Wheaton, Ill.-based ETF innovator and PowerShares Chief Executive Bruce Bond argues that traditional indexing is no longer adequate, in an interview with MarketWatch.
In order differentiate itself in the booming $350 billion industry and to compete with companies like Barclay’s Global Investors and State Street Global Advisors, his company will continue to introduce funds with strategies that challenge traditional indexes.
The interview comes during a week in which columnists in the financial presses have consistently criticized such strategies.
“Indexes were built originally to measure the market, and they’re excellent for that. But they’re not necessarily the best thing for investing,” said Bond, whose company has recently reached a $730 million agreement to be acquired by Amvescap, if it meets its five-year targets.
“A cap-weighted structure can cause individual stock risk and realty skew the performance of an index,” Bond said.
PowerShares’ so-called “intelligent” design indices, also called the “Intellidexes,” change with time, according to 25 different financial factors. This constant shifting helps weed out which stocks in an index lack investment merit.
Fundamental indexes cut out companies based on cash flow, dividends, book value and sales.
Among PowerShares, many products awaiting approval, Bond called the “Automatic” among the more unique. “It’s a mother index that allocates among all the Intelidexes the PowerShares are based on and adjusts your weighting for the domestic piece of your portfolio,” Bonds said. Because ETFs are so tax-efficient, he said, the product will help sidestep capital gains distributions.
Bond also said that the partnership with Amvescap might help introduce ETFs into the 401(k) retirement space, although he acknowledged challenges posed by the way ETFs trade and commissions involved.
“The 401(k) market is going to crack open suddenly. One of the midsize administrators will decide they’re going to do ETFs and maybe start to take over some of the larger administrators’ business,” Bond predicted. “Once it happens, it will probably happen very, very quickly,” he said.
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