indexing.
The newest PowerShares will mirror specific industries such as semiconductors, software, pharmaceuticals, and food and beverages.
The funds' expense ratios will be capped at 0.60%, according to PowerShares -- higher than some indexed sector ETFs. For example, average expenses for the Select Sector SPDR ETFs, which carve the S&P 500 index by sector, is 0.25%.
The new PowerShares sector funds will use an approach similar to their broad-based siblings, but Bond says the task isn't as simple as just plugging the index formula into a new sector.
"The index methodology is evaluated on an industry-by-industry basis to ensure it applies," he said.
Although there are several competing sector ETFs tracking various index families, Bond says the PowerShares fill a need because they attempt to provide market-topping performance.
"If you want a benchmark index, you don't want PowerShares," he said. "Go to the other providers."
The firm also plans new dividend-focused ETFs, another area of the market that's become popular.
The largest such offering is the $6.4 billion iShares Dow Jones Select Dividend DVY,
The PowerShares High Yield Equity Dividend Achievers Portfolio PEY,
Still, PowerShares plans to forge ahead with three more dividend funds it has filed with regulators.
"We don't think dividend ETFs are overdone," Bond said. "Different investors are looking for different things: High-yielding companies, stocks committed to growing dividends, fast-growing dividends or international exposure."
The existing dividend PowerShare follows an index of the 50 highest-yielding companies that have at least 10 years of consecutive dividend increases.
One of the new funds would invest in a broad index of all companies that have boosted dividends each year over the past decade -- about 314 stocks, according to the latest regulatory filings.
Another proposed PowerShare would track 100 stocks that are growing dividends at a high rate. The third ETF in registration would provide exposure to non-U.S. dividend-paying stocks by investing in American Depositary Receipts, or ADRs.
How to Tell if a Street Is Public or Private
Source: https://www.marketwatch.com/story/powershares-expanding-with-new-sector-dividend-funds
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