Bloomberg has an article today entitled “ETFs Passive No More.” It’s an article about the rise of intelligent indexation. Here’s their thesis:
Exchange-traded funds are posing a new threat to the $7.8 trillion market for active mutual funds by challenging the notion ETFs are only good for tracking benchmarks.
Here’s their blurb about PDP:
The PowerShares DWA fund, which invests in U.S.-listed companies, uses an index that selects them based on “relative strength,” a proprietary screening methodology developed by Richmond, Virginia-based Dorsey, Wright & Associates Inc. The fund has advanced at an annual rate of 2 percent since its inception in March 2007, compared with the 1.2 percent gain for the Standard & Poor’s 500 Index over the same period, and the 3.8 percent increase in the Russell 3000 Growth Index.
Their offerings may further erode the market share of active mutual funds, sold by traditional money managers such as Fidelity Investments, Capital Group Cos. and Franklin Resources Inc. The companies tout the ability of their managers to beat benchmarks mostly through individual security selection.
“Historically, active managers held a unique appeal to prospective investors,” said Steven Bloom, who helped develop the first ETF in the 1980s and is now an assistant professor of economics at the U.S. Military Academy at West Point, New York.“Now, ETFs are infringing on that territory by holding out the prospect of alpha.”
The article points out that by using a rules-based investment process within an ETF, you can shoot for alpha, while getting the tax benefits of the ETF structure. Rules-based ETFs are going to continue to blur the line with active mutual funds over time. It’s also going to be interesting to see how many of the rules-based processes are robust and how many have been optimized. Curve-fitted performance will tend to degrade over time, while a truly adaptive model should be more consistent.
We think the trend toward intelligent indexes will continue and we’re excited to be one of the pioneers.
See www.powershares.com for more information about PDP. Past performance is no guarantee of future returns. A list of all holdings for the trailing 12 months is available upon request.
