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 (NDAQ) 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.
One question that leaps to mind is whether PowerShares plans to alter the fund structure to gain more discretionary control over the marketing budget. The QQQs and BLDRs are both unit investment trusts [UITs], and under the UIT structure, the “marketing dollars” must be spent directly on advertising.
However, if the funds were to be converted to an open-ended structure, PowerShares could gain much more flexibility in how that money could be used, and not be forced into the cookie cutter UIT forced advertising budget, and perhaps be able to more effectively market the funds. This is one other reason PowerShares could be a great fit in this deal. Because of their recent deal with AMVESCAP, PowerShares has recently been through a huge proxy vote with ALL of its existing funds, so has the infrastructure and expertise to mount a proxy vote that could convert the fund structure. John Jacobs of the Nasdaq mentioned that the QQQ had some 900,000 investors, so such a proxy effort on the very retail-focused QQQ could be enormously expensive and wouldn’t necessarily be guaranteed to succeed…but could be a real boon both to PowerShares and the funds.
Another interesting aspect of the deal is whether the huge increase in assets would count toward PowerShares earnout on its multi-tiered buyout agreement with AMVESCAP. Under the terms of that deal, PowerShares receives large contingency payments when net management fees reach certain levels: a $40 million payment when net management fees reach $17.5 million per year; a $130 million payment when management fees hit $50 million/year; etc. It is not clear whether the sponsor fees qualify for these stepped payouts; calls to PowerShares’ PR group were not immediately returned.
Going forward, Nasdaq and PowerShares promised to work closely together on future index-based ETFs, although not exclusively: Nasdaq will be free to work with other ETF providers, and PowerShares will be free to list ETFs on other exchanges.