Exchange-Traded Funds For Dummies
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Invesco PowerShares, number four in size and number two in number of ETF offerings, hesitates to call all but five of its 120 ETFs “actively managed” and instead refers to them as “dynamic.”

The ETFs track “enhanced” indexes, or, to use the company’s own jargon, “Intellidexes.” An Intellidex is a custom-made index, which, according to Invesco PowerShares, “quantitatively chooses stocks for their capital appreciation potential, evaluating and selecting stocks based on multiple valuation criteria, rather than simply by market cap alone.”

Multiple valuation criteria. Hmmm. That means potential high turnover and some added trading expenses. It also means that if you choose PowerShares ETFs to build your portfolio, you are no longer a true index investor, which (judging by historical data) may put you at something of a disadvantage.

The company has been quite innovative in its offerings of market-sector ETFs. Examples of this innovation include the Water Resources ETF (PHO), which allows you to invest in a “group of companies that focus on the provision of potable water,” and the WilderHill Clean Energy Fund (PBW), which allows you to invest in “companies that focus on greener and generally renewable sources of energy.”

Another example is the KBW Property & Casualty Insurance Portfolio (KBWP). If you want to slice and dice your portfolio a gadzillion different ways (or at least 120 ways), this lineup of ETFs will let you do just that.

It’s hard to embrace PowerShares’ new indexes without a longer track record. But nothing about the PowerShares alternative indexes is particularly concerning, either. Thus far, the firm has been very good at avoiding capital gains taxes, and with average management expenses of 0.60 percent, the funds are still cheap when compared to actively managed mutual funds.

Some of the market segments created by PowerShares, such as those mentioned in the previous paragraph, are intriguing, especially if they prove over time to show limited correlation to the rest of the stock market. Still, Water Resources should not make up the whale’s share of anyone’s portfolio.

For more information, call 800-983-0903 or visit the PowerShares website.

About This Article

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About the book author:

Russell Wild, MBA, an expert on index investing, is a fee-only financial planner and investment advisor and the principal of Global Portfolios. He is the author or coauthor of nearly two dozen nonfiction books.

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