ETF Update: PowerShares' SEC Exemption; New Barron's 400 Index: Emerging Markets Benefit From Credit Crunch

Topics in this ETF Update Include: PowerShares' SEC Exemption; New Barron's 400 Index; Emerging Markets Benefit From Credit Crunch.

PowerShares' SEC Exemption
PowerShares Capital Management, provider of fundamentally-weighted ETFs, has been granted an exemption from the SEC on investment constraints. This allows other investment companies to invest in PowerShares' ETFs above the restrictions laid out in Section 12(d)-1 of the Investment Company Act of 1940, reports Kevin Burke for Ignites.

The exemption applies to all future ETF products brought to the market by PowerShares and requires that investment companies agree to certain terms before investing. Most importantly, they must enter into a participation agreement to not use any unnecessary influence. The next launch of PowerShares ETFs is set for October, with a municipal-bond ETF series.

New Barron's/Dow Jones Index Could Inspire More ETFs
More ETFs could be on the way, based on the announcement yesterday that Dow Jones Indexes and Barron’s will collaborate to launch the Barron’s 400 Index. The index will track the performance of highly-liquid U.S. stocks from American companies as defined by fundamentally-weighted, rules-based criteria. As of August 31, 2007, the estimated Barron’s 400 Index, based on back-tested data, is up 321.04% since its inception on December 31, 1997.

To be eligible for inclusion, stocks are rated by fundamental criteria that measure companies’ profitability, cash flow and “growth” and “value” characteristics. Stocks must then pass additional rules-based screens applied by Dow Jones Indexes, reports Michael Santoli for Barron's Online.

The top 400 stocks that meet these criteria are selected as components of the Barron’s 400 Index, which is reviewed semi-annually in March and September. Components are equal weighted and industries are capped at 20% of the index to ensure diversification. Real estate investment trusts (REITs) are ineligible for inclusion.

Dow Jones Indexes intends to license the new index to underlie financial products such as mutual funds, ETFs and other investment vehicles. For Barron’s, the new index will provide additional subject matter for articles and analysis in the print publication and on Barron’s Online.

The question that remains is: Who will be the first ETF provider to create an ETF that will track the Barron's 400 Index?

Emerging Markets Benefit From Credit Crunch

Emerging markets and the ETFs that follow them appear to benefit from the global credit crunch as long as there isn't a recession. According to an investment strategy report by Merrill Lynch, analysts do not detect one on the horizon.

The report says that "nominal GDP growth of 12% in emerging markets should be more than sufficient to deliver the consensus EPS growth target of 15% next year." Fundamentals are strong, yet emerging markets are still undervalued, underowned, undercapitalized and underleveraged", according to Trang Ho for Investor's Business Daily.

Next year, it appears the consumer and infrastructure sectors of the BRIC countries (Brazil, Russia, India and China) will take center stage thanks to higher global inflation and strong domestic demand. One way to play the emerging-market countries is through:

SPDR S&P BRIC 40 (BIK)

Claymore/BNY BRIC (EEB)

Energy, financials and telecommunications dominate in both ETFs, while EEB has higher weightings in materials and technology. EEB caps energy at 25% of assets, and BIK caps at 39%.

EEB vs. BIK 1-yr chart: