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: 53.37 +1.46%), 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: 53.9475 +1.31%), 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: 44.33 +1.53%). 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:

 
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One of the first topics raised in the discussion was that of actively-managed ETFs when Crawford suggested that ETFs will continue to dominate the passively-managed landscape with actively-managed ETFs only remaining on the margins and active mutual continuing to dominate in the active management arena. Ben Fulton, who heads up the actively-managed ETF pioneer PowerShares which currently has five Active ETFs, responded that there are definitely some areas of the market that remain difficult to index such as alternative investments. That’s where there would continue to be opportunities for active managers.

In the broader scheme of things though, a large majority of asset remain actively-managed held within mutual funds. And in that respect, many of the panellists agreed that the ETF structure represents in many ways a better structure compared to the mutual fund. Tom Lydon chimed in saying that his firms started using ETFs in their portfolios when the mutual fund companies started made it difficult for him to get in and out of funds and in comparison, ETFs offered more flexibility.

With regards to Active ETFs, the consensus seemed to be that they’ll grow but will continue to remain a small part of the ETF universe. This view was supported by Thomas Anderson at Kiplinger’s who wrote in an article recently that while the best and brightest minds in the fund industry could soon be picking securities for ETFs, the assets aren’t rushing into Active ETFs. Anderson proposed three main catalysts that could lead to the Active ETF space taking off. First, if star managers like Bill Miller of Legg Mason started managing these ETFs. Second, if the existing actively-managed ETFs are able to produce strong track records in the next few years and get good ratings from Morningstar. And thirdly, if the SEC gets more comfortable with these products and speeds up the approval process, thus reducing the time to market for new Active ETFs.
 
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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.

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======================

Shishir Nigam – Active ETFs | InFocus: Ed, welcome to ActiveETFs | InFocus and tell us a little bit more about yourself and how PowerShares stepped into the Active ETFs.

Ed McRedmond, Senior Vice President – Invesco PowerShares: Sure, and I clarify one thing – depending on who you talk to, PowerShares was the first to bring actively-managed equity ETFs to the marketplace but Bear Stearns probably had the first actively-managed fixed income ETF which they brought to market slightly before us. They also brought it to market right before their demise through the financial crisis, when they were bought out by JP Morgan. So the product they brought out isn’t in existence anymore but some might argue they had the first product to market. PowerShares brought our line-up to market in a partnership with a group called AER Advisors, which is based in New Hampshire. So we partnered with them to bring the products to market and they are actually the sub-advisors on a couple of the products and the others are sub-advised by Invesco, our parent company.

Shishir: As you mentioned, PowerShares launched its 5 products in 2008, that are still on the market right now. But since then, PowerShares hasn’t launched any new Active ETF products. So how do you plan to be a part of the growth that’s anticipated for Active ETFs?

Ed: Invesco PowerShares certainly believes in the future of actively-managed ETFs. If you really break it down and ask “What is an ETF?”, at its core, it’s really just a delivery vehicle for some type of an investment. In the first generation, it was a delivery vehicle for your traditional, cap-weighted, passive benchmark indices. Then it evolved into 2^nd and 3^rd generation indices, indices that were created through more of a research driven, rules-based methodology that attempted to add value through the index construction methodology or reduce risk through the index construction methodology. And then continuing on to the most recent evolvement which is the actively-managed ETF, where it not tracking any type of index and the manager has some degree of flexibility and freedom to decide what securities they are going to buy and sell, versus simply just trying to manage to an index and the changes that occur in the index. We always believed that it was going to be a slow educational process that would take time to build up and it’s really no different than what happened to traditional ETFs. You can see that the first ETF launched in 1993, the SPDR, then you had a couple more come out up till 2000-01. Then you had a big shift and a new wave of ETFs started to come to the market and some different products. And it wasn’t really until after that point that ETFs really began to gather steam, so you had a number of years where ETFs were out in the market after the launch of the SPDR but they certainly hadn’t gathered up the steam they have now. Likewise, we don’t expect the actively-managed ETFs evolvement will be that different. It will come out, it’ll take time for people to get comfortable and get familiar with them. But we think there’s a couple of differences there – one, unlike the index based products the actively-managed products don’t come out with some type of a track record for someone to look at. So right off the bat, most people are going to take a wait-and-see approach to get a sense of how is this performing – whether that requires a 12-month time period or a 3-year time period, that will certainly depend on the individual. Some people might be comfortable enough after watching it for 12 months, other people might wait until it’s been out for 3 years and it gets the Morningstar ranking. That’s one of the challenges that the actives have that the index based products didn’t, in that there is no immediate way to go back and judge the track record.  Number two, there’s still wait-and-see approach where people think – if an ETF is actively-managed, it’s not going to be as tax efficient as traditional ETFs have been and what people have come to expect in the way of tax efficiency. We in Invesco PowerShares don’t necessarily agree with that. We’ve always believed that certainly in the traditional equity and fixed-income space, it’s not low turnover that makes an ETF tax-efficient, it’s the structure and the creation/redemption process, being able to in-kind shares in and out of a fund – that’s really what makes an ETF tax efficient, not the fact that it tracks an index that has low turnover.

Shishir: What do you think is the critical mass that’s required for an Active ETF to be viable in the long-term?

Ed: Whether it’s active or fixed-income based, it’s hard to pin down a specific number. Obviously, it’s going to be different between ETF providers, based on the number of products they have, economies of scale, what they’re paying the underlying manager of the product which will certainly vary and that’s going to be a different number for fixed-income versus equity based ETFs. I’ve seen numbers out there where people have said at the low-end to be $30million to $50million to breakeven.  I think those numbers are probably in the ballpark for certainly the larger ETF providers. Obviously, if someone only has 1 or 2 products in the market and they can’t spread the cost, they might have a higher number than someone who has a 100 products in the market.

Shishir: Currently, there are only 5 issuers in the Active ETF market. But a lot of big names have filed to launch new products such as Legg Mason, Claymore and PIMCO. How does PowerShares plan to compete with these larger players entering the Active ETF space?

Ed: I think it’s a couple of things. It’s not really much different per say on the active space as in the index space. Hopefully bringing innovative products to market that people feel add value – number one. And number two – getting out there and providing the education and sales support necessary. Invesco PowerShares has a dedicated ETF sales force both out in the field covering territories and an internal sales force; additionally we have a small institutional sales force. So there’s dedicated people out there that are working everyday with advisors, with RIAs, with institutions, telling the Invesco PowerShares’ story across our whole product line-up whether it be the index based products or the actively-managed products. In addition to that, we are part of a large global asset manager, being part of the Invesco family and that opens up another universe of people that are out there from the Invesco generalist side, they’re talking about Invesco mutual funds, separate accounts and PowerShares ETFs. That’s certainly a big part of it. There’s also things like our PowerShares University series that we’ve been doing for a few years now, where we go out to a number of major markets throughout the year and do events that range from half a day to a couple of hours where we’ll bring in a number of industry people, talk about our whole line-up and ETF education. They’re geared towards financial advisors, professional investors – they are not opened up to the retail world. We’ve historically averaged in the neighbourhood of 150-200 people at these events, so they’re very well attended and we get very good feedback. This year we’ve got more on our schedule than we’ve had the previous few years. So all those things that you need to do to support the product and get people comfortable with it. I think that we certainly have the resources in place that can compete with anybody that’s out there.

Shishir: If you were to put a number on it, what kind of market share targeting to achieve within the Active ETF market?

Ed: Our intention is that we want to be and believe that we will be major players in that space. Hard to pin down a market share number, but right now we have a fairly significant market share. Obviously the piece of the pie is still very small, so we’ll see how that number plays out in the years ahead. Again, we fully expect and intend to be among the leaders in that space.

Shishir: How do you think Active ETFs can break into the massive 401(k) and retirement portfolios which really are a very huge market for ETFs?

Ed: A couple of things – to some extent, they’re already available to the through IRA accounts or through the self-directed brokerage window that someone might have as part of their company’s 401(k) plan.  So they’ve got some degree of access already, but you’re certainly right, the large portion of the assets is fairly heavily concentrated towards mutual funds. There’s a number of reasons for that, the biggest probably being that there are some operational issues that need to be overcome on the part of the 401(k) providers. Their systems were set up to deal with mutual funds, which meant their systems settle T+1 instead of T+3. They were set up to transact in dollar amounts instead of shares amounts. Those operational things are as much of a challenge as anything else. Certainly, if you look and see what’s out there in the way of people wanting more transparency, disclosure certainly on the fee front is important. On average, the lower costs that ETFs provide seem to be something that will eventually get some traction in the 401(k) world, once some of these operational challenges are overcome.

Shishir: In 2009, for the first time, Index ETFs had a greater market share than index mutual funds in the passively managed space. Do you see Active ETFs overtaking actively-managed mutual funds?

Ed: Certainly not for the foreseeable future. It’s like the debate about active versus passive strategies – you’re always going to have people that want active management over passive index based management. And if someone decides that they want active management, then the decision is, how do I want that provided to me? Certainly, in the world of Invesco, we can deliver active management to clients if that’s what they choose, in a number of formats – whether it be Invesco mutual funds, separate accounts or PowerShares ETFs. Again, I certainly don’t expect that the actively-managed ETFs are going to put too much pressure on active mutual funds anytime in the foreseeable future. But the thing that gives me hope for the future is that if people want active management – there may be some potential benefits of getting it delivered to you in an ETF format because of the structure. It is more efficient from a capital gains stand point, lower expenses because of not just the lower expense ratio of the ETF but also some of the internal expenses that a mutual fund might have such as paying commissions and bid/ask spread every time a manager is buying and selling stocks. If that’s turnover is handled in an ETF through the in-kind in stocks going in and out, then the ETF shareholders are not bearing those costs, they’re not paying those commissions, they’re not paying those bid/ask spreads from the manager turning over the portfolio.

Shishir: That’s fantastic. Ed, thanks a lot for joining us and we wish you all the best for the future.

Ed: My pleasure, thank you.

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Michael Johnston of ETFdb, provides a good summary of the different index ETFs that are available to investors looking to park their cash somewhere for a short period of time. There are also a couple of options available to investors in the actively-managed ETFs arena. Active ETFs allow investment managers to use active management to beat their traditional index benchmarks, while at the same time preserving the advantage and benefits of the ETF structure. The two Active ETFs listed below have lower expenses than short-term money market mutual funds but provide the same type of active management to investors in a more accessible, tradable and transparent ETF structure.

1. PowerShares Active Low Duration Fund (PLK: 25.5199 -0.04%)

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. PLK is expected to have a normal effective duration between 0-3 years and carries an expense ratio of 0.30%. PLK has provided an alpha of about 2.5% over the index since inception, as seen below. However, the liquidity of the ETF is an issue due to low traded volumes and a high bid-ask spread. Find a complete breakdown of PLK here.

2. PIMCO Enhanced Short Maturity Strategy Fund (MINT: 100.76 0.00%)

MINT invests at least 65% of its assets in short duration, investment grade debt and the average duration of the portfolio will not exceed 1 year. This ETF provides access to PIMCO’s fixed-income strategies which are driven by top-down approaches involving financial and economic outlooks as well as bottom-up approaches involving the identification of undervalued securities. The fund is benchmarked against the Citigroup 3-month Treasury Bill Index and carries an expense ratio of 0.35%. MINT is currently the largest Active ETF on the market, with a market cap of $129.35 million, thanks to the reputation that PIMCO brings as an investment manager. MINT has also beaten the 3 month T-bill benchmark since inception. Find a complete breakdown of MINT here.

Disclosure: No positions in above-mentioned names.

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A contrarian on real estate could utilize one of the many real-estate passive index ETFs out there such as the Vanguard REIT ETF (VNQ: 53.37 +1.46%) or the SPDR Dow Jones REIT (RWR: 58.72 +1.40%) to execute their strategy.  These ETFs track the performance of an index such as the MSCI US REIT Index for VNQ or the Dow Jones U.S. Select REIT Index for RWR. The indices in turn comprise of a certain segment of the real estate market, or in these 2 cases, all the publicly traded US REITs. That means every REIT on the US market will be part of these indices, whether good or bad. There is little doubt that there are many companies in the real estate space that are still in dire straits and will likely go belly-up soon. Actively-Managed ETFs allow investors the use of active management to leave out the bad apples from their portfolios while still utilizing the benefits of an ETF structure. If you believe in that line of argument, there is currently only one real estate Active ETF on the market, but more are planned:

1. PowerShares Active US Real Estate (PSR)

(PSR: 44.33 +1.53%) invests at least 80% of its assets in components of the FTSE NAREIT Equity REITs Index. The fund is allowed to take temporary defensive positions in cash, in times of market stress. Investment decisions for the fund are made by Invesco Institutional with 5 managers taking part in the day-to-day management of the fund. The managers identify attractive securities through quantitative and statistical analysis. The downside is the fund’s expense ratio of 0.80% and a lack of liquidity, with its current market cap at around $10 million. However, PSR has outperformed its passive counterparts since inception. For a complete breakdown of PSR, head here.

2. PowerShares Prime Non-Agency RMBS Opp0rtunity Fund

This potential future investment option was announced by PowerShares on Jan 28, 2009. The Prime Non-Agency RMBS fund will invest in non-agency mortgage-backed securities which are collateralized by pools of Prime residential mortgage loans. Prime residential mortgages are given to borrowers with a good credit history and low-risk profile.

3. PowerShares Alt-A Non-Agency RMBS Opportunity Fund

Part of the same announcement, the Alt-A Non-Agency fund will invest in non-agency mortgage-backed securities which are backed by pools of Alt-A residential mortgage loans. Alt-A loans extended to borrowers who fall in between the Prime – Subprime spectrum.

Given the fact that the two RMBS Active ETFs have not made it to market a year after their filing, don’t hold your breath expecting their launch. But if they do make it to market, they’ll provide some additional opportunities for investors looking to get into real estate ETFs, but through active management.

Next Step: Actively-Managed Real Estate ETFs for emerging markets?

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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: 25.5199 -0.04%) 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: 16.05 +2.82%) 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.