Preferring ETFs

August 04, 2006

PowerShares files for seven more ETFs with the SEC, tapping into new kinds of assets, including preferred stock.

When Bruce Bond of PowerShares says that he wants to provide exchange-traded funds (ETFs) across all asset class, he isn't kidding around.  Fresh from inking a deal with Deutsche Bank to co-brand DBC's family of currency and commodity ETFs, PowerShares has filed with the Securities and Exchange Commission (SEC) for the right to launch seven new ETFs, including funds tied to assets like preferred securities, listed private equity firms and real estate investment trusts.

The seven new funds are:

PowerShares Financial Preferred Portfolio
PowerShares Listed Private Equity Portfolio
PowerShares REIT Preferred Portfolio
PowerShares DWA Technical Leaders Portfolio
PowerShares Value Line 400 Portfolio
PowerShares Value Line Industry Rotation Portfolio
PowerShares Wilderhill Progressive Energy Portfolio

The prospectus is available here.

The funds all carry a 70 basis point expense ratio, the new standard for PowerShares and one of the highest expense ratios in the ETF industry. Despite the high fees, however, the funds could attract sophisticated investors as, in many cases, that tap into previously untouched segments of the market.

For instance, the Financial Preferred Portfolio tracks the performance of the Wachovia Hybrid and Preferred Securities Financial Index, a market-cap weighted index of the preferred stocks of leading financial companies. Preferred stocks are unique securities that operate somewhere in the gray area between equities and fixed-income. Generally speaking, they pay a fixed dividend to shareholders and have a higher claim on assets in the event of a bankruptcy filing than do common stocks. They do not, however, have voting rights, and the dividend does not increase over time. They tend to be less volatile than common stocks, but come with limited upside potential. They are traded largely for their income potential.

The REIT Preferred Portfolio tracks a market-cap weighted index of REIT preferred securities from Wachovia.  Like the Financial Preferred portfolio, the REIT fund trades income stability for potential upside performance.

The PowerShares Listed Private Equity Portfolio attempts to capitalize on the rising popularity of private equity investments, and the recent trend of private equity funds listing their stocks on public markets. This fund comes with a number of unusual tweaks and risks, including the unusually subjective nature of the index.  According to the SEC filing, the index will be constructed by Red Rock Capital Partners using a proprietary methodology that will look at items like the "reputation" and "management" of individual companies.  It will be interesting to see how regulators, investors and specialists respond to what appears to be a rather subjective index.

The DWA Technical Leaders Portfolio tracks the performance of 100 U.S. companies selected by Dorsey Wright & Associates based on "strong relative strength" characteristics. Relative strength is a measure of how a stock is performing against its peers. Dorsey Wright chooses from large- and mid-cap stocks.

The Value Line 400 Portfolio selects 100 "number 1 rated" and 300 "number 2 rated" stocks from Value Line's Timeliness indicator, which uses a quantitative ranking system based on price and earnings momentum, earnings surprises and other factors to select components.

The Value Line Industry Rotation Portfolio includes 75 stocks chosen based on the "timeliness" of their industry. Essentially, the fund chooses the highest rated stock in each of the 50 highest rated industries, and the second highest rated stock in the second 50 highest rated industries. The index is adjusted on a quarterly basis.

The PowerShares Wilderhill Progressive Energy Portfolio operates at a unique point on the energy continuum. Unlike the existing PowerShares Wilderhill Clean Energy Portfolio (ticker: PBW), which focuses on companies involved in the development of clean energy technologies like solar and wind, the Progressive Energy Portfolio selects companies seeking to improve the use of fossil fuels and nuclear power. Companies creating hybrid batteries or clean coal technology are just two examples of the kind of companies included in the modified equal-weighted index.

The original PowerShares Wildherhill Clean Energy Portfolio is among the most popular of the PowerShares' 37 existing ETFs, with assets over $650 million.

PowerShares also already offers a Value Line fund, the PowerShares Value Line Timeliness Select Portfolio (ticker: PIV), which (despite the name) selects stocks based on a combination of Timeliness, Technical and Safety ratings from Value Line. Launched in December 2005, it currently has $185 million in assets.

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