A Special ETF from Powershares

PowerShares Capital Management was on a flow throughout 2005. One after another .. they launched new and innovative Exchange Traded Funds (ETF). In December they introduced an ETF that challenged 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 special 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%. Its Top 5 holdings are Exxon Mobil (XOM), General Electric (GE), Citigroup (C), Bank of America (BAC), General Motors (GM). It made its debut in the last week of 2005 at $50. Yesterday it closed at $54.85 -- a return of 9.8% in 9 months.