Ishares/Powershares?

Question

I would really appreciate someone explaining ishares, powershares and other index ETFs. Any recommendations would also be welcomed.

Answer 1

ishares are mkt cap weighted indices. These type of ETF mirrors your typical indices such as S&P 500, Russell 1000, MSCI EAFE, and so forth. The reason why I prefer to use Powershares is because in a mkt cap weighted index, you have biases from the large companies within the index. An example would be the top 50 companies in the S&P500 is 10% of the number of holdings but actually represents 50% of the index. Due to this, your returns are heavily dependent on these top companies.

Powershares however have different kinds of ETFs. They have Dynamic, FTSE RAFI, Access ETFs. Dynamic is pretty well explained by Dave. FTSE RAFI ETFs is what people would consider as fundamental indexing. The way this works is instead of looking at mkt cap it looks at the companies sales, book value, dividend, cash flow and weight and rank them accordingly. This will give you an index with companies based on investment merit rather than cap size. Access ETFs are basically indices that will give you a way to invest in certain sectors such as materials, gold, currency and things of that nature.

Since you are just beginning I suggest you use PRF. (PRF) is a FTSE RAFI etf that comprises of the top 1000 companies based on those fundamental merit I mentioned earlier. To get some exposure to Int'l companies I suggest you pair that ETF with (PXF), which is a fundamental index of international companies.

I hope that helps.

Answer 2

Andy gave you an excellent answer, but I believe not all are reballanced quarterly, but certainly some are.

There are so many index funds now, that indeed it is quite a chore to sort through all of them. Indeed new indexes are invented so that an index fund can be created based upon it. Sort of begs the question of which came first the chicken or the egg.

QQQQ is I believe by far the most popular Powershares index fund with 18 billion outstanding, also the one perhaps most likely to drop the most in any market correction. It certainly did during 2000-2003 loosing 3/4 of its value. You read that right 3/4. It is loaded with high pe tech stocks that are currently hot. Well anyway at one time hot. Apple is its largest holding. Personally I would not consider it as an investment but the put options are a great hedge against a falling stock market. I use them frequently.

I really can not specifically recommend one over the other. It somewhat depends on how it might fit in with the rest of your portfolio. However, if you are looking for an index fund that provides a good chance of capital appreciation, fairly broad diversification, and a decent track record, give RSP some consideration, a Rydex fund. It is based on the S&P 500 index as are many other index funds but unlike all of the others it is equal weighted rather than capitalization weigted. Much better diversification than its rivals. Also a much better if somewhat short track record. The only critique that I have against it as a one fund holding is that there is no foreign stock holdings. That prevents really decent diversification. (Almost every foreign region is currently out performing the U S).

Ideally, ones equity holdings would consist of about 40% U S equities and about 60% broadly diversified foreign holdings.

Unfortunately, there is not any really ideally suited foreign index funds to choose from. There are a lot of foreign index funds but they are none very diversified so one would have to choose several to achieve decent diversity.

Answer 3

If I understand your question correctly, you want to know how they work. Basically an exchange traded fund (ETF) is very similar to a mutual fund, but can be traded like an individual stock throughout the day instead of only at the end of the day like a mutual fund.

So an S&P 500 ETF (e.g. SPY) would own stocks from the S&P 500 in quantities that will make it perform almost exactly the same as the S&P 500 index. You can then buy shares of the ETF, which essentially gives you ownership of a tiny fraction of all the stocks in the S&P 500 index.

My personal favorites are MDY (which tracks the Mid-Cap 400) and IWM (Russell 2000) or IWN (small company "value" stocks). The reason is that smaller company stocks have historically performed slghtly better in the long run than larger company stocks. Those three ETFs all container smaller to mid-size company stocks.

Take a look at this chart of MDY over the past 12 years and you just might like it too: http://finance.yahoo.com/q/bc?s=MDY&t=my&l=on&z=l&q=l&c=

Answer 4

iShares and Powershares are two different brands of ETFs. IShares ETFs are based on traditional indexes; so they have IVV which is based on the S&P 500, IWM which is based on the Russell 2000, etc.

Powershares uses "dynamic" or active indexing. In this approach, the index is based on certain quantitative measures and the index is reconstituted on a quarterly basis; so if a stock no longer meets the quantitative measure it is replaced by a stock that does. Basically, the powershares dynamic indexes give you a cheap way to do quantitative (black box, "quant", etc.) investing.

Because of the proliferation of ETFs it is now quite a chore to decide which fund to choose. Good luck.

Answer 5

Dave W. & Andy have it covered for you!

Answer 6

never heard of them....

here's daves investing advice..

http://www.daveramsey.com/media/pdf/daves_investment_philosophy.pdf