In a launch that could have a sweeping impact on the future of ETF and index investing, PowerShares has filed for the launch of 25 new ETFs. The new ETFs will have a structure that allows for an upfront sales charge that could have the potential to revolutionalize the way that ETFs are distributed and marketed.
Essentially, shares of the ETFs will become available through creation units of 50,000 shares, the same as existing ETFs, but the shares will be directly offerable to investors by the Authorized Participants in the creation process (broker- dealers and other institutional investors), who can then charge investors up to a 2% sales charge on the initial offering.
The SEC registration can be viewed in its entirety here: http://www.sec.gov/Archives/edgar/data/1209466/000089720404000081/n-1a.txt
A Momentous Change in ETF Distribution
This new mechanism is meant to incentivize brokers to sell the product to investors, in the same way that loads have done so for years. However, in the case of ETFs, the sales charge is not a zero-sum upfront payment the way it is for mutual funds. Because investors will pay no additional brokerage commission, be subject to ask-bid spread losses, or variations from the net asset value at the initial purchase, even a significant portion the 2% fee at offer (as compared to a 5% load for a fund) would have to be paid on the secondary market by investors anyway. And after the initial offering, the ETF shares will be available on the secondary market at no sales charge just like any other ETF or stock. PowerShares has filed for a patent on this IPO process.
This structure, it should be noted, is somewhat similar to that which the Merrill Lynch HOLDRs have used for years. The difference, however (and it's a big one) is that the HOLDRs portolios are just static portfolios of stock and not dynamic index portfolios that are rebalanced and consist of large, diversified index portfolios. Similar to the proposed PowerShares, however, the HOLDRs are exchange listed and use a similar 2% sales commission to help sell the product, which Merrill brokers in particular have done with great success.
The launch by PowerShares, which has the support of the American Stock Exchange (AMEX) in terms of the construction and maintenance of the innovative indexes, may signal first part of a major effort by the American Stock Exchange's effort to again reinvent itself. PowerShares submitted an SEC filing for a major launch of 25 new ETFs.
Essentially, the sales load provides a smaller ETF firm like PowerShares with distribution leverage that even the large ETF managers have not thusfar enjoyed. Fund managers, like BGI (iShares), SSgA (SPDRs) and Vanguard (Vipers) have been forced to spend significant marketing dollars on advertising and on sales forces to generate asset growth. The idea with the sales charge is that with the distribution leverage, this could be much less necessary.
The following 25 funds are proposed for launch in the filing (as noted below, ticker symbols for most of the proposed funds have not yet been settled):
- PowerShares Dynamic Large Cap Growth Portfolio - PWB
- PowerShares Dynamic Large Cap Value Portfolio - PWV
- PowerShares Dynamic Mid Cap Growth Portfolio - PWJ
- PowerShares Dynamic Mid Cap Value Portfolio - PWP
- PowerShares Dynamic Small Cap Growth Portfolio - PWT
- PowerShares Dynamic Small Cap Value Portfolio - PWY
- PowerShares Dynamic Aerospace & Defense Portfolio - _______
- PowerShares Dynamic Biotechnology & Genome Portfolio - _______
- PowerShares Dynamic Brand Name Products Portfolio - _______
- PowerShares Dynamic Consumer Electronics Portfolio - _______
- PowerShares Dynamic Food & Beverage Portfolio - _______
- PowerShares Dynamic Hardware Portfolio - _______
- PowerShares Dynamic Internet Software & Services Portfolio - _______
- PowerShares Dynamic Leisure and Entertainment Portfolio - _______
- PowerShares Dynamic Media Portfolio - _______
- PowerShares Dynamic Networking Portfolio - _______
- PowerShares Dynamic Pharmaceuticals Portfolio - _______
- PowerShares Dynamic Semiconductors Portfolio - _______
- PowerShares Dynamic Software Portfolio - _______
- PowerShares Dynamic Telecommunications Services Portfolio - _______
- PowerShares Dynamic Wireless Portfolio - _______
- PowerShares Halter Golden Dragon China Portfolio - _______
- PowerShares High Yield Equity Dividend Achievers Portfolio - _______
- PowerShares Value Line #1 Timelines and Safety Portfolio - _______
- PowerShares Wilder Alternative Power Technologies Portfolio - _______
- PowerShares Zacks Rank Large Cap Portfolio - _______