Everything that No One Can Talk About

September 06, 2005


streetTracks SPDR Dividend ETF

The most exciting new streetTracks fund of all may be the specialty offering.  The streetTracks SPDR Dividend  ETF will track the S&P's recently launched High Yield Dividend Aristocrats Index.  Launched May 2005, that index features all of the companies in the S&P 500 with a 25-year history of boosting their dividends.  The important word is "all": Unlike other dividend indexes on the market today, the Dividend Aristocrats index doesn't select only the highest-paying names. Instead, it includes all companies with a consistent record of boosting their dividends. The result is that the index offers a lower yield than focused dividend indexes, but much more diversity. 

Whereas most dividend indexes have huge concentrations in the Utilities and Finance sectors, for instance, the Dividend Aristocrats Index looks more like a dividend-screened version of the S&P 500 itself.  Utilities and banks make up nearly 50 percent of the Dow Jones Select Dividend Index, for instance, but just over 20 percent for the Dividend Aristocrats.

S&P's historical data shows that the Dividend Aristocrats Index outperformed the S&P 500, S&P 500 Equal Weight and S&P 500 Barra Value indexes over the past three, five and ten-year periods - and it did so with less risk.  Over the past ten years, for example, it's topped the S&P 500 by 2.4 percent/year in total return. 

That strong performance - combined with the decent diversification of the index - raises the possibility that investors could replace their large-cap index exposure wholesale with the dividend-screened Aristocrats fund from SSgA.  If that idea catches on, this could be a very significant fund for SSgA.

And More PowerShares, Of Course

PowerShares has its own specialty offerings, too, including three new funds that will compete with the Dividend Aristocrats in the growing dividend space. 

The first fund - which shares much in common with the Dividend Aristocrats product - will include all the companies on the U.S. market with a ten year history of boosting their dividends.  As such, the fund will act as a dividend-screened version of a broad market ETF - and could form a core holding in many portfolios.  As currently constructed, the fund will hold a little over 300 securities, and will have a marked large-cap tilt.  Using historical data, this fund has beaten the S&P 500 voer the past ten years by about three percent per year.  The fund will be called the "Dividend Achievers" portfolio.

The second fund is the High Growth Rate Dividend Achievers Portfolio.  This fund will buy the 100 companies with the highest ten-year dividend growth rate on the market.  As currently constructed, the fund will tilt strongly towards Financials, with a Financials weighting of 50.7 percent.

The third fund is the International Dividend Achievers Portfolio, which will hold all foreign companies with American Depository Receipts trading in the U.S. that have a five year history of boosting their dividends.  Based on the most recent data, that comes to 42 firms, with a strong dose of Financials and a smattering of Materials, Utilities and Energy stocks.  Based on historical data, this fund has walloped the MSCI EAFE international index over the past ten years, returning 10.6 percent per annum versus 5.9 percent.

It remains to be seen whether investors really want to customize their dividend exposure in this way, but PowerShares is willing to find out.  The funds are scheduled to launch on Thursday, September 15.

Beyond the dividend funds, PowerShares also has plans for two targeted funds.  And although either of these funds have the potential of the dividend products, they could still be interesting ETFs.

The first fund is the PowerShares Palisades Water Portfolio.  That fund will track the Palisades Water Index, a new index launched on August 11 by the Amex which is designed to capture the performance of companies involved in the management of the most basic commodity in the world: water.  The index is a (very) modified equal-dollar weighted index of 25 companies that stand to benefit from the increasingly difficult task of slaking the world's thirst. Using historical data, the index is up 35 percent over the past eighteen months, compared to 11 percent for the S&P 500.

The second fund covers a more obscure area, but one that is nonetheless exciting. The new PowerShares Lux Nanotech tracks the performance of 26 publicly-traded companies operating on the frontiers of nanotechnology.  The companies include businesses working on everything from nanomaterials to nanotools, ranging in size from industrial giants (Dupont, GE) to theoretical research groups (NanoPhase Technologies).  The index has only been around for a few days, but interest in nanotechnology is high.

In Conclusion

There you have it - a look at what's on the horizon.  From commodities to leveraged funds to nanotech indexes, there's something in it for everyone.  And clearly, the best days of the industry are still ahead of us.

It can be difficult to wait as the years tick by for the products to make it to market.  We've been waiting two years now for the leveraged ProFunds (although I think that wait is almost over).  But just think back a few years - back to when there were no gold funds, no dividend funds, no enhanced indexes fund and no VIPERs, it's clear that things are moving right ahead.

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