Less than three months after winning the race to offer the first prospectus for an actively managed stock exchange-traded fund (ETF), PowerShares is close to getting a green light to launch.

The Securities & Exchange Commission (SEC) has given notice that it's ready to let four ETFs hit the market and be advertised as "actively managed exchange-traded funds."

But there's a catch. The SEC is tying final approval to completion of a public review process. The last time that happened several years ago, public dissent ended any significant efforts to open up the ETF market to active management.

If no public hearing is requested, PowerShares' new lineup of active ETFs can proceed to market, the SEC said in a notice dated Feb. 1. The deadline for submitting hearing requests is 5:30 p.m. on Feb. 26.

Changes Coming?

In some respects, the proposed active PowerShares ETFs will introduce some unique innovations into the marketplace.

But many observers remain skeptical that the new crop will significantly boost returns compared to market-cap size index funds.

"What's the difference between an actively managed mutual fund and an actively managed ETF really going to be for most long-term investors?" asked Allan Roth, founder of Wealth Logic in Colorado Springs, Colo. 

While not specifically addressing PowerShares' latest prospectus, he says in general the move towards more active ETFs is "narrowing the market to the point where we're now seeing ETFs more risky and more expensive than some low-cost, low-turnover actively managed mutual funds."

Active bond ETFs are already here. But that's a small piece of the overall marketplace. More than 90% of all ETF assets are estimated to be in stock-focused portfolios. That's roughly the same percentage of all open-end stock mutual-fund assets invested in actively managed portfolios rather than indexed ones.

Advances In Trading Strategies

Even if approved, questions are likely to continue how much the new PowerShares ETFs will push the actively managed envelope. Like its current crop of intellidex-based ETFs, the new offerings appear to be largely quantitatively based.

First Trust AlphaDex and SPA MarketGrader ETFs also could be considered part of these more active yet quant-based ETFs now on the market.

PowerShares first made its request for the active ETFs in November 2007. According to the SEC's notice, the sponsor will offer two ETFs subadvised by AER Advisors Inc. Those are the PowerShares Active AlphaQ Portfolio, which screens from the Nasdaq 100, and the PowerShares Active Alpha Multi-Cap Portfolio. That portfolio would come from domestic large-caps and also use AER's own ranking system.

The firm's methodology includes using computers to crunch data focusing on flow metrics. Those involve sector money flows as well as stock flows. Earnings outlook changes will also be automatically monitored. Returns on equity and changes in fundamental business data will also be sorted. On a weekly basis, AER has said that it plans to review those results. Holdings will be equally weighted.

But the biggest difference will be that the proposed PowerShares active ETFs won't be tied to any specific benchmark. That could be viewed as a key departure for the SEC, which in the past hasn't allowed any potential ETFs to launch without being matched to a specific index. 

Perhaps more importantly, the funds won't necessarily let investors know what each fund holds all of the time.

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