PowerShares Nabs Venture Financing; Seven New Funds on Tap for March

February 10, 2005

PowerShares and their maverick line of ETFs continue to make headway both in assets, and now in V.C. financing. Loaded structure has still not been approved by SEC.

PowerShares Capital Management is moving forward aggressively on the dramatic expansion of its stable of exchange-traded funds (ETFs).

Flush with $10 million in new venture capital financing, PowerShares plans to launch seven new ETFs on March 3.  The new funds will almost triple the number of PowerShares products on the market.

The seven new funds include six style-box funds based on PowerShares' proprietary "Intellidex" indexing methodology, which uses quantitative analysis in an attempt to deliver above-average returns with below average risk.  Those funds are:

  • PowerShares LargeCap Growth Intellidex Portfolio (PWB)
  • PowerShares LargeCap Value Intellidex Portfolio (PWV)
  • PowerShares MidCap Growth Intellidex Portfolio (PWJ)
  • PowerShares MidCap Value Intellidex Portfolio (PWP)
  • PowerShares SmallCap Growth Intellidex Portfolio (PWT)
  • PowerShares SmallCap Value Intellidex Portfolio (PWY)

The seventh fund is the PowerShares WilderHill Clean Energy Portfolio (PBW), a partnered fund designed to track the performance of the WilderHill Clean Energy Index (ECO).  The ECO index is composed of thirty-seven companies involved in the "green energy" business, including companies involved in solar power, fuel cells, hybrid technologies and micro-turbines.

Venture Capital Financing

The $10 million VC placement comes from FTVentures, a San Francisco-based firm known for their focus on the financial marketplace.  The new financing marks the first institutional-level fundraising for PowerShares - a remarkable fact, considering the growth the company has already achieved.  With four ETFs already on the market, PowerShares already has more than $500 million under management.

Clearly, however, the company is not content to sit tight with those four funds.  In addition to the seven new products scheduled to launch in March, PowerShares has more than a dozen other funds in registration with the SEC.  Fueling that kind of growth requires outside capital.

"PowerShares has all of the key attributes we look for when making an investment," said Brad Bernstein, FTVentures Partner and new member of PowerShares' Board of Directors. "It has a distinctive product offering, a strong management team and a market audience and demand that are exploding."

Entering the Style Box Arena

The seven "style box" funds will place PowerShares in the center of a crowded battle for one of the hotspots of the ETF market - the use of ETFs in advised asset allocation strategies.  All of the largest fund families in the ETF industry - iShares from Barclays Global Investors, streetTracks from State Street, and VIPERs from Vanguard - offer style-box ETFs, and assets tied to those funds are growing rapidly.  Given the broad distribution networks and high-profile names of those funds, it may be hard for PowerShares to find a foothold.

The company is not deterred.

"There's been a lot of interest in Intellidex-based style box funds from advisors who focus on asset allocation and risk/return issues, as the funds carry lower betas and higher returns than some competing products, " said PowerShares vice president Jason Schoepke.

Historical data bears Schoepke out.  According to data supplied to IndexUniverse.com by PowerShares, the Intellidex indexes have historically posted higher annual returns with the similar or lower levels of volatility than competing indexes from Dow Jones and/or S&P.

The interesting catch, however, is that the Intellidex indexes tend to have lower correlations to the growth/value dichotomy - in other words, competing indexes are more strongly tied to the specific performance of the growth or value sectors of the stock market, whereas other factors have more of an influence on the Intellidex products.  That's not altogether surprising when you consider that the Intellidex products actively select components for performance, rather than simply following a defined "growth" or "value" strategy.   Still, it remains to be seen is whether advisors looking for asset allocation strategies will accept the lower correlations in exchange for enhanced performance, or if the lower correlations will throw off their asset allocation models altogether.

As with other PowerShares funds, the seven new PowerShares will not come with "load" fees attached.  PowerShares reserves the right to use these loads in the future, but says that they aren't necessary at the current time.

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