Small & Micro-Cap ETFs
The simplest would be to buy small cap stocks or ETFs before the year end and hold until they have a pop. Since the definition of “small-cap” has been continuously revised up over the past few years, it might be a good idea to look at “micro-cap” stocks. Here are a few ETFs:

PowerShares Quant Strategy Broad ETFs
PowerShares Dynamic Market Portfolio (PWC)
PowerShares Dynamic OTC Portfolio (PWO)
PowerShares Dynamic MagniQuant Portfolio (PIQ)
PowerShares DWA Technical Leaders Portfolio (PDP)
Value Line Industry Rotation Portfolio (PYH)
Value Line Timeliness Select Portfolio (PIV)

By Matthew Hougan

The real question with these new active ETFs is not active vs. passive. It is, "Does front-running matter?"

Your blog about chasing returns got me thinking, Jim: Will all these new quantitative strategies suffer from returns decay?

By returns decay, I mean a fading of outperformance over time. In other words, will these new quantitative strategies outperform during their first stretch on the market, only to lag over the long haul?

It's easy to imagine why this might happen. These strategies are designed in the rearview mirror, using historical data to create an investment screen that would have beaten the market in the past. By capturing whatever trends exist in the market, you might guess that these funds would ride on inertia and continue to outperform immediately post-launch. But as market forces shift, will the funds keep up? In the active-quantitative world, people are always monkeying with their formulae trying to keep their models au courant. But these new quantitative ETFs are "set it and forget it," as far as I know.

PowerShares has received an exemption from the Securities and Exchange Commission [SEC] regarding Section 12d-1 of the Investment Company Act of 1940.

What does that mean? It means that mutual funds can invest large sums of money in PowerShares ETFs.

Hickey and Walters (Bespoke) submit: We have taken all the ETFs from our daily ETF Trend report and calculated their second quarter and year to date price performance. Not only is this a useful list of ETFs sorted by category (much like our popular ETF Cheat Sheets), but it also shows which areas have outperformed or underperformed in recent quarters.

Below we highlight index, style, dividend and other strategic ETFs. In the second quarter, QQQQ, DIA, NYC and OEF all outperformed the S&P 500 tracking SPY. Smallcap and midcap ETFs were up, but they underperformed their largecap brethren. Growth stock ETFs outperformed value stock ETFs, and many of the dividend ETFs were down or only up slightly in price.

January 30, 2007

Special message: Yesterday we conducted a lengthy podcast interview with Kevin Rich of Deutsche Bank regarding the spate of commodity ETFs issued by them in concert with PowerShares. It is available free to the public without registration. Given today's action in commodity markets, you may find it enlightening.

DOH!!

You may not be old enough to remember the original "DOH" guy (James Finlayson) from many Laurel and Hardy movies and skits, but he was a favorite character back then. His pic is here since it represents typical reaction to another day when market action defied poor economic news. The Fed's review of economic conditions revealed "...a distinct slowdown in housing with the majority of Fed's 12 regions reporting lower asking prices for homes, a softening in sales and rising inventories of unsold homes." Bearish? Not on your life!

Now why would we post a cartoon like this? Because it was published in 1974 in the Sacramento Bee, and the U.S. has done nothing to alter the frustration depicted. Today we’re treated to the same scene, as OPEC threatens supply cutbacks to support the price levels we suggested over the past two weeks.

"Bernanke to the rescue" along with a short-squeeze sums up today's stock market rally. You'll get no argument here. And, what did he say to cause this buying stampede? He said he was worried about the health of the housing market; that the poor conditions in the sector could cause a drag on economic growth by 1-1.5%; he didn't know how protracted the decline would be; and, inflation fears are declining. Translation? The Fed is going to cut interest rates and continue to print enough money to keep things chugging along. End of story.

So you can go from market cap weighted indexation to fundamental weighted indexation. You can call a product an Intellidex or Alphadex or some other term that seems to meld the idea of active management implemented within some form of index fund or ETF. But I can’t get around the fact that it’s just not alpha.

"The problem which PowerShares faces is that between them, Barclays and State Street basically cover all the tools that most investors need to build a diversified portfolio..., so PowerShares has to focus on slightly quirky ETFs," Mr. Jackson said.