PowerShares Plans EM, Payout ETFs
August 01, 2012
Invesco PowerShares, the money management firm best known for its Nasdaq-100 ETF (NasdaqGM: QQQ), is looking to expand its reach into yield-generating strategies with two new funds that would serve up exposure to emerging markets local debt and to U.S. high-dividend-paying equities, respectively.
In two separate filings the company submitted to U.S. regulators, PowerShares detailed plans to bring to market the PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD) and the PowerShares Fundamental Emerging Markets Local Debt Portfolio, for which a ticker was not provided. No fees were disclosed in either filing.
What both funds have in common is an underlying hunt for yield. Both high-payout ETFs and emerging markets debt have been popular strategies these days due to the uncertainty in the global economy. Fund providers have been racing to cater to the appetite for yield-producing funds in a near-zero interest rate environment.
But payout ETFs abound, and snagging investor attention in an ever-crowding space of funds is no easy task. Emerging markets debt ETFs are not that rare either.
PowerShares’ take on emerging market debt, for instance, will join the likes of WisdomTree’s Emerging Markets Local Debt ETF (NYSEArca: ELD)—the biggest in the space with more than $1.18 billion in assets—as well as offerings from iShares and Van Eck, to name a few.
Its high-dividend strategy will also face some well-established competition from funds like State Street Global Advisors’ SPDR S&P Dividend ETF (NYSEArca: SDY), which boasts more than $9.12 billion in assets, as well as from the $1.6 billion iShares High Dividend Equity Index Fund (NYSEArca: HDV).
Emerging Market Debt Access Via Arnott’s RAFI Indexes
The emerging markets strategy is linked to Rob Arnott’s Research Affiliates’ fundamental index methodology, the latest to join an extensive family of RAFI-linked PowerShares ETFs.
The strategy is designed to track the performance of the Citi RAFI Sovereign Emerging Markets Bond Index, which comprises locally issued debt from 14 emerging markets economies selected through four fundamental screens: GDP, population, land area and energy use.
The company said in the filing that the bonds are weighted annually according to each country’s composite ranking.
For inclusion in the new fund, bonds have to have at least one year to maturity and come from a country with a debt rating of at least “C” according to either S&P standards or Moody’s. At the end of June, countries like Mexico, Czech Republic, Poland, Thailand and Indonesia were in the mix.
The ETF applies a representative sampling approach to replicating its index, meaning it does not own all of the securities found in the underlying benchmark.
The fund would also join PowerShares’ other emerging markets strategy, the $1.8 billion PowerShares Emerging Markets Sovereign Debt ETF (NYSEArca: PCY), which is a basket of dollar-denominated government bonds and costs 0.50 percent in net expense ratio.
Details On The Dividend Fund
SPHD will track the S&P 500 High Dividend Index, which consists of 75 securities that have historically provided high-dividend yields. The benchmark weights those securities based on their payouts, with the highest-paying stocks weighing the most in the mix.
The selection process begins with picking the 100 highest-dividend-paying names from the S&P 500, and then narrows down to the 75 stocks that showed the lowest realized volatility in the previous 12 months, the filing said.
Unlike the emerging market strategy, SPHD will fully replicate its underlying index, meaning it should hold all 75 securities found in the benchmark.
SPHD is not PowerShares’ first high-dividend yield strategy—the company already offers a roster of equity income strategies.