PowerShares Launches Financial ETFs

By Alex Ulam and Olivier Ludwig,

Shutterstock photo


Invesco PowerShares launched four new financial-industry ETFs today based on the same KBW indexes State Street stopped using on a group of similar funds only a week ago.

PowerShares is framing the index kerfuffle with SSgA as something of a coup, trumpeting in a press release the fact that it won exclusive licensing rights to the benchmarks. Highlighting the heated competition with SSgA, PowerShares said in a separate press release that it’s waiving the new funds’ 0.35 percent expense ratio until Feb. 1, 2012.

“We didn’t do it to try to make things free,” Taylor Ames, manager of the Invesco PowerShares Product Strategy ' Research Group, said in a telephone interview. “The main idea behind it is to ease that transition and to try to make it as simple as possible for people who wish to maintain exposure to KBW indexes, but certainly waiving the fee will play out well in the minds of some investors.”

The new PowerShares funds and their tickers are:

  • PowerShares KBW Bank Portfolio (NYSEArca:KBWB)
  • PowerShares KBW Capital Markets Index (NYSEArca:KBWC)
  • PowerShares KBW Insurance Portfolio (NYSEArca:KBWI)
  • PowerShares KBW Regional Banking Portfolio (NYSEArca:KBWR)


The funds target various pockets of one of the hardest-hit sectors of the U.S. economy since the market collapse in 2008-2009. Now with the uncertainty surrounding the eurozone’s sovereign debt crisis, there’s renewed concern about the overall direction of the U.S. economy. That said, the financial sector’s recovery will no doubt be a crucial part of the broader recovery, which means investing in it could result in a big payoff some day. The question is when.

For its part, SSgA made a preemptive publicity strike last week, dropping the KBW indexes PowerShares is using on its new funds and re-branding a family of five similar funds using S'P indexes. Industry sources said PowerShares was contemplating filing a lawsuit to block SSgA from reintroducing the SSgA funds before the PowerShares launch. Officials at both companies declined to comment on any potential legal wrangling over the funds and their indexes.

Those SSgA funds include the $1.19 billion SPDR S'P Bank ETF (NYSEArca:KBE) and also the SPDR S'P Regional Banking ETF (NYSEArca:KRE), a $47 million fund that also happens to be one of the most heavily shorted ETFs on the market.

SSgA framed the index change as a move to adopt more diversified indexes with more holdings. It also maintained that the move that would consolidate indexes of its popular sector funds within S'P. However, some industry sources said SSgA was keen on lowering the licensing fees it was paying KBW. Such fees are often calculated as a percentage of assets under management, meaning the bigger the fund, the bigger the licensing fees.

SSgA officials declined to comment on financial aspects of its indexing agreements with either S'P or KBW.



The Indexes

While both SSgA and PowerShares apparently were part of the bidding process for the KBW indexes, an official at KBW said the attractiveness of PowerShares’ bid was part of the reason KBW went with PowerShares.

“We decided to consolidate our ETF providers under one roof, and felt that Invesco PowerShares had the best global platform to support our indexes,” Frederick Cannon, director of research at KBW, said in a telephone interview. Cannon added that another reason behind the decision is that KBW and PowerShares already have agreements in place for other ETFs.

Cannon also argued that KBW indexes are more rigorous in establishing categories than the S'P Indexes. For example, he said that within the KBW Bank Index, larger banks are more heavily weighted than smaller institutions.

Further, the KBW Bank Portfolio index of 24 banks includes only heavyweights such as J.P. Morgan Chase, which has a market cap of $136 billion.

In contrast, the S'P Banks Select Industry Index includes smaller banks, such as the $2 billion market-capped Puerto Rican bank, Banco Popular, which wouldn’t come close to making it into KBW’s index.

“We believe this model more closely mirrors what investors consider when they think of the market-cap universe of large-cap banks,” said Cannon. “In contrast, the S'P-based model equally weights all of its constituents, so you have Banco Popular in Puerto Rico equally weighted with JP Morgan.”


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: KBE , KRE

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