Anatomy of an ETF Upstart
PowerShares is small but has big plans.
The exchange-traded fund world is filled with cute sobriquets: iShares and PowerShares, SPDRs and Vipers, StreetTracks and Qubes. Smart investors know there's more to an investment than a catchy name, though. There are investment advisors of varying sizes and expertise behind those monikers. To help put these firms and their places in the industry into context, this column will offer periodic reviews of ETF purveyors. We'll start at the bottom--size- and age-wise--with industry upstart, PowerShares Capital Management of Wheaton, Ill.
PowerShares was founded by former Nuveen Investments sales and marketing executive H. Bruce Bond in August 2002. Its offices are in a single-story professional building next to a suburban Chicago children's zoo--a location that belies the splash the firm is trying to make in the ETF industry. With more than $500 million in assets at the end of January 2005, PowerShares is still miniscule compared with industry-leader Barclays Global Investors and its $114 billion iShares ETF family. However, it has attracted attention with its unorthodox offerings: Whereas all other ETFs track traditional indexes, PowerShares' strategy is to offer ETFs that track specialized indexes designed specifically to beat the usual benchmarks.
PowerShares' first two funds, PowerShares Dynamic Market (PWC) and PowerShares Dynamic OTC (PWO), track the American Stock Exchange's Intellidex indexes. These benchmarks are reconstructed by Amex once a quarter based on a quantitative stock-picking model that trolls for the most promising securities in the broad U.S. stock market and the Nasdaq Composite, respectively. So far, the funds have been able to beat their respective benchmarks. The funds' trailing one-year gains through Feb. 4, 2005--17.2% for the Dynamic Market fund and 9.3% for the Dynamic OTC portfolio--are far ahead of the S&P 500, which rose 8.5%, and the NASDAQ Composite, which advanced 3.6%. Both funds are below the median size for ETFs, but the Dynamic Market ETF's strong absolute performance has helped it gather $254 million in less than two years.
Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.