Everything that No One Can Talk About

September 06, 2005

Enhanced Indexes / Semi-active Funds

This field, pioneered by PowerShares in the ETF industry, looks ascendant.  More and more firms are looking to launch "enhanced" products, and PowerShares keeps rolling out new funds like there's no tomorrow.

Dow Jones Microcap

Dow Jones surprised a number of people this summer when it rolled out an enhanced index.  After all, Dow Jones is the original home of indexing; the wellspring; the mothership.  And now it was embraced this avant-garde offshoot of the indexing industry?

The answer is yes.  At least for the murky world of microcaps, Dow Jones has apparently decided that investors can be better served by an enhanced approach.  It rolled out its enhanced index earlier this year, and First Trust Advisors licensed it for an ETF.

The sad thing for First Trust is that, even if all goes well at the SEC, it'll be the third belle at the micro cap ball: BGI launched its own microcap index in early August, just beating PowerShares for first-mover advantage.  First Trust won't even have the first enhanced micro cap ETF, since PowerShares' product is enhanced as well.

Q-Funds Technology Focus Portfolio

While we're covering the enhanced ETF upstarts, we've gotta mentioned Firsthand Funds, the controversial California mutual fund shop famous for its high beta tech funds.  Founded by Kevin Landis, Firsthand Funds is turning to the fascinating world of ETFs as a new source of growth.  They filed with the SEC in December 2004 for the right to launch a tech-focused fund.  The Q-Funds Technology Focus Portfolio will use quantitative strategies to select 30 tech stocks within the S&P 500 that should outperform the market in the short-term.

Firsthand Funds has said that it wants to launch an active ETF, but that it doesn't want to be the first to try.

--PowerShares A-Plenty--

PowerShares rolls out funds by the dozens.  The ambitious pioneer of enhanced indexes has launched 18 funds in the past year, and now has over $1 billion in assets under management.  They're not letting up either, with at least twenty-two additional funds in registration. While all the funds are "enhanced funds," most are also sector products, and will be covered under the "sectors" section of this article. Some of the most exciting funds, however, are the ones partnered with outside developers - and those will be covered here.

Getting Ziggy With Zacks

PowerShares rolled out its first Zacks-partnered product in mid-August, with the debut of the Zacks MicroCap Portfolio.  The fund relies on Zacks Investment Research's proprietary quantitative research approach in an attempt to outperform the market.  Although its too early to gauge the market's reception, that's not stopping PowerShares from extending the Zacks' brand.

One product that's been in registration with the SEC for a while is the Zacks Large Cap ACE Fund.  That fund would track the popular Zacks Rank Large Cap Index, a long-standing index that tracks the performance of companies with rising analyst earnings estimates. 

PowerShares also has a small cap Zacks fund in the works.  All they need is a Zacks midcap product and they'll have the whole investment universe covered.

Valuing ValueLine

One new filing that sure to gets tongues wagging is for the PowerShares ValueLine #1 Timeliness And Safety Portfolio.  Although it's a mouthful, the ValueLine fund could attract a lot of interest, as there are heaps of investors who slavishly follow Value Line, one of the oldest and most respected names in stock market research.  The fund would purchase the 50 stocks with the highest ratings for safety and timeliness under the Value Line System.  For what it's worth, the Value Line Index - an equal-weighted index of 1,700 highly-ranked names using similar methodology - has trounced the major market averages over the past two decades.

Research Is Fundamental

Another PowerShares filing with high-profile potential is the PowerShares FTSE RAFI US 1000 Portfolio.  That portfolio would track the recently launched "fundamental-ranked" index developed by FTSE and academic researcher Rob Arnott.  The trick is that, rather than weighting stocks by market capitalization, the index weights them by fundamentals: sales, cash flow, book value and dividends.  The result is a value-biased index, and one that has outperformed major market indexes (along with other value indexes) four decades - at least!  A global index is also available from FTSE, but PowerShares has yet to act on it.

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