For Truth In ETF Advertising, PowerShares Fails

By Matthew Hougan and Murray Coleman

Transparency is a key virtue of exchange-traded funds. If an investor wants to know what's in their ETF, they can go to a Web site, type in the ticker and see exactly what it holds.

It's one of the reasons investors like ETFs: What you see is what you get.

Sometimes, however, the information that gets passed around this industry falls short of the full truth. A prime example is a press release issued Wednesday by PowerShares. Its headline was: "PowerShares First to Receive SEC Exemptive Relief for Actively Managed ETFs."

That sounds like a big story. The fast-growing ETF market has been waiting for years to gain approval from the SEC to launch a nonindexed, actively run fund. Media outlets like Reuters picked up the story and ran with it, writing:

"PowerShares Capital Management said on Wednesday it won conditional regulatory approval for four actively managed exchange-traded funds [ETFs], becoming the first firm to get the green light for the products."

Well, sort of. In fact, the SEC provided exemptive relief to four ETF providers to launch active funds:

• PowerShares
• WisdomTree (WSDT.PK)
• BGI
• Bear Stearns (BSC)

You can read the orders here. That makes PowerShares ... first among equals?

But the story becomes even more convoluted when other recent developments are taken into account.

The SEC actually gave a provisional green light to all four firms in early February. At the time, regulators said that outside interests could call for a public hearing on the matter anytime through 5:30 p.m. ET on Tuesday, February 26. No one protested, so when the comment window expired, the SEC made its conditional go-ahead final.

Don't get us wrong: That's still news. Protests at public hearings effectively killed the prospects for active ETFs in the first half of this decade. But it's more industry news than PowerShares news, as it applied equally to all four companies. In fact, the way it looks from here, PowerShares isn't even first in line to launch an actively managed ETF.

After all, getting your exemptive relief filing doesn't mean you can launch a fund. It's a critical hurdle, but not the final one. Before you launch, you need a "Notice of Effectiveness" from the SEC. That's the formal go-ahead that says your prospectus is "live."

Here's the link to all the recent Effectiveness Notices. You won't find PowerShares in there. You will, however, find the Bear Stearns Active ETF Trust. It got "noticed" at 5:15 p.m. on February 27, 2008.

(Even that doesn't guarantee launch; there are additional regulatory steps that both fund companies and the listing exchanges must go through.)

PowerShares' Bruce Bond said in Wednesday's press release that the PowerShares exemptive relief was "an important milestone for the ETF industry..."

Well, yes. As were the relief offerings for Bear Stearns, BGI and WisdomTree.

The real milestone will come when the first fund actually launches, and right now, the smart money's on Bear Stearns (which, by the way, was the first company to file a prospectus for an actively managed ETF).

This isn't the first time PowerShares has claimed a "first" that really wasn't. In August 2005, the company issued a press release saying "PowerShares Capital Management LLC Introduces the World's First Micro Cap Exchange Traded Funds." BGI actually beat them to market by six days.

On August 7, 2007, PowerShares issued a press release reading, "PowerShares Prepares World's First Family Of Muni Bond ETFs" (pdf file). But both BGI and State Street Global Advisors beat them to market.

More recently, on January 30, 2008, PowerShares put out a press release saying, "PowerShares To List Industry's First India ETF With Direct Investment Into Local Indian Securities." As of February 29, the fund hadn't launched ... but the WisdomTree India Earnings ETF (EPI) had.

PowerShares has a lot of real "firsts" in its book, and likely, many more to come. They're an aggressive, innovative firm, and they deserve credit for pushing the envelope and growing this industry.

But this industry has always prided itself on a what-you-see-is-what-you-get mentality. It should stay true to that, even as we roam onto the range of active management.

Comments

[kkin365:]

Given that the price of an ETF issue fluctuates continuously during a day, how would active management -- with buys and sells all day -- affect pricing of ETF? Would it be subject to manipulation? What controls are incorporated in pricing?

2008 Mar 03 09:42 AM

[jimsep:]

Well done, I have been wondering about Powershares "first" claims, particularly with respect with India, where i am fully aware of Wisdom Tree. They need to tamp it down.

2008 Mar 03 12:31 PM

[User 86999:]

So, how does the debate between "first" or "first of the arbitrarily listed four" help a Seeking Alpha reader? What is so significant about this piece from investment point of view?

2008 Mar 03 02:02 PM