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| The PowerShares S&P SmallCap Sector Portfolios are the first suite of exchange-traded funds (ETFs) offering sector-specific beta1 exposure within the small-cap space. The PowerShares S&P SmallCap Sector Portfolios seek to offer a low-cost,2 transparent3 and tax-efficient4 way to gain sector-specific small-cap exposure. These ETFs offer a new means of implementing sector-based strategies. |
| Over the last 10 years, small-cap stocks have outperformed large-cap stocks on both an absolute and risk-adjusted basis. This outperformance was not the result of any single sector achieving disproportionate outperformance. Rather, eight of nine small-cap indexes outperformed their large-cap counterparts. |
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| Source: Bloomberg, as of March 2011. Past performance is no guarantee of future results. An investor cannot invest directly in an index. |
| As the table below illustrates, sectors of the S&P SmallCap 600 Index have historically exhibited a wide range of returns. Large inter-sector performance differences may create unique opportunities for investors. |
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| Source: Bloomberg L.P., as of March 31, 2011. Past performance cannot guarantee future results. An investment cannot be made directly in an index. |
| Note: Energy, Materials, Utilities and Consumer Staples are blended indexes using non-capped index data prior to 3/19/2010. |
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| An ETF, or exchange-traded fund, is a unique investment tool that combines some of the features of mutual funds with some of the features of individual stocks. Like a mutual fund, an ETF gives investors exposure to a group of securities through a single transaction. Like a stock, these ETF shares are traded on exchanges at market-determined prices. |
| Most ETFs hold a basket of securities designed to mirror the performance of an index. Investing in a basket of securities allows investors to access large portions of the market quickly and efficiently. Indexes come in all shapes and sizes: holding as little as a few dozen securities to as many as a few thousand. In addition, indexes are themed. For instance, a healthcare exchange-traded fund would likely mirror an index full of healthcare-related stocks. |
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- Portfolio Diversification: ETFs provide exposure to multiple underlying securities, even in targeted market segments. For example, instead of an investor stock-picking among individual healthcare companies, investors can buy shares of a healthcare ETF and gain wider exposure to the industry. Portfolio diversification does not guarantee a profit or eliminate the risk of loss.
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| Achieving diversification is an important step in portfolio construction. Holding a wide variety of securities across multiple industries, market cap levels, geographic regions and asset classes is a critical component to asset allocation. Most ETFs hold a basket of securities designed to mirror the performance of an index. Investing in a basket of securities allows investors to access large portions of the market quickly and efficiently. |
| As such, ETFs are one of the most effective ways to add a specified amount of portfolio exposure to targeted markets. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. |
- Tax Efficiency4: Taxes may be one of the most critical and yet overlooked factors in wealth creation over time as they can erode even the best fund's returns. Because of their unique structure, ETFs may serve as a tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.
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| PowerShares S&P Small Cap Sector Portfolios primarily use use a LI–FO (lowest in – first out) in-kind tax management strategy unique to ETFs. This method typically allows the portfolio manager, during the creation and redemption process, to remove the lowest cost basis stocks through in-kind stock transfers. This unique operational trait generally leaves the fund with the highest cost basis securities, which may systematically reduce tax exposure. |
| Mutual funds use a HI–FO (highest in – first out) pooled tax treatment strategy for managing most portfolios. This method may create embedded, unrealized capital-gain exposure and eventual taxable distributions. These distributions are declared and distributed annually and can occur regardless of whether the investor has made or lost money in the fund. |
| Separately managed accounts (SMAs) allow for customized tax planning and properly align a stock's cost basis to each individual account, which is beneficial for wealthy investors. However, when adjusting their portfolios, SMAs lack an in-kind mechanism by which to remove embedded portfolio gains. |
| There is no guarantee that the Funds will not distribute capital gains to their shareholders. |
- Transparency: PowerShares ETFs report their holdings on a daily basis, allowing investors to see the investments that underpin each ETF.
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| ETFs disclose their portfolio holdings daily. Most mutual funds, on the other hand, only disclose their holdings quarterly. As regulators continue to push for accountability, transparency has become increasingly significant. ETFs allow investors to know exactly what they own on a daily basis. |
- Flexibility: ETFs offer investment flexibility, allowing investors to buy and sell shares throughout the day on an exchange. Investors can use ETFs to implement advanced trading techniques such as purchasing on margin, short selling and placing limit orders. In addition, ETFs are never closed to investors.
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| ETFs allow investors to quickly get in or out of an investment as markets fluctuate throughout the trading day on exchanges. Moreover, investors can use ETFs to implement advanced trading techniques such as purchasing on margin, short selling and placing limit orders. |
| In addition, the Intraday Indicative Value (IIV), the value of the underlying basket of stocks, is calculated and disseminated every 15 seconds. This allows investors to know the value of the underlying portfolio at every moment during market operations. |
| Other investment vehicles do not provide intraday pricing. Instead, the vehicle’s price is disseminated once a day, after trading hours. |
- Lower Ownership Cost: ETFs may provide lower ownership costs because of their efficient structure. Many sponsors have established expense caps to make the cost of ownership clear and straightforward for investors.
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| ETFs provide low ownership cost because of their efficient product structure. Transactional costs generally associated with the buying and selling of securities in a mutual fund are substantially reduced by the unique in-kind operational structure of ETFs. Consequently, the low ongoing ownership costs of ETFs can be very attractive to investors. |
| ETF ownership costs on average are less than comparable actively managed mutual funds and even lower in many cases than index mutual funds. Ordinary brokerage commissions apply when buying or selling ETF shares on an exchange; however, these costs can be very economical for investors who buy and hold, when compared to an investment with higher annual fees. |
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