PowerShares’ fundamentals-weighted RAFI ETFs surpass $5 billion in AUM

Jul 9th, 2013 | By | Category: Equities

PowerShares, a leading global provider of exchange-traded funds (ETFs) and a subsidiary of Invesco, has revealed that assets under management in its fundamentals-weighted suite of ETFs, part of its smart beta range, recently passed the $5 billion mark.

Invesco PowerShares’ smart beta fundamentals-weighted ETFs surpass $5 billion in AUM

Andrew Schlossberg (centre), Head of Global ETFs at Invesco PowerShares, joined by fellow executives on the floor of the NYSE (Photo by Mia Curcio/NYSE Euronext).

PowerShares offers such ETFs on local exchanges in the US, Canada and Europe, including the UK, France, Italy, Switzerland and Germany.

Andrew Schlossberg, head of global ETFs at PowerShares, said: “Invesco PowerShares has been focused on providing investors with the broadest and most diverse family of smart beta ETFs since the firm was founded. Invesco PowerShares pioneered fundamentals-weighted ETFs introducing the first broad-based US 1000 portfolio back in 2005, followed by international portfolios in 2007, and the first fixed-income portfolio in 2010. We are pleased to reach this $5 billion milestone.”

The funds are based on the Research Affiliates Fundamental Index (RAFI) methodology. This methodology, which was developed by Rob Arnott and Jason Hsu of Research Affiliates, varies according to asset class and combines the insights of active management with the benefits of passive investing.

For equities, the methodology uses four fundamental measures of company size – book value, cash flow, sales and dividends – to select and weight index constituents. The resultant portfolios tend to exhibit a value tilt and a slight small-cap tilt. These tilts, however, are dynamic. When value stocks are out of favour and thus are cheap, the strategies tend to increase their allocation to deep value stocks. When value is in favour, the value tilt is much milder because these stocks tend to be priced higher. Rebalancing into unloved stocks and out of the most popular stocks – what is essentially a contrarian strategy – provides the majority of RAFI strategies’ added value.

Similar to equities, the RAFI methodology for fixed income weights bonds based on a company or nation’s economic footprint. This reflects a company or country’s debt service capacity, rather than market value of debt outstanding. For corporate bonds, cash flow, sales, book value of assets and dividends are used. For sovereign bonds, the methodology uses total population, gross domestic product, square root of land areas, and energy consumption. Whether for corporate bonds or sovereign debt, the resultant portfolios tend to have higher average credit ratings than their market-weighted counterparts. Sovereign debt portfolios can have quite different country allocations, with decreased exposure to aging and debt-laden countries such as Japan and the United States and increased exposure to younger, resource-rich countries such as Australia and Canada.

John Feyerer, head of product strategy & research at PowerShares, said: “The PowerShares Fundamental ETFs seek to provide investors with improved risk-adjusted returns compared to cap-weighted benchmarks. Our two flagship ETFs in this suite, the PowerShares FTSE RAFI US 1000 Portfolio (PRF) along with the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ), its US 1500 complement, have established five-year and since-inception track records that demonstrated their effectiveness over varying market cycles.”

He added: “We believe the PowerShares Fundamental ETFs provide investors an important alternative to passive cap-weighted strategies, and also represent great value compared to actively managed portfolios when relative performance and fees are considered.”

PowerShares’ biggest competitors in the fundamentals-weighted and wider smart beta ETF space include WisdomTree, iShares, SPDR, First Trust and Ossiam.

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