PowerShares is adding to its lineup of international exchange-traded funds with five new offerings that it expects to launch on the American Stock Exchange [AMEX] on September 27.
Four of the five will track fundamentally weighted indexes developed jointly by FTSE and Research Affiliates. These FTSE RAFI indexes use four fundamental factors—book value, sales, cash flow and dividends—rather than market capitalization to weight the stocks in the index. The designers claim this strategy helps their indexes outperform over the long haul by avoiding market bubbles and not overweighting overvalued stocks.
Three of the new ETFs operate in the increasingly popular small- and mid-size international segments:
- the PowerShares FTSE RAFI Asia-Pacific Ex-Japan Small-Mid Portfolio (PDQ)
- the PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (NYSEARCA:PDN)
- the PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD)
Investors are increasingly looking to small-cap exposure overseas, as large-cap international becomes more and more correlated with U.S. stocks. The thinking is that small-caps will be more attuned to changes in the local economy.
The new PowerShares funds will complement existing PowerShares FTSE RAFI ETFs covering the large-cap versions of the same markets: the PowerShares FTSE RAFI Asia-Pacific Ex-Japan Portfolio (NYSEARCA:PAF), the PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (NYSEARCA:PXF) and the PowerShares FTSE RAFI Europe Portfolio (PEF). Those funds launched on June 25 and, to date, have gathered only marginal assets. It is obviously far too early to draw any conclusions, but as of Monday's close, they had generally delivered on their promise to outperform their market-cap-weighted benchmarks.
The fourth FTSE RAFI-based ETF is the PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEARCA:PXH), which tracks the largest stocks in the emerging markets region. It will be the second fundamentally weighted emerging markets ETF, joining the WisdomTree High Yielding Emerging Markets ETF (NYSEARCA:DEM).
The fifth and final ETF in the group launch tracks a segment of the market that has been getting a lot of attention lately. The PowerShares International Listed Private Equity Portfolio (PFP) will track the Red Rocks International Listed Private Equity Index, which covers more than 30 listed companies trading around the world which, combined, have investments in more than 1,000 private companies. The index is not entirely quantitative—among the criteria for selection are such subjective standards as company reputation, management and the need for diversification within the index.
Private equity was hot for a while, thanks to splashy tales of private equity entrepreneurs making big money on fast deals, either by getting in early on nonpublic companies or by buying established companies, improving their performance and cashing in through a lucrative initial public offering (NYSEARCA:IPO). With the recent credit crunch, however, some of the pop has come out of the private equity space, and the timing of this launch is uncertain.
Still, the fund should prove attractive to investors already interested in the PowerShares Listed Private Equity ETF (NYSEARCA:PSP). PSP launched in October 2006 and has $137 million in assets. The fund focuses on the U.S. market, and suffers from that focus: There are few publicly traded private equity firms in the U.S., meaning the ETF must stretch the definition of private equity to fill out its roster of components. The private equity market is more mature in Europe, giving the international version more latitude in choosing components.
iShares also has a global private equity ETF under development.
There's no word yet from PowerShares on expense ratios, but they're pretty much guaranteed to be at the upper end of the range for ETFs. Two of the existing FTSE RAFI-based ETFs have expense ratios of 0.75%, while PAF's is a rather breathtaking 0.80%.
For those of you keeping track of the different fund providers, the launch will also pop PowerShares up over the 100 mark for ETF listings.
Written by Heather Bell