PowerCubes

October 19, 2006

Nasdaq transfers sponsorship of the QQQs and five other funds to PowerShares. At stake? A $20 million marketing spend.

PowerShares has entered into an agreement with the Nasdaq to assume sponsorship for the hugely popular Nasdaq-100 Index Tracking Stock (NDAQ: QQQQ), as well as the Nasdaq-100 European Tracker (NDAQ: EQQQ) and Nasdaq's 4 BLDRS funds (ADRE, ADRD, ADRU, ADRA).

The deal brings the six funds and a combined $19.5 billion in assets under the PowerShares banner, more than tripling the company's total assets under management, from approximately $7.5 billion to nearly $27 billion.

Shareholders in the funds should notice no differences beyond the rebranding of the funds: the expense ratios, tickers and indexes will all remain the same.  The Nasdaq will continue to administer and own the underlying indexes, including the Nasdaq-100, and The Bank of New York will remain as trustee.

What will change, however, is the marketing and sales arrangements, which PowerShares will acquire (we assume inexchange for a cash payment, although the two parties declined to discuss details), including the massive marketing budget for the funds.

As sponsor, PowerShares will use its broad sales apparatus to market the funds with financial advisors.  John Jacobs, CEO of Nasdaq Global Funds, said that the key factor driving the deal was Nasdaq's desire to link up with a partner with broader sales reach. In fact, Nasdaq has been trying to sell the funds' sponsorship over the past couple of years, and it is believed that they talked to all of the other major players in the ETF industry, likely including BGI and SSgA, but ultimately determined that the best fit was with PowerShares. 

In addition to prestige, PowerShares will, as mentioned, control the marketing spend for the six funds … and that spend is substantial. According to the prospectus, the QQQ collects 10 basis points per year from shareholders for "marketing expenses," while the BLDRs funds collect between 8 and 14 basis points per year. Multiply 10 basis points by $19.5 billion and you get a $19.5 million advertising budget … no small cookie by any means.

The deal is similar in many ways to the November 2005 arrangement between the American Stock Exchange and State Street Global Advisors (SSgA), whereby SSgA bought the licensing rights to the SPDR (SPY), Midcap SPDR (MDY) and Dow Diamonds (DIA) ETFs for an undisclosed fee. That deal was also about controlling the marketing budget, which in that case, worked out to $21 million per year.

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