In the Spotlight: PowerShares Active AlphaQ ETF

| About: PowerShares Active (PQY)

The Active AlphaQ Fund (NYSE:PQY) is PowerShares’ largest actively-managed ETF with about $21 million in assets at the end of May 2010. The AlphaQ fund has been one of the few Active ETFs provided by PowerShares that has gained some sort of traction with investors. It was the part of the group of 4 Active ETFs that were launched together by PowerShares in Feb 2008 and now represent the oldest actively-managed ETFs in the US.

The Active AlphaQ Fund saw a strong increase in assets in the month of Feb 2010, with AUM increasing by more than 400% as PQY saw inflows of $14 million. Since then the fund had continued to gather assets peaking at more than $25 million at the end of Apr, before dropping back down to about $21 million.

Investment Mandate

As mentioned in the In Focus article on PQY, the Active AlphaQ Fund has an objective of long-term capital appreciation with the goal of outperforming the Nasdaq 100 Index. The fund sub-advisors, AER Advisors, invest the portfolio largely in 50 Nasdaq-listed securities that are selected based on a ranking system developed by AER called the “NOW” ranking system, based on earnings growth, valuations and money flows. The portfolio is managed on a day-to-day basis by David O’Leary who is the CIO of AER Advisors. A unique aspect of the fund is that PQY focuses on holding each of the 50 securities on an equal weight of 2% and rebalances whenever the weight exceeds 3%. PQY has an expense ratio of 0.75% which is reasonable for actively-managed equity ETFs.

Performance Evaluation

Given that the managers operate the fund largely using a quantitative model, it’s hard to discern the investment reasoning behind the fund’s holdings or strategies. In general though, PQY has more than 90% of the fund invested in mid-cap growth and large-cap growth equities, and 44% of the fund is invested in companies within the information technology sector.

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Looking at the chart of the fund’s performance since inception, the results have been mixed. While PQY has underperformed its official benchmark by about 7-8%, it has outperformed the S&P500 by more than 10% during that period. However, that outperformance is more attributable to the fact that the Nasdaq 100 Index itself outperformed the S&P500 by a wide margin, rather than due to manager skill. Looking at a more recent period though, the performance is favorable for PQY.

If we look at returns in the last 6-months, the managers have really pulled up their socks. Especially during the market ramp-up from Feb-April end, PQY was able to outperform both the Nasdaq 100 and the S&P 500 quite handily. However, that outperformance has been reduced since, due to the tough month in May. That improvement in performance might well have been the impetus that lead to new flows into the fund starting in Feb.

If the managers can keep up the recent performance, then PQY could definitely attract more assets once the markets come out of their recent short-term slump.

Disclosure: No positions in above-mentioned names.

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