When Benjamin Fulton began working at what's now Invesco PowerShares in 2003, the firm had just two index-tracking exchange-traded funds. "We knew we had to be better, smarter and faster than the guys with all the money just to compete," he says. So Fulton and his team decided to focus on problem solving.
One of the first problems they addressed was the indexes themselves. When an index weights stocks by market value (as does Standard & Poor's 500), the better a stock performs, the bigger a role it plays in the index. That creates the risk that the index tilts toward over-valued stocks. A firm called Research Affiliates was working on indexes that would weight companies by fundamental factors, such as cash flow and dividends. Fulton contacted the firm to forge a partnership. PowerShares now offers eight ETFs that bear the stamp of Research Affiliates.
The funds, which hold $3 billion in assets, are representative of PowerShares' approach to innovation -- scouring news, investment research and popular culture to see what issues are being debated and how an ETF might play into the solution. The company's rapidly growing investment mix includes funds that focus on clean energy (symbol PBW), water (PHO) and floating-rate bank loans (BKLN). PowerShares has become one of the fastest-growing and most innovative ETF companies, with 120 funds all aimed at either providing a new way to diversify and hedge market risks or a better way to index.
Not every ETF innovation succeeds; PowerShares has closed about 30 funds over the past three years for lack of interest. But that doesn't mean Fulton and his colleagues will stop trying. Among PowerShares' latest offerings: stock funds geared to different levels of volatility. Still, Fulton says the real innovators are the PowerShares partners who create the indexes. "We're just looking for the rock stars," he says.