What are PowerShares
PowerShares are the branded name of a family of domestic and international exchange-traded funds managed by the investment management company Invesco Ltd. Founded in 2003, PowerShares trade like stocks on both U.S. and international stock exchanges, including the NASDAQ and NYSE Arca, and are intended to offer investors tax efficiency, transparency, flexibility and broad exposure. As of June 4, 2018, all PowerShares ETFs were rebranded as Invesco ETFs.
BREAKING DOWN PowerShares
While ETFs were originally designed to track a market index, PowerShares were part of a universe of ETFs designed to outperform market indexes. For this reason, the company refers to its ETFs as "next generation," "intelligent" or "value added" ETFs. The company's broad categories of ETFs offer investors choices such as actively managed ETFs, ETFs focused on dividend-paying stocks, commodities and fixed-income.
Invesco is the largest provider of smart beta ETFs which actively target academically identified investment factors. A factor is a quantifiable characteristic that explains much of a stock’s risk-return profile. Six factors – low volatility, momentum, quality, value, small size and dividend yield – are academically supported and have historically demonstrated outperformance across asset classes and geographies. Smart beta ETFs invest in stocks that exhibit tilts toward specific factors.
Differences and Risks of PowerShares
PowerShares grew its market share in the ETF category by offering investors both traditional passive and next generation active ETF products. PowerShares were the largest part of Invesco’s ETF business and helped it become one of the five largest ETF providers, with assets of approximately $175 billion across more than 200 ETFs through March 2018. In addition to its smart beta suite of ETFs, PowerShares offered market cap weighted ETFs designed to track index and stock sector performance, investment style-box ETFs, investment theme-based ETFs, risk-based ETFs as well as ETFs that tracked such alternative asset classes as currencies and real estate.
Invesco expanded its ETF offerings in February 2018 with the purchase of Guggenheim Investments’ ETF business. The Guggenheim acquisition added BulletShares fixed income and equal-weighted equity ETFs to Invesco’s lineup.
While products offered by Invesco have been gaining greater acceptance among investors, they also carry specific smart beta risks. Most smart-beta ETFs have too short a track record to draw conclusions about their efficacy in real market conditions compared to hypothetical back tests. Compared to traditional capitalization-weighted passive ETFs, the higher management fees assessed by smart beta ETFs could lead to a drag on performance. Some observers have noted that the proliferation of smart beta ETFs offering similar strategies could create some vehicles that lack the assets or liquidity to properly function as advertised.