This latest reading on the US housing market probably confirms in many people’s minds that the supposed recovery is not going to be as smooth and V-shaped many were hoping for in 2009. With the real estate sector being such a drag on the US economy, it’s hard to see this reflecting anything but poorly on the future prospects of the US real estate market. That’s where the “contrarian” investor in many people would say now would be a good time to make long bets on the US real estate market, after all, how much lower could it go? However, a naive line of thinking precisely like that could bring significant risks along with it. Any investors betting on the real estate sector now would have to pick their bets wisely, and avoid catching onto any falling knives.

Traditionally, investors have chosen to get exposure to the US real estate market through ETFs like the Vanguard REIT ETF (VNQ: 52.66 0.00%), the largest real estate ETF, which follows the MSCI REIT Index and cover about two-thirds of the entire US REIT market. Another popular alternative is the iShares Dow Jones U.S. Real Estate Index Fund (IYR: 53.23 0.00%), which follows the Dow Jones US Real Estate Index, and is the second largest real estate ETF in the US. And investors would generally have been satisfied with the performance of these ETFs so far, with VNQ returning a very solid 53.90% over the last 1 year till July 31^st and IYR returning 49.44% over the same period. However, it would be naive to expect similar performance going forward, especially after the weakness that has been confirmed by today’s data number.

A case can be made for the need for active management in the REITs sector, especially given the minefield that the US real estate sector is likely to represent going forward. Holding a passive can be useful to the extent of providing you with the broadest exposure possible, though as an investor, you would end up holding all the component securities in the index, whether bad or good. In contrast, an active manager would be able to apply some discretion with regards to which securities they choose to hold and would be able to take into account the fundamental quality of the securities.

An actively-managed ETF that provides investors with that possibility is the PowerShares Active U.S. Real Estate ETF (PSR: 43.76 0.00%). This fund is actively-managed by Invesco PowerShares and invests in securities selected from those included in the FTSE NAREIT Equity REITs Index (FNER). The lead portfolio manager, Joe V. Rodriguez, selects securities by using quantitative and statistical metrics to identify attractively priced securities and manage risk. PSR has total expenses of 0.80%, so investors will definitely be paying a premium over index ETFs, but PSR has shown the performance to justify the expenses. Since fund inception in Nov 2008, PSR has been able to return 53.3% as of June 30, 2010, compared to the FTSE NAREIT Equity REITs Index returning 33.1% while the S&P500 returned 11.8% in that period. A graphical comparison of the PSR fund to the Vanguard REIT Index (VNQ) and the iShares Dow Jones U.S. Real Estate Index Fund (IYR) highlights the outperformance:

 
Disclosure: No positions in above-mentioned names.

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The Active AlphaQ Fund saw a strong increase in assets in the month of Feb 2010, with AUM increasing by more than 400% as PQY saw inflows of $14 million. Since then the fund had continued to gather assets peaking at more than $25 million at the end of Apr, before dropping back down to about $21 million.

Investment Mandate

As mentioned in the In Focus article on PQY, the Active AlphaQ Fund has an objective of long-term capital appreciation with the goal of outperforming the Nasdaq 100 Index. The fund sub-advisors, AER Advisors, invest the portfolio largely in 50 Nasdaq-listed securities that are selected based on a ranking system developed by AER called the “NOW” ranking system, based on earnings growth, valuations and money flows. The portfolio is managed on a day-to-day basis by David O’Leary who is the CIO of AER Advisors. A unique aspect of the fund is that PQY focuses on holding each of the 50 securities on an equal weight of 2% and rebalances whenever the weight exceeds 3%. PQY has an expense ratio of 0.75% which is reasonable for actively-managed equity ETFs.

Performance Evaluation

Given that the managers operate the fund largely using a quantitative model, it’s hard to discern the investment reasoning behind the fund’s holdings or strategies. In general though, PQY has more than 90% of the fund invested in mid-cap growth and large-cap growth equities, and 44% of the fund is invested in companies within the information technology sector.

Looking at the chart of the fund’s performance since inception, the results have been mixed. While PQY has underperformed its official benchmark by about 7-8%, it has outperformed the S&P500 by more than 10% during that period. However, that outperformance is more attributable to the fact that the Nasdaq 100 Index itself outperformed the S&P500 by a wide margin, rather than due to manager skill. Looking at a more recent period though, the performance is favourable for PQY.

If we look at returns in the last 6-months, the managers have really pulled up their socks. Especially during the market ramp-up from Feb-April end, PQY was able to outperform both the Nasdaq 100 and the S&P 500 quite handily. However, that outperformance has been reduced since, due to the tough month in May. That improvement in performance might well have been the impetus that lead to new flows into the fund starting in Feb.

If the managers can keep up the recent performance, then PQY could definitely attract more assets once the markets come out of their recent short-term slump.

Disclosure: No positions in above-mentioned names.

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Links: Website, Factsheet, Prospectus

Investment Strategy:

PSR is the latest of five actively-managed ETFs launched by PowerShares. PSR looks to invest at least 80% of its assets in companies operating in the US Real Estate industry (they derive >50% of revenues from real estate operations or invests >50% of its assets in US real estate) and those which are included in the FTSE NAREIT Equity REITs Index. The portfolio managers, Invesco Institutional, identify attractive securities through quantitative and statistical analysis, in order to achieve high total return in terms of capital appreciation and current income. PSR is also allowed to take temporary defensive positions in cash.

Portfolio Managers:

Investment decisions for PSR are made by Invesco Institutional, and involve the following portfolio managers in day-to-day management of the fund:

Joe V. Rodriquez Jr., Portfolio Manager – Is the lead manager overseeing the investment team and has been responsible for the fund since inception. He’s been involved with Invesco Institutional since 1990.

Mark Blackburn, Portfolio Manager – Has been associated with Invesco Institutional since 1998.

Paul S. Curbo, Portfolio Manager – Has been associated with Invesco Institutional since 1998.

James W. Trowbridge, Portfolio Manager – Has been associated with Invesco Institutional since 1989.

Ping-Ying Wang, Portfolio Manager – Has been associated with Invesco Institutional since 1998.

The Numbers:

Expense Ratio – 0.80%

Average Bid-Ask Ratio – 0.24%

Average Volume – 4,371 shares

What’s special about it?

1. PSR is the only actively-managed ETF on the market that provides focused exposure to the US Real Estate market.

2. While the portfolio evaluation process is only repeated once per month, the managers have discretion on when they can perform trades or how frequently they want to refresh the model.

Analysis:

Positives –

- Looking at the performance chart, PSR has quite convincingly outperformed the S&P500, which should give investors confidence in the fund managers.

- PSR is part of a very small group of 4-5 Active ETFs that have exceeded a market cap of $10 million, even though in the grander scheme of things, $10 million isn’t much. However, it does indicate that there is some investor interest out there.

Negatives –

- The low level of trading volumes will still hamper liquidity and will hurt investors looking to move in or out of PSR.

- Whether the US real estate market is completely out of the wood is another debate all together but investors looking to get into PSR should be wary of the commercial real estate market, which still faces numerous challenges.

Performance since inception vs S&P500:

Disclosure: No position in above-mentioned names
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Links: Website, Factsheet, Prospectus

Investment Strategy:

PMA is an actively-managed ETF part of a group of PowerShares products all launched at the same time. PMA invests at least 80% of its assets in mega-cap securities with market capitalizations greater than the smallest company in the Russell Top 200 Index, which is the fund’s benchmark. However, the fund can invest in securities outside the benchmark as well. PMA invests in securities that are shown to have above-average growth prospects, through analysis of fundamental and behavioural factors. At the same time, the fund tries to maintain a high correlation between the fund’s benchmark return and portfolio returns. PMA is also allowed to increase its proportion of cash holding if taking a defensive stance.

Portfolio Managers:

Investment decisions for PMA are made by Invesco Institutional, and involve the following portfolio managers in day-to-day management of the fund:

Jeremy S. Lefkowitz, Portfolio Manager – Mr. Lefkowitz is the lead manager of Invesco Quantitative Strategies and has been responsible for the fund since inception. He’s been involved with Invesco Institutional since 1982.

Daniel A. Kostyk, Portfolio Manager – Has been associated with Invesco Institutional in an investment management capacity since 1995.

Glen E. Murphy, Portfolio Manager – Has been associated with Invesco Institutional in an investment management capacity since 1995.

Anthony J. Munchak, Portfolio Manager – Has been associated with Invesco Institutional in an investment management capacity since 2000.

Francis M. Orlando, Portfolio Manager – Has been associated with Invesco Institutional in an investment management capacity since 1987.

The Numbers:

Expense Ratio – 0.75%

Average Bid-Ask Ratio – 0.22%

Average Volume – 1,709 shares

What’s special about it?

1. Was one of the 4 Active ETFs launched by PowerShares on April 11, 2008 that were the first Active ETFs on the market that still live on. (The VERY first launch was by Bear Stearns but that fund went down with the company)

2. While the portfolio evaluation process is only repeated once per month, the managers have discretion on when they can perform trades or how frequently they want to refresh the model.

3. PMA is a pure blue chip fund, with all its 45 current holdings being mega-cap companies with an average market cap of $97 billon.

Analysis:

Positives –

- According to performance charts on PMA’s website, the fund has outperformed its benchmark, the Russell Top 200 Index for most of 2009, which is a great sign going forward.

Negatives –

- The low traded volumes will mean insufficient liquidity for investors wanting to get in or come out of PMA. The market cap of PMA is only about $3.28 million after being in existence 22 months. The lack of investor interest after being on the market for so long may mean that PowerShares may have to pull PMA off the market.

- Investing in individual stocks does bring stock-specific risk into play, though holding a portfolio of 45 stocks should reduce that risk significantly.

Performance since inception:

Disclosure: No position in above-mentioned names
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Links: Website, Factsheet, Prospectus

Investment Strategy:

(PLK: 25.53 0.00%) tries to achieve its objective of “total return” by investing at least 80% of its assets in US government, corporate and agency debt instruments. PLK seeks to provide alpha over the Barclay’s Capital 1–3 Year U.S. Treasury Index. Their strategy involves managing portfolio construction and security selection according to market conditions, macro-economic and sector level factors as well as issue specific factors. There is no minimum or maximum required investment in the 3 types of debt instruments mentioned above. The fund may invest in US Treasury futures as well as derivatives which can create leverage in the portfolio. PLK is expected to have a normal effective duration between 0-3 years. Finally, the fund is also allowed to invest up to 25% of its assets in non-investment grade securities or junk bonds.

Portfolio Managers:

Investment decisions for PLK are made by Invesco Institutional, primarily by the following portfolio managers who handle the day-to-day management of the fund. Invesco Institutional had around $194 billion dollars under management as of Dec 31, 2008.

Brian M. Schneider – Senior Portfolio Manager, who has been managing the fund since January 2009.

D. Scott Case – Portfolio manager, who also started managing the fund in January 2009.

The Numbers:

Expense Ratio – 0.30%

Average Bid-Ask Ratio – 0.61%

Average Volume – 4,067 shares

What’s special about it?

1. PLK was the second actively bond ETF on the market after the first launch by Bear Stearns.

Analysis:

Positives –

- By virtue of its mandate, PLK invests in short-maturity bonds and that can be a useful part to a well-rounded portfolio, especially when the market turns volatile and money flows into safe havens such as US Treasuries pushing their prices up.

- Looking at the performance of PLK relative to its benchmark, the Barclay’s Capital 1-3 Year Treasury Index (which is tracked by SHY), PLK does seem to provide an alpha of about 2.5% over the index since inception.

Negatives –

- A market cap of only $6.36 million after 22 months, does not provide much confidence in PLK’s appeal and longevity. The two other bond funds launched by PIMCO, MINT and MUNI, only months after being launched have already left PLK far behind in the dust when it comes to growth.

- With an average bid-ask ratio of 0.61%, simply going in and out of PLK means losing 1.2% of your investment and when the 1-year return on the ETF is just 2.77%, that accounts for a big chunk of your gains.

Performance since inception vs SHY (which tracks the Barclay’s Capital 1-3 Year Treasury Index) :

Disclosure: No position in above-mentioned names
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Links: Website, Factsheet, Prospectus

Investment Strategy:

(PQZ: 15.8799 0.00%) is an actively managed ETF that invests at least 95% of its assets in 50 US-listed securities based on a methodology which involves rating companies with market caps greater than $400 million and ranking them using AER’s proprietary “NOW” ranking system based on earnings growth, valuations and money flow. The portfolio managers than narrow their universe down to the 2000 largest capitalization securities and then go on to hold 50 of those stocks. The goal of the fund is to achieve long-term capital appreciation and outperform the S&P500 Index by focusing on stocks within the “Multi-Cap Universe”.

Portfolio Managers:

David O’Leary, AER Advisors Inc. – Mr. O’Leary has served as Chairman and Chief Executive Officer of Alpha Equity Research for the past 14 years, as well as the Chairman and Chief Investment Officer of AER Advisors. David has been in the investment business for more than 35 years.

The Numbers:

Expense Ratio – 0.75%

Average Bid-Ask Ratio – 0.74%

Average Volume – 3,022 shares

What’s special about it?

1. Was one of the 4 Active ETFs launched by PowerShares on April 11, 2008 that were the first Active ETFs on the market, that still live on. (The VERY first launch was by Bear Stearns but that fund went down with the company)

2. In essence, PQZ is a quant-driven equity fund and the portfolio decisions made by the managers are dependent on the factors that go into the “NOW” model. The fund tries to remain equally-weighted and hold 2% in each stock and rebalances when a position exceeds 3%.

3. While AER performs the ranking methodology process on a weekly basis, the advisors have discretion on when they can perform trades or how frequently they want to refresh the model.

4. If you like to play in smaller cap companies, then PQZ may fit your bill as about 88% of the fund is invested in small and mid cap names, compared to its sister fund PQY, which invests mainly in large caps.

Analysis:

Positives –

- If you believe in quantitative strategies, then this is good choice as the fund basically follows quantitative screens.

Negatives –

- The low traded volumes may well be contributing to the high bid/ask ratio on PQZ. The market cap of PQZ is only about $4.2 million after being in existence 22 months. The lack of investor interest after being on the market for so long may mean that PowerShares may have to pull PQZ off the market.

- Investing in individual stocks does bring stock-specific risk into play, though holding a portfolio of 50 stocks should reduce that risk significantly.

- The significant under-performance compared to the S&P500, as seen in the chart below, is not a good sign either, especially because we have seen consistent underperformance since Sep 2008 in both rising and falling markets.

Performance since inception vs S&P500:

Disclosure: No position in above-mentioned names
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Links: Website, Factsheet, Prospectus

Investment Strategy: (PQY: 24.40 0.00%) is an actively managed ETF that invests at least 95% of its assets in 50 Nasdaq-listed securities based on a methodology which involves rating companies with market caps greater than $500 million and ranking them using AER’s proprietary “NOW” ranking system based on earnings growth, valuations and money flow. The portfolio managers than narrow their universe down to the 100 largest Nasdaq-listed Global Market Securities and then go on to hold 50 of those stocks. The goal of the fund is to achieve long-term capital appreciation and outperform the Nasdaq 100 Index.

Portfolio Managers:

David O’Leary, AER Advisors Inc. – Mr. O’Leary has served as Chairman and Chief Executive Officer of Alpha Equity Research for the past 14 years, as well as the Chairman and Chief Investment Officer of AER Advisors. David has been in the investment business for more than 35 years.

The Numbers:

Expense Ratio – 0.75%

Average Bid-Ask Ratio – 0.24%

Average Volume – 2,087 shares

What’s special about it?

1. Was one of the 4 Active ETFs launched by PowerShares on April 11, 2008 that were the first Active ETFs on the market, that still live on. (The VERY first launch was by Bear Stearns but that fund went down with the company)

2. In essence, PQY is a quant-driven equity fund and the portfolio decisions made by the managers are dependent on the factors that go into the “NOW” model. The fund tries to remain equally-weighted and hold 2% in each stock and rebalances when a position exceeds 3%.

3. While AER performs the ranking methodology process on a weekly basis, the advisors have discretion on when they can perform trades or how frequently they want to refresh the model.

4. You can expect ETF returns to stick very closely to those of the Nasdaq 100 Index as the correlation between the two is 0.95.

Analysis:

Positives –

- If you believe in quantitative strategies, then this is good choice as the fund basically follows quantitative screens.

- Following its strategy, PQY sticks largely to mid-large cap names, with more than 80% of the fund allocated to large-cap growth and mid-cap growth stocks.

Negatives –

- The market cap of PQY after being in existence for around 22 months is still only $4.36 million which is paltry to say the least. The lack of investor interest after being on the market for so long is definitely a negative and if it continues, PowerShares may well have to pull PQY off the market. The low daily traded volume doesn’t help it’s cause.

- Restricting the investment universe to Nasdaq-listed securities will limit the spectrum of opportunities available to the portfolio managers as they exclude stocks trading on other markets.

- Investing in individual stocks does bring stock-specific risk into play, though holding a portfolio of 50 stocks should reduce that risk significantly.

Performance since inception vs Nasdaq 100:

Disclosure: No positions in above-mentioned names
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.