PRF: New Style Index

PowerShares Capital Management was on a flow throughout 2005. One after another .. they continued to launch new and innovative Exchange Traded Funds (ETF). On Monday they introduced another ETF that challenges traditional notions on index investing.

Its name is PowerShares FTSE RAFI U.S. 1000 Portfolio (PRF) and is listed on the New York Stock Exchange. This newest ETF from Powershares is based on a controversial new "fundamental" indexing strategy pioneered by Robert Arnott, chairman of Research Affiliates and editor of the Financial Analysts Journal. In 2004, Arnott published an academic paper that was critical of most traditional benchmarks prevalent in the indexing market, which weigh companies by their market capitalization. Arnott's opinion was that indexes formed in this way get over-exposed to overvalued companies, especially during periods of 'irrational exuberance' (thanks, Mr. Greenspan for this phrase). The prominent example is the S&P 500 index which, during the bubble days of late 1990s, got dominated by highflying growth and technology companies whose stocks were driven by some sort of madness. When rationale came back to investors, the index (which thus far was considered a safe heaven) suffered quite a lot.

PRF, on the other hand, tracks the performance of the top U.S.-based companies whose fundamental factors (i.e. sales figures, price-to-earning ratio, cash inflow, dividends) -- would determine the weighting in the index.

At the same time PRF has kept a low expense ratio of only 0.6%. On Monday it made its debut at $50. Yesterday it closed at $49.63.