PowerShares Keeps Expanding; Crosses $2 Billion Mark

October 25, 2005

PowerShares continues its dramatic expansion, with eight new industry funds on tap this week.

PowerShares Capital Management shows no signs of slowing its fevered pace of product launches.  The enhanced indexing pioneer says it will launch nine new sector-based funds on Wednesday, October 26, bringing the total count of PowerShares exchange-traded funds (ETFs) to thirty.  That's up from two - yes, two - a year ago.

 

The new funds will join eight existing PowerShares sector funds, which launched in late June.  Seven of the new industry funds will track Intellidex "enhanced" indexes from the American Stock Exchange, which use quantitative strategies in an attempt to outperform the market.  The two remaining funds will track specialty indexes: the Lux Nanontech Index, the leading index of companies involved in the nanotech space; and the SPADE Defense Index, which is focused on companies involved in the homeland security, space industry, and technology-based weapons systems industries.

 

The new funds are:

  • PXN -- PowerShares Lux Nanotech Portfolio
  • PPA -- PowerShares Aerospace and Defense Portfolio
  • PKB -- PowerShares Dynamic Building & Construction Portfolio
  • PXE -- PowerShares Dynamic Energy Exploration & Production Portfolio
  • PUI -- PowerShares Dynamic Utilities Portfolio
  • PMR -- PowerShares Dynamic Retail Portfolio
  • PXJ -- PowerShares Dynamic Oil & Gas Services Portfolio
  • PIC -- PowerShares Dynamic Insurance Portfolio

PowerShares CEO Bruce Bond says that with the launch of the new funds, PowerShares will have "the most diverse ETF industry offering in the United States."

 

iShares may disagree with that - it offers twenty-five different industry funds - but the iShares offerings do have a good deal of overlap, with multiple ETFs covering the same industry sector (five Financial funds, six Technology funds, etc.).

 

But that horse race is beside the point. The point is that PowerShares is dramatically expanding its line-up, and fashioning itself as a real alternative to the iShares and streetTracks families of straight indexed ETF line-up.  For every traditional indexed ETF, it seems, PowerShares wants to offer an "enhanced alternative."  The company hopes to convince investors and financial advisors to replace their traditional index holdings wholesale with the "enhanced" alternative.

 

Already Over $2 Billion

 

The eight existing sector funds launched in June have garnered a mixed reception from the market, with some funds off to a strong start ($120 million in assets for the Biotechnology and Genome fund) and some funds attracting little attention ($22 million for the Leisure and Entertainment portfolio).  But PowerShares has succeeded in creating some sort of critical mass, as their total assets under management jumped above $2 billion earlier this fall.  There are economies of scale for registering and offering more than one ETF (reductions in advertising, back office work, printing costs etc.), and the cost to maintain each of these funds is relatively small.

 

One common concern expressed about PowerShares' many-fund strategy is that it may keep asset levels and liquidity for the different funds below critical mass. The worry is that this could lead to uneven trading, with large bid/ask spreads that tax investors as they enter and exit the fund.  But a recent check of the PowerShares funds put the bid/ask spread for most funds around four or five cents - hardly the one penny spread common for the QQQQ or SPDR ETFs, but not out-of-line for most funds, either.  And if PowerShares can fashion itself as a real alternative to iShares - and if its enhanced indexes deliver as promised - it could hit find a very nice place for itself in the ETF industry.

 

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