PowerShares Takes On … PowerShares?

October 12, 2006

PowerShares launches eleven sector-focused Intellidex ETFs, going head-to-head with its own FTSE RAFI fund; we compare the two fund-by-fund.

Let the battle of the enhanced indexers begin.

In a rarity in the exchange-traded fund (ETF) industry, PowerShares has launched a new slate of ETFs that compete directly with existing PowerShares products already on the market.  The company eleven new ETFs include one market-timing fund, two industry funds and eight sector products.

The sector funds will go head-to-head with a recently launched slate of FTSE RAFI "fundamentally weighted" sector ETFs, which debuted on the Nasdaq Stock Exchange on September 20

 The new funds track "Intellidex" indexes developed by the American Stock Exchange (AMEX), and not surprisingly, they listed on the Nasdaq as well.  Intellidex indexes use a proprietary mix of quantitative screens in an attempt to outperform the market. Generally speaking, the indexes choose stocks based on some combination of growth-at-a-reasonable-price and momentum-based strategies. 

The funds charge 60 basis points per year in annual expenses, and are:

Market Timing
PowerShares Dynamic MagniQuant Portfolio (AMEX: PIQ)

Industry
PowerShares Dynamic Banking Portfolio (AMEX: PJB)
PowerShares Dynamic Healthcare Services Portfolio (AMEX: PTJ)

Sector
PowerShares Dynamic Basic Materials Sector Portfolio (AMEX: PYZ)
PowerShares Dynamic Consumer Discretionary Sector Portfolio (AMEX: PEZ)
PowerShares Dynamic Consumer Staples Sector Portfolio (AMEX: PSL)
PowerShares Dynamic Energy Sector Portfolio (AMEX: PXI)
PowerShares Dynamic Financial Sector Portfolio (AMEX: PFI)
PowerShares Dynamic Industrials Sector Portfolio (AMEX: PRN)
PowerShares Dynamic Healthcare Sector Portfolio (AMEX: PTH)
PowerShares Dynamic Technology Sector Portfolio (AMEX: PTF)

The Magniquant fund is a sector-rotation fund that uses macroeconomic data to make allocations across different sectors.

"We are very excited to welcome PowerShares back to the Amex for their 11 new ETF listings," said Cliff Weber, Senior Vice President of the Amex ETF Marketplace. "The Amex takes great pride in supporting PowerShares' 47 ETF listings on the Exchange as we continue to bring innovative products to the marketplace."

How Do They Compare

The big question for investors is how the new sectors funds compare with the RAFI portfolios already on the market.  Both are complete sets of "enhanced index" sector funds, and both aim to outperform the market. The two fund families approach that goal from very different perspectives, however, and as a result, their portfolios are very different as well. An investor should take care when choosing one fund family or the other, as they will perform very differently in different market situations.  (This will get more complicated later this year when First Trust launches its Russell-linked "AlphaDex" sector funds.)

As a general rule, the Intellidex funds tilt more towards growth and small caps than the FTSE RAFI portfolios, which select and weight stocks bases on four "fundamental" metrics: book value, income, sales and dividends.   The Intellidex indexes use a weighting methodology designed to sharply increase the weight of small-cap stocks, allocating at least 60 percent of the portfolio to "smaller" stocks, and equal-weighting those stocks so that even the smallest names have a substantial impact on the fund.

Below, we compare the two sets of index in the six sector categories that are directly comparable on a variety of fundamental- and performance-based metrics.  The FTSE RAFI Consumer Goods and Consumer Staples are not directly comparable to the FTSE RAFI Consumer Discretionary and Consumer Staples funds.  All data is through June 30, 2006, and is from PowerShares. 

It should be noted that the performance record is based on backtested data, and stretches over a period when small caps easily outperformed large caps. That factor explains why the Intellidexes beat the FTSE RAFI indexes on almost every measure for almost every sector.  There's no guarantee that small-caps will continue to perform so well.

Basic Materials

In the Basic Materials category, the Intellidex index has strongly outperformed the FTSE RAFI fund over the past one-, three- and five-years.  That is most likely due to its strong small-cap, although a sharply higher return-on-equity might help as well.  The results are compared below.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

11.19

13.32

3-Year

20.08

23.77

5-Year

17.06

27.80

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

13.86

13.52

Average P/B

2.53

2.77

Return on Equity

16.74

23.86

Average Market Cap.

$18.544 ($USB)

$8.096 ($USB)

Number of Securities

51

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

9.69

3.92

Large Cap Value

52.95

16.48

Mid-Cap Growth

8.59

16.28

Mid-Cap Value

23.52

35.40

Small Cap Growth

0.08

2.9

Small Cap Value

5.16

25.02

ENERGY

In the Energy patch, the Intellidex index once again handily beats the FTSE RAFI index on a 1-, 3- and 5-year basis.  And once again, the small-cap tilt is the likely explanation: the average company in the Intellidex index is one-fifth the size of the average company in the FTSE RAFI index.

Note also the significant discrepancy in the price/earnings ratio. Many experts believe that small-caps have gotten overly pricey, and that may be the case here. 

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

22.94

27.29

3-Year

32.23

36.87

5-Year

15.30

22.44

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

9.41

12.13

Average P/B

2.38

2.75

Return on Equity

28.40

28.89

Average Market Cap.

$151.539 ($USB)

$29.715 ($USB)

Number of Securities

51

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

111.24

13.90

Large Cap Value

73.87

18.91

Mid-Cap Growth

3.04

18.63

Mid-Cap Value

10.40

22.90

Small Cap Growth

0.61

8.40

Small Cap Value

0.83

17.27

FINANCIALS

In this case, the FTSE RAFI index has outperformed the Intellidex index over the past year, while the Intellidex has the edge for 3- and 5-years. Interestingly, the Intellidex fund has more "value-oriented" fundamentals, with a lower average P/E ratio than the FTSE RAFI fund.  The Intellidex fund also has a very strong value-tilt, unlike in other sectors.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

13.62

13.07

3-Year

14.92

15.11

5-Year

8.52

11.31

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

13.56

11.74

Average P/B

1.79

1.78

Return on Equity

13.98

16.75

Average Market Cap.

$76.054 ($USB)

$14.467 ($USB)

Number of Securities

225

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

 Large Cap Growth

6.37

9.85

Large Cap Value

66.02

25.59

Mid-Cap Growth

5.80

7.81

Mid-Cap Value

18.66

34.13

Small Cap Growth

0.54

1.43

Small Cap Value

2.61

21.20

HEALTHCARE

Here again, the Intellidex's back-tested historical performance tops that of the FTSE RAFI index.  The chief differences here are the market capitalization and the growth/value split. Although the average fundamental characteristics look similar, the Intellidex fund has 83 percent exposure to "growth," compared to just 34 percent for the FTSE RAFI index.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

0.50

2.11

3-Year

5.38

19.41

5-Year

2.68

14.42

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

18.28

20.54

Average P/B

3.36

3.28

Return on Equity

19.40

20.27

Average Market Cap.

$73.904 ($USB)

$14.220 ($USB)

Number of Securities

71

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

26.66

22.61

Large Cap Value

44.56

7.43

Mid-Cap Growth

7.65

38.64

Mid-Cap Value

5.46

4.67

Small Cap Growth

0.00

22.47

Small Cap Value

15.6

4.18

INDUSTRIALS

The Intellidexes easily outperform the FTSE RAFI funds here, thanks again to the dramatic small-cap tilt.  The FTSE RAFI fund is dominated by large-cap value, while the Intellidex has almost no large-cap value exposure.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

17.68

23.53

3-Year

19.16

26.13

5-Year

10.06

16.60

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

17.68

17.65

Average P/B

2.67

3.03

Return on Equity

17.77

19.27

Average Market Cap.

$92.423 ($USB)

$12.640 ($USB)

Number of Securities

152

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

20.50

20.70

Large Cap Value

44.13

2.54

Mid-Cap Growth

8.06

18.56

Mid-Cap Value

22.31

23.44

Small Cap Growth

0.34

18.57

Small Cap Value

4.66

16.19

TECHNOLOGY

Both of these funds achieve a balance between growth and value exposure. The Intellidex strongly outperforms the FTSE RAFI on a historical basis, most likely because of its pronounced small-cap tilt.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

6.13

15.02

3-Year

10.63

12.44

5-Year

2.58

5.35

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

18.61

20.82

Average P/B

2.61

3.19

Return on Equity

18.15

20.85

Average Market Cap.

$85.373 ($USB)

$19.688 ($USB)

Number of Securities

109

60

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

39.30

7.43

Large Cap Value

39.85

9.96

Mid-Cap Growth

9.87

30.95

Mid-Cap Value

8.33

14.29

Small Cap Growth

0.36

18.53

Small Cap Value

2.30

18.84

UTILITIES

Once again, there is very little difference in the growth/value split between these two indexes.  The difference lies in the capitalization, with the average market cap on the Intellidex just over half that of the FTSE RAFI.  That small-cap tilt, along with the Intellidex's focus on return-on-equity, led to strong outperformance in recent years.

Performance Comparison - Index Only - Through 6/30/2006
Time Period

FTSE RAFI

Intellidex

1-Year

2.60

8.96

3-Year

18.38

21.83

5-Year

11.77

14.28

Fundamentals

Category

FTSE RAFI

Intellidex

Average P/E

15.59

15.91

Average P/B

1.77

2.13

Return on Equity

10.79

14.91

Average Market Cap.

$14.186 ($USB)

$8.168 ($USB)

Number of Securities

71

30

Capitalization Comparison (%)

Category

FTSE RAFI

Intellidex

Large Cap Growth

0.00

0.00

Large Cap Value

43.19

19.97

Mid-Cap Growth

6.05

10.62

Mid-Cap Value

42.64

50.64

Small Cap Growth

1.18

2.57

Small Cap Value

6.95

16.20

 

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