PowerShares and iShares are the brand names of two exchange-traded fund (ETF) families that were originally launched by PowerShares Capital Management and Barclays Global Investors, a subsidiary of Barclays Plc. While the brand names were retained, both companies have since been acquired. PowerShares was purchased by Invesco Ltd. in early 2006. More recently in 2009, Barclays Global Investors and its iShares ETFs were sold to BlackRock, Inc.
Exchange Traded Funds
An exchange-traded fund is an investment vehicle, organized as a mutual fund or unit investment trust, that combines some of the features of traditional mutual funds and individual stocks. ETFs are either passively managed -- designed to closely track the performance of a securities market index, like the S&P 500 -- or they are actively managed using quantitative or fundamental strategies in an attempt to beat the market. Like stocks, ETFs are listed and traded throughout the trading day on a stock exchange at market determined prices. They may also be sold short. While the character of ETFs is changing, the key benefits of these index tracking investment vehicles are their transparency, cost effectiveness, tax-efficiency and continuous pricing.
With more than 440 ETFs, around $471 billion in assets and a market share of 44 percent in the U.S. as of March 2011, BlackRock is the largest provider of ETFs. The firm offers a wide variety of index-based ETFs under the brand name iShares that seek to replicate various segments of the capital markets both in the U.S. and overseas. These include stock, bond and commodity indexes that seek to match the total return performance of a large universe of broad and more narrowly constructed indexes covering U.S. and overseas companies. iShares ETF expenses tend to be low, and due to the firm’s large-scale and effective management techniques, the tracking error of iShares ETFs relative to the underlying indexes tends to be narrow.
PowerShares offers a family of more than 120 domestic and international index-based ETFs and actively managed ETFs with assets of about $26 billion and a 4.3 percent market share as of March 2011. During its early days, PowerShares ETFs were largely index-based and passively managed. In more recent years, however, PowerShares has gravitated toward offering actively managed ETFs; rules-based ETFs that invest in stocks selected on the basis of multiple valuation criteria; and ETFs focused on commodities, currencies and narrowly based sector offerings, such as clean energy, water resources, and health care. A byproduct of these type of offerings is that they are subject to higher expenses and, in the case of more narrowly based ETFs, tracking errors relative to the index tend to be wider. Both of these factors can reduce ETF returns.
Expenses Can Eat Into ETF Returns
An analysis of the largest 10 ETFs offered by each of the firms shows that the average expense ratio levied by PowerShares is 61 basis points (each basis point is 1/100 of 1 percent) versus an average of 32 basis points charged by iShares ETFs, or an average expense ratio that is 50 percent lower.