PowerShares Spreads The Love

September 21, 2006

PowerShares lists ten FTSE/RAFI ETFs on the Nasdaq Stock Exchange, spreading its funds among the three major U.S. stock exchanges.

PowerShares listed ten new FTSE RAFI "fundamentally weighted" exchange-traded funds (ETFs).  The begain trading on the Nasdaq Stock Exchange on September 20.

The new funds expand the list of FTSE/RAFI PowerShares from one to eleven.  They include one U.S. "smid-cap fund," which compliments the existing large-cap FTSE/RAFI fund, as well as nine sector products.  The new funds are:

PowerShares FTSE RAFI US 1500 Small-Mid Portfolio
PowerShares FTSE RAFI Basic Materials Sector Portfolio
PowerShares FTSE RAFI Industrials Sector Portfolio
PowerShares FTSE RAFI Consumer Goods Sector Portfolio
PowerShares FTSE RAFI Health Care Sector Portfolio
PowerShares FTSE RAFI Consumer Services Sector Portfolio
PowerShares FTSE RAFI Telecommunications Sector Portfolio
PowerShares FTSE RAFI Utilities Sector Portfolio
PowerShares FTSE RAFI Financial Services Sector Portfolio

The launch gives PowerShares a leg-up in the sector market over two of its chief quant-screened ETF competitors.  WisdomTree filed for a slate of dividend-screened global sector funds in July, and First Trust Advisors teamed up with Russell last week on a new family alpha-seeking domestic sector ETFs.

Bruce Bond, president of PowerShares, says that he expects to continue to build the portfolio of FTSE/RAFI products, with plans in the works for international funds.  In a new development, PowerShares may even take the brand overseas by listing FTSE/RAFI ETFs on foreign markets, something PowerShares has shied away from doing in the past.

The Ties That Bind

When the initial prospectus for the ten new funds was published in June, we noted that it did not indicate where the products would list.  That was unusual, as the listing venue is often one of the first decisions an ETF developer makes. Now we know why PowerShares was being so coy.

The decision to list on the Nasdaq Stock Exchange is a significant development in the ETF industry, and a major change for PowerShares. Currently, 36 of the 37 PowerShares ETFs list on the American Stock Exchange (AMEX).  Interestingly, the only PowerShares product not listed on the AMEX right now is the FTSE RAFI 1000 (NYSE: PRF), which trades on the New York Stock Exchange (NYSE). The decision to launch the new FTSE/RAFI ETFs on the Nasdaq, then, is quiet unusual.

" PowerShares wants to have a relationship with all the exchanges, and more and more ETFs are trading on the Nasdaq," said Bruce Bond, president of PowerShares.  "In the future, we expect to list more ETFs on the American Stock Exchange, the NYSE and the Nasdaq, as well."

Bond admitted that he had some concerns about moving from the specialist-based environment at the Amex to the Nasdaq's all-electronic market. He worried that the lack of a specialist for the products would mean wider spreads and limited liquidity in the early stages of the product launch.  After working with the Nasdaq, however, Bond became convinced that the exchange could provide a solid trading environment, even for funds with relatively low initial volume. He noted that the BLDRs ETFs trade well on the Nasdasq, despite having relatively low volume.

While Bond's argument about wanting a relationship with all three exchanges rings true, the cynic in me would point out another angle.  It is no coincidence, I'd argue, that the early PowerShares listed on the AMEX.  After all, the AMEX developed the "Intellidex" enhanced indexes that underlie many of the funds.  If PowerShares hadn't listed those funds on the AMEX, it would have created some unusual tensions.

A similar dynamic may be in place here.  While the relationship is not quite as direct, it still exists. Specifically, the Nasdaq owns about 25 percent of the London Stock Exchange (LSE), and the LSE owns 50 percent of FTSE.  A little nudge here, a little wink there, and presto - the FTSE RAFI funds list on the Nasdaq.  It probably doesn't hurt that the Nasdaq is in the process of acquiring the LSE.

Regardless, the listings are an important win for the Nasdaq, which has been gaining a larger and larger share of ETF trading under unlisted trading priveleges.  If the Nasdaq can prove that its platform can support important new products like these ETFs, that could give it a leg up in landing more ETF listings in the future.

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