New ETFs Based on Custom Indexes

ETFs are popular with investors as they offer low fees and they don't have to pay a manager to pick stocks. However, ETFs are increasingly being based on new or custom-made indexes that have the elements of mutual funds, The Wall Street Journal reports. Some new ETFs are based on indexes that operate like traditional mutual funds by actively trying to pick winning stocks.

PowerShares Capital Management says the indexes tracked by many of their ETFs are designed to find stocks "that have the greatest potential for capital appreciation." Generally, most older indexes are designed to represent a market or segment of a market, and do not search for hot stocks.

Critics are quick to declare these firms are departing from a basic premise of indexing and point out that most stock-picking fund managers fail to consistently beat the overall market.

Another issue is that the Securities and Exchange Commission is undecided about allowing ETFs to be actively managed and not tracking indexes because they are concerned about transparency and trading issues. Some people question whether firms are calling their offerings index funds to get SEC approval. The SEC has received proposals for actively managed ETFs and continues to review them.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.