Exchange-traded fund firm PowerShares Capital Management hit the floor of the American Stock Exchange yesterday with its latest offering, the PowerShares Zacks Small Cap Portfolio. The new fund, PowerShares’ thirty-third since January 2005, and the first since its acquisition by Anglo-American fund giant Amvescap was announced last month, is designed to track Zacks Investment Research‘s Zacks Small Cap Index, which holds 250 small-cap stocks, equally-weighted and rebalanced quarterly.
This is the second PowerShares ETF created with Zacks; the PowerShares Zacks Micro Cap Portfolio was launched in August 2005. But Zacks V.P. Mitchell Zacks cautions against confusing this fund’s methodology with the earlier offering.
“The micro-cap index is really focused on valuations and price momentum,” he says, while “the small-cap index is focused on earnings surprises and analyst coverage.” The proprietary methodology used in the small-cap index, Zacks says, is uniquely effective for picking small-caps. Such stocks are susceptible to a positive “post-earnings announcement drift” when earnings come in ahead of analysts’ forecasts. That drift lasts for up to an entire quarter, until the next earnings report, rather than for just a few days, as is common with larger-capitalization companies.
In addition, that upward drift is especially pronounced, Zacks says, where there is a paucity of coverage. “The factor is most powerful on stocks that have less analyst coverage,” so the index steers away from companies with more than about a dozen analysts.
The new fund, and its corresponding “intelligent” index, “should appeal to investors who are loyal to Zacks, and those seeking to outperform the small-cap benchmarks,” PowerShares President Bruce Bond, says. The index has 3-, 5- and 10-year annualized returns of 29%, 16.9% and 18.9%, respectively. It will need to keep that performance up if it is to succeed in a crowded field of small-cap ETFs.
The PowerShares Zacks Micro-Cap fund has garnered about $115 million in assets over the past six months, and it has the benefit of being a relatively unique offering: It was the second micro-cap ETF, following Barclays Global Investors by a matter of days, and remains one of only three, which had a combined total of $269 million in assets at the end of last year, according to Morgan Stanley research. On the other hand, Morgan Stanley reports that, at the same time, there were already 17 small-cap ETFs with $22.1 billion in assets under management.
Still, some experts think it should be able to find an investor base. “When you’ve got a market that’s growing so quickly, they are all finding a place,” notes Paul Mazzilli, an ETF expert at Morgan Stanley. Coupled with what he calls PowerShares’ “improving name,” the new offering has a chance to prove that the small-cap ETF space is not saturated just yet. Nor will it be the firm’s final foray into a heavily represented market space: PowerShares has a fund in registration based on the Zacks Large Cap Index, which uses yet another quantitative methodology from the other two indices, ready to go head-to-head with 25 other funds and their $121.8 billion AUM.
