ETFs are funds that trade like individual stocks on all of the major exchanges, similar to securities of publicly held companies. They can be bought and sold at any moment during market hours. Most ETFs are index based, which means the fund's holdings seek to replicate the holdings of a specified index — known as the ETF's "underlying index." Currently, a handful of ETFs are actively managed.
There are risks involved with investing in ETFs including possible loss of money. The investment return and principal value of an ETF investment will fluctuate so that shares, when sold, may be worth more or less than their original cost.
When the first ETF was launched in 1993, its purpose was simple — to track the S&P 500 Index while trading on a major exchange. Since then, many traditional ETFs have been designed to mirror benchmark indexes. Not all investors, however, are willing to settle for simply a measure of the market.
For those investors that choose index funds, selecting an index that matches their investment objectives is key. Invesco PowerShares offers a collection of ETFs based on next-generation indexes for individuals with investment objectives that go beyond merely tracking the market. These indexes attempt to outperform industry averages through intelligent security selection and weighting.
PowerShares ETFs are sophisticated investment tools that seek to take ETF investing to a new level.
One major family of our ETFs is based on FTSE™ RAFI™ indexes, which weight stocks according to four fundamental economic factors: sales, cash flow, book value and dividends. This strategy represents a major shift from the traditional approach of weighting indexes according to companies' market capitalization. We believe fundamentally weighted indexes more accurately represent stocks' economic footprint, and that market-cap-weighted indexes overweight overvalued stocks.
Our largest family of ETFs is based on Intellidexes™ — dynamic indexes that use rules-based quantitative analysis to choose stocks for their capital appreciation potential. The Intellidex methodology evaluates and selects securities using a wide variety of investment value determinants such as fundamental growth, stock valuation, timeliness and risk factors. The goal is to identify those stocks that have the potential to outperform the market.
We also have a wide range of ETFs that target more narrow slices of the market — specific industries and world regions — as well as a lineup of ETFs based on indexes that follow niche investing strategies.
Like traditional ETFs, actively managed ETFs are funds whose shares are traded intraday on stock exchanges. However, active ETFs do not seek to replicate the holdings of an underlying index. Rather, their holdings are chosen by a professional investment manager.
Actively managed ETFs have a limited trading history and, therefore, there can be no assurance as to whether and/or the extent to which the shares will trade at premiums or discounts to NAV, which is the market value of a fund share.
Taxes may be one of the most critical and yet overlooked factors in wealth creation over time as they can erode even the best fund's returns. Because of their unique structure, ETFs may serve as a tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.
While it is not Invesco PowerShares intention, there is no guarantee that the Funds will not distribute capital gains to its shareholders. Invesco PowerShares does not offer tax advice. Please consult your own tax advisor for information regarding your own tax situation.Are ETFs transparent?
ETFs report their holdings on a daily basis, allowing investors to regularly see the investments that underpin each ETF share.Do ETFs offer investors flexibility?
ETFs offer investment flexibility, allowing investors to buy and sell any quantity of shares throughout the day on an exchange. Investors can use ETFs to implement advanced trading techniques such as purchasing on margin, short selling and placing limit and stop orders. In addition, ETFs are never closed to investors.
Short selling may require investors to meet margin requirements and potential losses may be accelerated.
Shares are not individually redeemable and owners of the shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 50,000 shares.What type of broad exposure do ETFs offer?
ETFs provide exposure to multiple underlying securities, even in targeted market segments. For example, instead of an investor stock-picking among individual nanotechnology companies, investors can buy shares of a nanotechnology ETF and gain wider exposure to the industry.Do ETFs trade at or near NAV?
ETFs generally trade at or near the value of the holdings that compose each fund — largely because of their transparency and the fact that shares can be created and redeemed daily. This means that market speculation generally won't drive the price of an ETF. Shares of the ETF may trade at a discount or premium to the net asset value of those underlying securities.What are the ownership costs associated with ETFs?
ETFs may provide lower ownership costs because of their efficient structure. Many sponsors have established expense caps to make the cost of ownership clear and straightforward for investors. Ordinary brokerage commissions apply.
PowerShares ETFs use a LI–FO (lowest in – first out) in-kind tax management strategy unique to ETFs. This method typically allows the fund manager, during the creation and redemption process, to purge the lowest cost basis stocks through in-kind, non-taxable stock transfers. This unique operational trait leaves the fund with the highest cost basis securities, which systematically reduces tax exposure.
Mutual funds use a HI–FO (highest in – first out) pooled tax treatment strategy for managing most portfolios. This method may create embedded, unrealized capital-gain exposure and eventual taxable distributions. These distributions are declared and distributed annually and can occur regardless of whether the investor has made or lost money in the fund.
Separately managed accounts (SMAs) allow for customized tax planning and properly align a stock's cost basis to each individual account, which is beneficial for wealthy investors. However, when adjusting their portfolios, SMAs lack an in-kind mechanism by which to purge embedded portfolio gains.
To learn more about Invesco PowerShares and our investment products, please email us at email@example.com or call (800) 983-0903.
1 Sources: ICI, Dec. 31, 2008; Strategic Insight Simfund/MF, Dec. 31, 2008
2 Source: Bloomberg, Dec. 31, 2008
3 Source: Strategic Insight Simfund/MF, Dec. 31, 2008
4 Source: Invesco PowerShares, Dec. 31, 2008
5 Source: National Stock Exchange, Inc., Dec. 31, 2008
6 "Most Innovative New ETF Product" 2004, 2005, 2008 - Capital Link ETF Awards. "Most Innovative Index Fund or ETF", 2006 - William F. Sharpe Indexing Awards. "Most Innovative ETF product for the Americas" 2007 - Global ETF Awards
7 "Best Shareholder Relations," "Best Investor Relations Website" 2006 - Capital Link ETF Awards
8 2004 - 2008, Capital Link ETF Awards. Recipients: Bruce Bond (2004 - 2007) and Ed McRedmond (2008)
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risk similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.
Past performance is not indicative of future similar results.
Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risk similar to stocks, including those related to short selling and margin maintenance.
Investments concentrated in a single industry or sector involve substantially greater risk of loss and price fluctuations than an investment diversified across multiple industries or sector segments.
An investment in the securities of non-U.S. issuers involves risks beyond those associated with investments in U.S. securities, including, but not limited to: greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity, political instability, negative impact of changes in currency exchange rates or foreign governmental regulation.
When we say that our ETFs are intelligent, we mean that in several different ways.
Our largest family of ETFs is based on Intellidexes™ — dynamic indexes that use rules-based quantitative analysis to choose stocks for their capital appreciation potential. We believe this is an intelligent way for an index to select stocks.
Our second-largest family of ETFs is based on FTSE RAFI indexes, which weight stocks according to fundamental economic factors. We believe this is a more intelligent weighting method than market-cap weighting. Furthermore, our fundamentally weighted ETFs are based on four factors — sales, cash flow, book value and dividends — which we believe is a more balanced, intelligent approach than weighting stocks according to just one fundamental measure.
We also have a wide range of ETFs that target narrow slices of the market — from niche industries to specific world regions. For investors who are interested in these niches, we believe ETFs — which invest in multiple companies within a market sector — may offer a more intelligent investment approach than stock picking.
Overall, no matter what the focus, all ETFs offer investors tax efficiency and trading flexibility, which make them an intelligent investment tool for investors to consider.
Whether you're looking for broad market exposure, specialized investment strategies or access to niche markets, we believe PowerShares ETFs represent an intelligent option for your portfolio. The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.
Shares are not individually redeemable and owners of the shares may acquire those shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 100,000 shares.