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PowerShares plans equal-weight ETF amid volatile market

Invesco PowerShares, one of the world’s biggest ETF providers, has come up with a slew of new product launches this year with LadderRite 0-5 Year Corporate Bond Portfolio (LDRI) and Multi-Strategy Alternative Portfolio (LALT) being the latest.

Continuing with this trend, the issuer has recently planned a new ETF targeting the U.S. large-cap space. Though some key information, including expense ratio and holdings, was not released, we have highlighted some of the main points of the proposed fund below.

PowerShares Russell 1000 Equal Weight Portfolio in Focus

As per the SEC filing, the proposed ETF seeks to track the performance of the Russell 1000 Equal Weight Index before fees and expenses. The index measures the performance of the large-cap segment of the U.S. equity universe. The index uses an equal weighting strategy wherein each sector and the individual securities within each of the sectors are given equal weights. As such, concentration risk is expected to be pretty low in this fund.

Presently, the index holds a well-diversified basket of 1032 stocks. Monster Beverage Corp, Pilgrim's Pride Corp and Hain Celestial Group Inc are the top three holdings in the index at time of writing.

How Might it Fit in a Portfolio?

The fund could someday be a good choice for investors seeking a diversified exposure to the U.S. large cap stocks. Currently the U.S. markets are experiencing extreme volatility and are seeing the wildest price swings in the markets since the fall of 2011.

Global growth concerns, escalating geo-political tensions, a surge in the U.S. dollar and chances of higher interest rates in the U.S. are some of the factors to be blamed for the volatility.

Rising volatility and related fear have recently led the Wall Street fear gauge indicator – the CBOE Volatility Index – to jump to its highest level in 28 months.

Amid such volatile times, big and stable companies are usually safer to focus on. Unlike small and mid-cap companies, large caps are less vulnerable to market volatity.

ETF Competition

As far as competition within the space is concerned, Guggenheim Russell 1000 Equal Weight ETF (EWRI) and Guggenheim S&P 500 Equal Weight ETF (RSP) are expected to be the biggest foes for the new fund if approved.

RSP is one of the most popular funds in its space managing an asset base of $8.3 billion and trading in good volumes of more than 850,000 shares a day on average. The fund tracks the S&P 500 Equal Weight Index, which measures the performance of the top 500 U.S. companies in equal weights.

Sector-wise, Financials, Consumer Discretionary and Industrials take the top three spots with more than 45% allocation. The fund charges 40 basis points and has returned 10% in the past one year.

EWRI, on the other hand, is comparatively less popular with an asset base of $110.7 million and trades in low volumes of roughly 10,000 shares. The fund tracks the Russell 1000 Equal Weight Index to provide exposure to the U.S. large-cap equity market. The fund charges the same fees and has returned 9% in the past one year.

Thus, though the U.S. large cap space is not much crowded, nonetheless, the new fund if launched is expected to face stiff competition from RSP. However, the fund might manage to build decent assets in case it charges less in fees, or if it manages to return more than the above two funds, should it ever pass over regulatory hurdles.
 
GUGG-R 1K EW (EWRI): ETF Research Reports
GUGG-SP5 EQ ETF (RSP): ETF Research Reports
 
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Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

Zacks Investment Research

Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.