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Wednesday, January 11, 2006
PowerShares Growth in 2005
Here is an excellent overview of Powershares written by the Dow Jones Jen Ryan
The past year has been busy for exchange-traded-funds provider PowerShares Capital Management.
The Wheaton, Ill., company, which came on to the scene in mid-2003 by offering ETFs that attempt to beat traditional indexes, ended 2004 with just four ETFs and $280 million in assets. But in the past 12 months, the company has introduced 32 ETFs, or more than all the other ETF providers combined this year, and expanded its assets to $3 billion. ETFs resemble index-tracking mutual funds but trade on an exchange like stocks.
A number of observers expect PowerShares to remain a strong presence in the ETF market given its specialized products. However, some say that questions about the company's higher-than-average costs, lack of long-term performance data and uncertainty over how big a marketing push it will use to support its funds make it tough to gauge how much success PowerShares will have in the future.
"I think PowerShares is a neat company because they're facing two giants who own the market, and they've got to try and find a little niche for themselves," said David Jackson, editor of ETFInvestor.com, a Web site that provides analysis on ETFs.
PowerShares currently holds the No. 4 spot in terms of ETF assets. Barclays PLC's Barclays Global Investors unit dominates the market with $193 billion in ETF assets, followed by State Street Corp.'s State Street Global Advisors, which has $91.9 billion in ETF assets. Vanguard Group, which entered the ETF market after PowerShares but already had a big footprint in the index-based mutual-fund business, is third in line with $10.7 billion in ETF assets.
"The problem which PowerShares faces is that between them, Barclays and State Street basically cover all the tools that most investors need to build a diversified portfolio..., so PowerShares has to focus on slightly quirky ETFs," Mr. Jackson said. He added that "they're doing as good a job as anyone could under very difficult circumstances."
To hear PowerShares tell it, the company isn't necessarily competing with the plain-vanilla ETFs offered by other ETF providers. Instead, PowerShares is trying to add value above what investors would get through a traditional ETF. "The investors or advisers most interested in PowerShares are looking to use the products that give them an opportunity to outperform or deliver less risk to their client in a very efficient way," said Bruce Bond, chief executive of PowerShares.
In addition, the audience that PowerShares is appealing to is more retail-oriented than either Barclays or State Street, which tend to target more institutional investors, Mr. Bond said. Ronald DeLegge, publisher and editor of ETFGuide.com, agrees that "what they're doing appeals to a certain demographic of active investors or maybe investors that aren't completely sold on the idea of index investing."
Though he added, "whether the company is able to prove that it's methodology can produce better results remains to be seen. "Mr. Jackson, of ETFInvestor, agreed that the performance of PowerShares will be key in coming years. Cost is another issue that may keep some investors or advisers from widely adopting PowerShares.
Most PowerShares ETFs have a 0.6% fee. According to data provided by ETF Guide's DeLegge, as of the fourth quarter, the average expense ratio for broad-market ETFs was 0.26%, 0.46% for industry and sector ETFs, 0.52% for global and international ETFs, 0.61% for emerging-market ETFs, and 0.47% for specialty index ETFs.
Another factor that will be crucial in determining how much success PowerShares will have in coming years is its marketing campaign. "On the retail side, I don't think they're making a big enough push," said Mr. DeLegge. "They've been going at this frantic pace of bringing new products to market and getting a lot of headlines," he said. "That's been their strategy. But what happens when there are no more products [to bring to market]?"
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