AROUND THE WORLD OF ETFS

January 04, 2007

PowerCubes

PowerShares entered into an agreement with the Nasdaq to assume sponsorship of the hugely popular Nasdaq-100 Index Tracking Stock (NDAQ: QQQQ), as well as the Nasdaq-100 European Tracker (NDAQ: EQQQ) and Nasdaq's 4 BLDRS funds (tickers: ADRE, ADRD, ADRU, ADRA).

The deal brings the six funds and a combined $19.5 billion in assets under the PowerShares banner, more than tripling the company's total assets under management, from approximately $7.5 billion to nearly $27 billion.

Shareholders in the funds should notice no differences beyond the rebranding; the expense ratios, tickers and indexes will all remain the same. The Nasdaq will continue to administer and own the underlying indexes, and The Bank of New York will remain as trustee.

As part of the deal, PowerShares will gain control of more than $20 million in annual advertising dollars. In fact, one question raised following the deal was whether PowerShares planned to alter the fund structure to gain more discretionary control over the marketing budget. The QQQs and BLDRs are both unit investment trusts (UITs), and under the UIT structure, the "marketing dollars" must be spent directly on advertising. However, if the funds were converted to an open-ended structure, PowerShares could gain more flexibility in how that money is used.

Rydex Rolling

Rydex Investments launched nine equal-weight sector ETFs onto the AMEX, as the company looked to build on the success of its stunningly popular S&P 500 Equal-Weight ETF (AMEX: RSP).

The new funds divide the S&P 500 along sector lines, weighting each stock within each sector equally. One major selling point for the funds is that they will not be dominated by a handful of mega-cap stocks, a major problem for certain sector ETFs. For instance, Exxon-Mobil (23.7 percent) and Chevron (17.1 percent) represent nearly 41 percent of the popular iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE). In the new Rydex fund, those numbers are reduced into the single digits.

The funds and tickers are:
• Consumer Discretionary (AMEX: RCD)
• Consumer Staples (AMEX: RHS)
• Energy (AMEX: RYE)
• Financial Services (AMEX: RYF)
• Healthcare (AMEX: RGI)
• Industrial (AMEX:RGI)
• Basic Materials (AMEX: RYT)
• Technology (AMEX: RTM)
• Utilities (AMEX: RYU)

Steel Yourself

Van Eck Global expanded its fledgling ETF empire by launching two highly specialized ETFs onto the AMEX. The new Market Vectors— Environmental Services ETF (AMEX: EVX) and Market Vectors—Steel ETF (AMEX: SLX) joined Van Eck's flagship Market Vectors-Gold Miners ETF (AMEX: GDX).

The new funds may not have the immediate luster of the gold product, which attracted a healthy $250 million-plus since its debut in May. But steel is a critical industrial metal, and the "environmental services industry" (read: trash removal and recycling) has delivered strong performance over the years.

The Environmental Services fund uses an unusual weighting methodology designed to boost the influence of small-cap stocks, a potentially important feature in an industry where consolidation is an important and ongoing process. The Steel fund uses a traditional market-cap-weighting methodology.

Both funds charge 55 basis points in expenses.

PowerShares Takes On … PowerShares?

PowerShares rolled out eight sector ETFs based on the alpha-seeking "Intellidex" indexes developed by the AMEX. The underlying indexes use a combination of "growth-at-a-reasonable-price" and momentum-based strategies in an attempt to beat the market. The new funds are:

• PowerShares Dynamic Basic Materials Sector (AMEX: PYZ)
• PowerShares Dynamic Consumer Discretionary Sector (AMEX: PEZ)
• PowerShares Dynamic Consumer Staples Sector (AMEX: PSL)
• PowerShares Dynamic Energy Sector (AMEX: PXI)
• PowerShares Dynamic Financial Sector (AMEX: PFI)
• PowerShares Dynamic Industrials Sector (AMEX: PRN)
• PowerShares Dynamic Healthcare Sector (AMEX: PTH)
• PowerShares Dynamic Technology Sector (AMEX: PTF)

The funds will compete head-to-head with an existing slate of alpha-seeking sector ETFs from PowerShares. Those funds, launched in September, are tied to the FTSE RAFI fundamentally weighted indexes. It will be interesting to see how the company markets both sets of funds to investors. Generally speaking, the FTSE RAFI funds tilt toward a value approach, while the Intellidex funds tilt toward growth and small caps.

In addition to the new sector funds, PowerShares launched Banking (AMEX: PJB) and Healthcare Services (AMEX: PTJ) industry funds, as well as a MagniQuant market-timing fund (AMEX: PIQ), which uses macroeconomic data to make allocations across different sectors.

All of the funds are listed on the AMEX and charge 60 basis points in expenses.

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