Powershares To Launch Eight Sector Funds

June 06, 2005

The rapidly expanding ETF outfit sets its sights on the sector market. Is it stretching itself too thin?

 

Powershares wants to play with the big boys.

That's the only conclusion one can come to after surveying their plans to launch new eight new exchange-traded funds (ETFs) by the end of the month.  Powershares is not content to occupy a niche providing enhanced indexes to a handful of tech-savvy investors; it wants to offer a full product portfolio and compete with the likes of Barclays Global Investors (BGI), Vanguard and State Street Global Advisors (SSgA).

Nearly a year ago, Powershares filed papers with the Securities and Exchange Commission (SEC) requesting permission to launch nearly forty new funds. At the time, the Chicago-based ETF provider had just two funds on the market, with limited assets, and few took their plans as anything other than "best case" optimism.  The company was filing papers for funds it might launch, but not necessarily for funds that it would launch … at least not any time soon.

But since then, funds have been trickling out in ever-increasing numbers. In December of last year, the company launched two new funds, one tracking China and one tracking a dividend-focused index. In March of this year, seven more funds hit the market, including a clean energy fund and a full suite of "style" funds covering the six traditional cross-sections of market capitalization and growth/value bias. 

Now, just three months after the launch of the style funds, Powershares is ready to unveil eight new sector funds, based - like the style funds and the two broad market Powershares - on "Intellidex" indexes from the American Stock Exchange (the Amex).  Intellidex indexes are "enhanced" indexes designed to select the subset of stocks within a particular universe with the best potential for capital appreciation.  Provided the SEC signs off on the relevant documents in time, the new funds will appear on June 23.    With 19 funds on the market, Powershares will have more funds than SSgA (15), nearly as many as Vanguard (23), and at least be near the ballpark of BGI (97).

The rapid launches, however, have not been matched by equally rapid asset flows.  Taken together, the nine products launched since December currently hold just $531 million in assets.  Furthermore, 71 percent of that amount ($374.5 million) is tied to a single fund, the High Yield Equity Dividend Achievers fund, which has piggy-backed on the success of the $6.9+ billion iShares Dow Jones Select Dividend Index Fund. (The Powershares fund offers a higher yield and stricter screening criteria, partially offset by higher costs.)  The style funds have seen particularly slow growth, with most of the ETFs still hovering around the $10 million mark, and the largest (the Dynamic Large Cap Growth fund) standing at $19.7 million.

"There's a little bit of a learning curve with people understanding how the American Stock Exchange assembled those (style) indexes," says Jason Schoepke, vice president of Powershares.  "But most advisors are pretty open and pretty excited about the concept of what those indexes are designed to do."

 

 

Powershares Products

FUND

TICKER

LAUNCH

ASSETS

Dynamic Market

PWC

May 1, 2003

$323.9 million

Dynamic OTC

PWO

May 1, 2003

$79.0 million

Golden Dragon Halter USX China

PGJ

Dec. 9, 2004

$52.1 million

High Yield Equity Dividend Achievers

PEY

Dec. 9, 2004

$374.5 million

WilderHill Clean Energy

PBW

March 3, 2005

$28.4 million

Dynamic Small Cap Growth

PWT

March 3, 2005

$10.7 million

Dynamic Small Cap Value

PWY

March 3, 2005

$11.8 million

Dynamic Mid Cap Growth

PWJ

March 3, 2005

$9.0 million

Dynamic Mid Cap Value

PWT

March 3, 2005

$10.6 million

Dynamic Large Cap Growth

PWB

March 3, 2005

$19.6 million

Dynamic Large Cap Value

PWV

March 3, 2005

$13.4

Sector ETFs

???

June 23, 2005

???

 

 

 

Slow growth, of course, is not unheard of for recently introduced ETFs - particularly for ETFs entering a crowded field, like style- or sector-based products.  But given the fact that these funds haven't roared out of the gates, and that Powershares nonetheless continues to move forward with multiple product launches, one has to think that Powershares considers the new funds important pieces in a larger puzzle - that they believe that there is value in offering a wide range of funds, above and beyond the individual appeal (and profitability) of each fund.

And there might be.  With broad market, style- and sector-based funds on the market, an investor will be able to execute a full asset allocation strategy using only Powershares' funds, or set up any variety of trades while staying within the Powershares family. The company can be a one-stop shop for investors,or perhaps more importantly, for the advisers who counsel them.  The notable hole in the Powershares portfolio is the fixed-income market; it will be interesting to see how (and if) Powershares goes after this field.

History teaches us, however, that ETFs are not a Field of Dreams industry: Just because you build it, that doesn't mean that they will come.  That's particularly true with Powershares, as their "enhanced indexing" approach is relatively new, and investors need to be educated on the value and function of these indexes; they are not commodity products that can be interchanged with other index funds on a one-to-one basis.  Flush with cash from a recent round of venture capital financing, expect to see Powershares put some marketing muscle behind the new suite of funds, and soon.

"We now have a wholesaling staff of fifteen people working full-time to help market these products," says Schoepke, who added that some of the team had just signed on recently. 

Like other ETF providers, Powershares is focusing its efforts on the financial adviser market, rather than targeting individual investors directly.

The New Funds

  • The eight proposed Powershares funds cover an interesting spectrum of sectors.  The funds are:
  • Powershares Dynamic Biotechnology & Genome Portfolio - PBE
  • Powershares Dynamic Food & Beverage Portfolio - PBJ
  • Powershares Dynamic Leisure and Entertainment Portfolio - PEJ
  • Powershares Dynamic Media Portfolio - PBS
  • Powershares Dynamic Networking Portfolio - PXQ
  • Powershares Dynamic Pharmaceuticals Portfolio - PJP
  • Powershares Dynamic Semiconductors Portfolio - PSIPowershares Dynamic Software Portfolio - PSJ

As mentioned earlier, all of the funds track sector indexes devised by the Amex using its proprietary "Intellidex" indexing model. That model aims to select the subset of stocks within a given universe that will offer the best performance.

Unlike traditional sector funds, the Powershares aim to find a balance between large and small cap exposure.  Specifically, the indexes are designed so that large and small cap stocks each make up 50 percent of the market capitalization of each index. Here's how it works: Stocks within each sector are divided into large and small cap baskets, and then ranked within each basket based on the "Intellidex" ranking system. The ten "best" large cap stocks are included in a fund, and assigned a five percent weight each; the twenty "best" small cap stocks are included, and assigned a 2.5 percent weight each.

The funds are based on eight out of nine new Intellidexes launched by Amex on May 26.  The ninth index covering Hardware and Consumer Electronics was not calculated in time for this round of product launches, but we can expect a Powershare tracking that index soon.

Needless to say, there's room to introduce plenty more sector indexes, as Amex's list is hardly comprehensive.  In fact, it's downright idiosyncratic.  It seems odd, for instance, to include food and beverages but to exclude energy.  Or to cover the leisure sector but leave out financials.  Telecommunications, anyone?

The funds carry an expense ratio of 60 basis points.

 

 

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