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Fund Times: PowerShares Nearly Doubles ETF Family

Plus, news on Gabelli, Vanguard, Clipper, Evergreen, Fidelity, and more.

Morningstar Analysts, 06/12/2006

Proving its appetite for new exchange-traded funds is limited only by its imagination, PowerShares Capital Management announced in an SEC filing last week its intention to launch 31 new ETFs.

If they're all approved, the new offerings would almost double the size of the PowerShares exchange-traded fund family, which currently has 37 ETFs.

Ten of the new ETFs will be based on the "fundamental indexing" methodology of Rob Arnott, chairman of Research Affiliates, according to the filings. One of these RAFI funds (short for Research Affiliate Fundamental Index) will weight mid- and small-cap stocks based on revenues, book value, cash flow, and dividends instead of by market capitalization.

The other ETFs will apply the same weighting scheme to stocks in nine sectors: energy, basic materials, industrials, consumer goods, health care, consumer services, telecommunications and technology, utilities, and financials. The PowerShares FTSE RAFI 1000 PRF already tracks Arnott's flagship fundamental index, which he has argued is a better gauge of the stock market than market-cap-weighted indexes in general and the S&P 500 specifically.

The 21 other proposed PowerShares funds would cover various market-capitalization levels, some oddball strategies, and more sectors. Sixteen of them will carry the Dynamic brand name and use the same Intellidex indexing methodology used by a series of AMEX indexes already tracked by other PowerShares, such as PowerShares Dynamic Market PWC. In addition to the RAFI sector funds, the firm plans to offer another 10 Dynamic sector ETFs that would follow indexes that use quantitative models to select stocks. Many of the additional sector funds land in areas where PowerShares already offers, or aims to offer, funds, such as basic materials, energy, technology, and health care.

The remaining new ETFs include: PowerShares Dynamic MagniQuant, PowerShares Dynamic Large Cap, PowerShares Dynamic Mid Cap, PowerShares Dynamic Small Cap, PowerShares Dynamic Deep Value, PowerShares Dynamic Aggressive Growth, PowerShares Buyback Achievers, PowerShares Cleantech, PowerShares NASDAQ Dividend Achievers, PowerShares India Tiger, and PowerShares Autonomic Allocation Research Affiliates.

Besides being novel and unproven, these ETFs, like the rest of PowerShares' offerings, will be expensive by ETF standards. Their expense ratios will range from 0.6% to 0.7%. Overall, we are very suspicious of gimmicky and expensive offerings like these, and we suggest investors select low-cost funds that will better serve their needs, or they should look at some of the traditional mutual funds that are better than their ETF counterparts.

Gabelli Settles for $100 Million

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