PowerShares' New VRDO ETF: Investor Education the Main Challenge

Last Thursday, PowerShares launched two more fixed-income ETFs on the American Stock Exchange.

The PowerShares VRDO Tax-Free Weekly Portfolio (PVI) is the first of its kind. It tracks the Thomson Municipal Market Data VRDO Index, which covers variable rate demand obligations [VRDOs]. VRDOs are floating-rate bonds issued by municipalities that are always purchased at par. They can be put back to an investment dealer at certain times so that the investor receives par plus interest. As municipal debt, they are exempt from federal and home-state taxes.

Generally, VRDOs are highly liquid and high-quality investments. However, they generally require a minimum investment of $100,000, which puts them out of reach for the average investor. PVI offers a far cheaper way for investors to gain exposure to the VRDO space. The ETF carries an expense ratio of 0.25%. The main obstacle facing the fund is likely investor education: Many have never even heard of VRDOs.

The PowerShares High-Yield Corporate Bond Portfolio (PHB) tracks the Wachovia High Yield Bond Index of bonds rated below investment-grade by Moody's, Fitch or Standard & Poor's, and payable in U.S. dollars. PHB has an expense ratio of 0.50%.

The iShares complex also has a high-yield bond ETF, the iShares iBoxx $ High Yield Corporate Bond Fund (HYG). Like PHB, it holds roughly 50 bonds and has an expense ratio of 0.50%. The indexes underlying both funds showed very similar performance, with PHB's index up 7.19% and 5.77% respectively for the one-year and three-year periods ended September 30. HYG's index was up 7.07% and 5.76%.

PowerShares has another fund waiting in the wings as well: the PowerShares Preferred Portfolio, tracking the Merrill Lynch Fixed Rate Preferred Securities Index, is expected to launch on the Amex soon and trade under the symbol PGX.

Written by Heather Bell.

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