PowerShares made a splash with the launch of four new exchange-traded products on Tuesday, rolling out a suite of financials-focused funds linked to indexes maintained by KBW. The new products will be linked to benchmarks that had historically been replicated by State Street ETFs, but that were dropped recently as the issuer made a switch to S&P indexes. The new PowerShares ETFs are:
- PowerShares KBW Bank Portfolio (KBWB): Linked to the KBW Bank Index, which includes companies that do business as banks or thrifts. KBE was previously linked to this index.
- PowerShares KBW Capital Markets Portfolio (KBWC): Linked to the KBW Capital Markets Index, which consists of companies that do business as broker-dealers, asset managers, trust and custody banks or exchanges. KCE was previously linked to this index.
- PowerShares KBW Insurance Portfolio (KBWI): Linked to the KBW Insurance Index, this ETF includes about 24 insurance companies. KIE was previously linked to this index.
- PowerShares KBW Regional Banking Portfolio (KBWR): This ETF is linked to the KBW Regional Banking Index, and offers investors exposure to regional banks. KRE was previously linked to this index.
PowerShares is taking a unique approach to launching these products; through January 2012, all expense fees on the four ETFs will be waived. This isn’t the first time an issuer has launched a “zero fee” ETF; Old Mutual tried the same tactic with the launch of its FTSE Emerging Markets Index Fund (GSR) in December 2009. The temporary price cut didn’t do much in that case; Old Mutual was out of the U.S. ETF industry completely by late 2010, citing a lack of investor interest in its products. GSR, competing with more established products such as EEM and VWO, failed to gain traction in the emerging markets ETF space.
The KBW products, however, could be different; at the end of the third quarter, the four State Street funds linked to the KBW benchmarks had aggregate assets of more than $1.5 billion [see Financials Equities ETFdb Category]. The switch now playing out will be an interesting study in investor loyalty to benchmarks; those attracted to the KBW methodology would presumably gravitate towards the new PowerShares products. State Street replaced the KBW benchmarks with modified equal-weighted S&P indexes [see 10 Strange But True Facts About The ETF Industry]. Though State Street ETFs are linked to indexes from various providers, S&P products account for the majority of the company’s products.
For the time being, the four new PowerShares funds will top the list of cheapest ETFs, a position previously shared by two FocusShares products. Each of the State Street funds charges an expense ratio of 0.35%.
“KBW is well known for producing industry-leading research on the financial services sector and the KBW indexes are widely used by industry professionals as performance benchmarks,” said Ben Fulton, Invesco PowerShares managing director of global ETFs. “Accordingly, we are very excited to expand our partnership with KBW with four additional ETFs that provide precise access to key financial sub-sectors. In order to ease the transition for investors that would like to continue to retain their portfolio’s exposure to the KBW financial Indexes, we are waving the unitary fee on these four ETFs through February 1, 2012. We are able to take this unprecedented step with the full support from our key partners who are also waiving their fees.”
The launch of the four new funds doubles the size of the PowerShares suite of ETFs linked to indexes from that provider; previously, there were four products offering exposure to corners of the domestic and international financial sector:
- KBW High Dividend Yield Financial Portfolio (KBWD)
- KBW Premium Yield Equity REIT Portfolio (KBWY)
- KBW International Financial Portfolio (KBWX)
- KBW Property & Casualty Insurance Portfolio (KBWP)
Disclosure: No positions at time of writing.