97 New ETFs Planned for U.S. Market -- Powershares Leads the Way

by: Richard Kang

On Monday of this week I received the latest reports from Deb Fuhr at Morgan Stanley [UK], who was probably the first of what is still a small number of sell-side analysts covering the ETF space.

The reports are big on stats and various data tables. One of the tables that always interests me is the one titled “Announced Plans for New ETFs” (for those of you who have the report, it's 'Exhibit 68' on page 35 of 83 in the report titled “Exchange Traded Funds – First Half 2006 Global Review”).

There are about 40 listed for Europe, about half of them being European sector ETFs from Lyxor.

For the US, there’s a list of 97. The slicing and dicing of the health care industry by HealthShares with 12 ETFs is part of the list. Another dozen or so “dynamic” sector ETFs from PowerShares. Despite this, PowerShares seems set to completely master the slicing and dicing by sector with yet another 8 sector funds based on Rob Arnott’s RAFI (fundamental indexation) methodology. You’ve got to give attention to PowerShares considering the full list of offerings they have in the pipeline. The sector funds may not appeal to the vast majority who have similar existing positions, but here are some others from this list that look really interesting from PowerShares:

PowerShares Autonomic Allocation Research Affiliates Portfolio. I just met with Rob Arnott last week here in Toronto so I wish I knew of this fund to ask him first, what’s it all about, and second, who thought of the name. Sounds like some kind of asset allocation fund but I’m eager to understand what autonomic means. I see on Wikipedia that “The autonomic nervous system [ANS] is the part of the nervous system of the higher life forms that is not consciously controlled.” I might suggest they find another word that doesn’t make my spidey sense tingle.

PowerShares Listed Private Equity Portfolio. I’m interested to understand the logistics of this fund. Certainly, it’s intriguing and I am all for expanding into new asset classes/strategies. However, the list of questions regarding a private equity based ETF requires a whole new blog site.

PowerShares Financial Preferred Portfolio and PowerShares REIT Preferred Portfolio. In this yield-hungry, expected low return environment, it’s not surprising to see this as well as all the dividend oriented ETFs.

PowerShares Cleantech Portfolio. I’ve mentioned this before and I think the high tech space applied to alternative energy, clean air/water and other closely similar areas is a worthy consideration for any portfolio. I see it as something that fits well with those who have PBW and PHO. Speaking of PBW, another new ETF mentioned is the PowerShares WilderHill Progressive Energy Portfolio. I hope to find more and report on this later.

PowerShares India Tiger Portfolio. For the truly long-term oriented investor, I believe that emerging markets are an important area to consider. Although a BRIC ETF is on this list, I wonder about the composition formula and the relatively underweighting in India. I’ve reported here earlier that the breakdown will be something like: 50% Brazil, 30% China, 15% India, and 5% Russia. Since we already have ETFs for Brazil and China, why not for India? The concept of BRIC is interesting but I think for most investors having EMM or VWO plus some single country exposure like India or China should be enough for EM exposure. Here’s a short online presentation by Goldman Sachs on the BRIC story.

Not to be outdone, both the SPDR family as well as WisdomTree are coming out with their own line of sector funds (ten each). Someone has to invent a word for saturation within the fund industry. I understand everyone thinks they’re doing something unique but after the launch of all these funds, if it actually happens, be prepared for even more commentary about the mass proliferation of ETFs!

streetTracks is coming out with something called the streetTracks KBW Mortgage Finance ETF. We see a lot more mortgage investment funds here in Toronto. I’m interested to see what this ETF is about.

Of course there are some commodity based ETFs (GSCI tracker from BGI and at least two oil ETFs). With all the new stuff from PowerShares, it’s funny that BGI only has a list of five: Aside from the GSCI tracker, the rest are rather boring fixed income ETFs. I say boring, but likely required in this current market environment.

Lastly, I’ll mention the First Trust Value Line & Ibbotson Equity Allocation Fund. Ibbotson & Associates are rather well known for asset allocation software. I’m thinking this could be like the autonomic ETF mentioned earlier. Burton and Malkiel may not like it, but the ETF industry is trying to move away from pure low cost indexing. I say, innovate away!