485APOS 1 a06-13268_1485apos.htm POST-EFFECTIVE AMENDMENT FILED PURSUANT TO SECURITIES ACT RULE 485(A)

 

As filed with the Securities and Exchange Commission on June 6, 2006.

 

No. 333-102228
No. 811-21265

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

 

FORM N-1A

 

 

 

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

 

o

 

 

Pre-Effective Amendment No.

 

o

 

 

Post-Effective Amendment No. 73

 

ý

 

 

 

 

and/or

 

 

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

 

Amendment No. 75

 

ý

 

(Check appropriate box or boxes)

 


 

PowerShares Exchange-Traded Fund Trust

(Exact Name of Registrant as Specified in Charter)

 

301 West Roosevelt Road

Wheaton, IL 60187

(Address of Principal Executive Office)

 

Registrant’s Telephone Number, including Area Code: (800) 983-0903

 

H. Bruce Bond
301 West Roosevelt Road
Wheaton, IL 60187
(Name and Address of Agent for Service)

 

With a copy to:
Stuart M. Strauss
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019

 

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:

 

It is proposed that this filing will become effective (check appropriate box)
o           immediately upon filing pursuant to paragraph (b) of Rule 485.

o           on [date] pursuant to paragraph (b) of Rule 485.

o           60 days after filing pursuant to paragraph (a)(1) of Rule 485.

o           on [date] pursuant to paragraph (a) of Rule 485.

ý           75 days after filing pursuant to paragraph (a)(2) of Rule 485.

o           on [date] pursuant to paragraph (a) of Rule 485.

 

 



 

The information in this Prospectus is not complete and may be changed. The Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated June 6, 2006

 

PowerSHARES xtf

 

xchange traded funds

 

POWERSHARES EXCHANGE-TRADED FUND TRUST

 

PowerShares FTSE RAFI US 1500 Small-Mid Portfolio – [   ]

PowerShares FTSE RAFI Energy Sector Portfolio – [   ]

PowerShares FTSE RAFI Basic Materials Sector Portfolio – [   ]

PowerShares FTSE RAFI Industrials Sector Portfolio – [   ]

PowerShares FTSE RAFI Consumer Goods Sector Portfolio – [   ]

PowerShares FTSE RAFI Health Care Sector Portfolio – [   ]

PowerShares FTSE RAFI Consumer Services Sector Portfolio – [   ]

PowerShares FTSE RAFI Telecommunications & Technology Sector Portfolio – [   ]

PowerShares FTSE RAFI Utilities Sector Portfolio – [   ]

PowerShares FTSE RAFI Financials Sector Portfolio – [   ]

 



 

PowerShares Exchange-Traded Fund Trust (the “Trust”) is a registered investment company consisting of forty-seven separate exchange-traded index funds. Additional funds may be offered in the future. This Prospectus relates to ten funds of the Trust, PowerShares FTSE RAFI US 1500 Small-Mid Portfolio, PowerShares FTSE RAFI Energy Sector Portfolio, PowerShares FTSE RAFI Basic Materials Sector Portfolio, PowerShares FTSE RAFI Industrials Sector Portfolio, PowerShares FTSE RAFI Consumer Goods Sector Portfolio, PowerShares FTSE RAFI Health Care Sector Portfolio, PowerShares FTSE RAFI Consumer Services Sector Portfolio, PowerShares FTSE RAFI Telecommunications & Technology Sector Portfolio, PowerShares FTSE RAFI Utilities Sector Portfolio and PowerShares FTSE RAFI Financials Sector Portfolio (each a “Fund” and together, the “Funds”).

 

The Funds anticipate that their shares (the “Shares”) will be listed on the [                   ]. Market prices for Shares may be different from their net asset value (“NAV”). Each Fund will issue and redeem Shares only in large blocks consisting of 100,000 Shares (“Creation Units”). Creation Units are issued and redeemed principally in-kind for securities included in a specified index.

 

Except when aggregated in Creation Units, the Shares are not redeemable securities of the Funds.

 

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense.

 

Prospectus Dated                  , 2006

 

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

 

2



 

TABLE OF CONTENTS

 

 

Page

 

 

INTRODUCTION – THE POWERSHARES EXCHANGE-TRADED FUND TRUST

4

WHO SHOULD INVEST IN THE FUNDS

4

TAX ADVANTAGED PRODUCT STRUCTURE

4

POWERSHARES FTSE RAFI US 1500 SMALL-MID PORTFOLIO

5

POWERSHARES FTSE RAFI ENERGY SECTOR PORTFOLIO

11

POWERSHARES FTSE RAFI BASIC MATERIALS SECTOR PORTFOLIO

17

POWERSHARES FTSE RAFI INDUSTRIALS SECTOR PORTFOLIO

23

POWERSHARES FTSE RAFI CONSUMER GOODS SECTOR PORTFOLIO

29

POWERSHARES FTSE RAFI HEALTH CARE SECTOR PORTFOLIO

35

POWERSHARES FTSE RAFI CONSUMER SERVICES SECTOR PORTFOLIO

41

POWERSHARES FTSE RAFI TELECOMMUNICATIONS & TECHNOLOGY SECTOR PORTFOLIO

47

POWERSHARES FTSE RAFI UTILITIES SECTOR PORTFOLIO

54

POWERSHARES FTSE RAFI FINANCIALS SECTOR PORTFOLIO

61

ADDITIONAL INVESTMENT STRATEGIES

67

ADDITIONAL RISKS

67

PORTFOLIO HOLDINGS

68

MANAGEMENT OF THE FUNDS

68

HOW TO BUY AND SELL SHARES

69

CREATIONS, REDEMPTIONS AND TRANSACTION FEES

70

DIVIDENDS, DISTRIBUTIONS AND TAXES

72

DISTRIBUTION PLAN

74

NET ASSET VALUE

74

FUND SERVICE PROVIDERS

74

INDEX PROVIDER

75

DISCLAIMERS

75

OTHER INFORMATION

76

 

3



 

INTRODUCTION – THE POWERSHARES EXCHANGE-TRADED FUND TRUST

 

The Trust is an investment company consisting of forty-seven separate exchange-traded “index funds.” The investment objective of each of the funds is to replicate as closely as possible, before expenses, the price and yield of a specified market index. This Prospectus relates to the Funds listed on the cover page. PowerShares Capital Management LLC (the “Adviser”) is the investment adviser for the funds.

 

The Funds anticipate that the Shares will be listed on [                     ] at market prices that may differ to some degree from the NAV of the Shares. Unlike conventional mutual funds, each fund issues and redeems shares on a continuous basis, at NAV, only in large specified blocks, each called a “Creation Unit.”  Creation Units are issued and redeemed principally in-kind for securities included in the relevant index. Except when aggregated in Creation Units, shares are not redeemable securities of the funds.

 

WHO SHOULD INVEST IN THE FUNDS

 

The funds are designed for investors who seek a relatively low-cost approach for investing in a portfolio of equity securities of companies in a specified index. The funds may be suitable for long-term investment in the market represented in the relevant index and may also be used as an asset allocation tool or as a speculative trading instrument.

 

TAX ADVANTAGED PRODUCT STRUCTURE

 

Unlike interests in conventional mutual funds, the shares are traded throughout the day on a national securities exchange, whereas mutual fund interests are typically only bought and sold at closing net asset values. The shares have been designed to be tradable in the secondary market on a national securities exchange on an intra-day basis, and to be created and redeemed principally in-kind in Creation Units at each day’s next calculated NAV. These arrangements are designed to protect ongoing shareholders from adverse effects on the portfolio of each fund that could arise from frequent cash creation and redemption transactions. In a conventional mutual fund, redemptions can have an adverse tax impact on taxable shareholders because of the mutual fund’s need to sell portfolio securities to obtain cash to meet fund redemptions. These sales may generate taxable gains for the shareholders of the mutual fund, whereas the shares’ in-kind redemption mechanism generally will not lead to a tax event for the funds or their ongoing shareholders.

 

4



 

POWERSHARES FTSE RAFI US 1500 SMALL-MID PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals US 1500 Small-Mid Index (the “FTSE US 1500 Small-Mid Index” or “Underlying Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE US 1500 Small-Mid Index. The Adviser will seek to match the performance of the FTSE US 1500 Small-Mid Index. The FTSE US 1500 Small-Mid Index is comprised of approximately 1,500 U.S. stocks. The FTSE US 1500 Small-Mid Index is designed to track the performance of small and medium-sized U.S. equity stocks selected based on the following four fundamental measures of firm size: book value, income, cash flow and dividends. As of March 31, 2006, the FTSE US 1500 Small-Mid Index included companies with a market capitalization range of between $100 million and $13 billion. FTSE International Limited (“FTSE”) is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 90% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE US 1500 Small-Mid Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE US 1500 Small-Mid Index; a figure of 1.00 would represent perfect correlation. Fund expects to generally invest in the stocks comprising the FTSE US 1500 Small-Mid Index in proportion to their weightings in the FTSE US 1500 Small-Mid Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE US 1500 Small-Mid Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE US 1500 Small-Mid Index universe to obtain a representative sample of stocks that resemble the FTSE US 1500 Small-Mid Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE US 1500 Small-Mid Index, purchase securities not in the FTSE US 1500 Small-Mid Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE US 1500 Small-Mid Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE US 1500 Small-Mid Index. The Fund may sell stocks that are represented in the FTSE US 1500 Small-Mid Index in anticipation of their removal from the FTSE US 1500 Small-Mid Index, or purchase stocks not represented in the FTSE US 1500 Small-Mid Index in anticipation of their addition to the FTSE US 1500 Small-Mid Index.

 

Index Methodology

 

The FTSE US 1500 Small-Mid Index is designed to track the performance of small and medium-sized U.S. equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the

 

5



 

equities with a fundamental weight ranking of 1,001 through 2,500 is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE US 1500 Small-Mid Index is comprised of companies incorporated in the United States. Small and medium-sized U.S. equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the equities with a fundamental weight ranking of 1,001 through 2,500 is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE US 1500 Small-Mid Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE US 1500 Small-Mid Index, dividend payments will be reinvested in the FTSE US 1500 Small-Mid Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE US 1500 Small-Mid Index, the common shares of the surviving issuer will continue to be represented in the FTSE US 1500 Small-Mid Index. In the event of a merger between a company in the FTSE US 1500 Small-Mid Index and a company not in the FTSE US 1500 Small-Mid Index, the common shares of the surviving issuer will continue to be represented in the FTSE US 1500 Small-Mid Index until further evaluation on the reconstitution date.

 

6



 

Acquisitions

 

A company will be dropped from the FTSE US 1500 Small-Mid Index in the case of its acquisition. The next small or medium-sized company not currently included in the FTSE US 1500 Small-Mid Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE US 1500 Small-Mid Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE US 1500 Small-Mid Index is suspended, the FTSE US 1500 Small-Mid Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE US 1500 Small-Mid Index as soon as applicable. For purposes of minimizing the impact to the FTSE US 1500 Small-Mid Index, the company to be deleted will be removed at the value at which it last traded. The next small or medium-sized company not currently included in the FTSE US 1500 Small-Mid Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE US 1500 Small-Mid Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE US 1500 Small-Mid Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE US 1500 Small-Mid Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE US 1500 Small-Mid Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE US 1500 Small-Mid Index, as would be the case if it purchased all of the stocks in the FTSE US 1500 Small-Mid Index with the same weightings as the FTSE US 1500 Small-Mid Index.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE US 1500 Small-Mid Index.

 

7



 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

FTSE US 1500 Small-Mid Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE US 1500 Small-Mid Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE US 1500 Small-Mid Index may be comprised of issuers in a single industry or sector of the economy. If the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 

8



 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) Securities and Exchange Commission (“SEC”) and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

9



 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,500 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,500 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

10



 

POWERSHARES FTSE RAFI ENERGY SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Energy Sector Index (the “FTSE Energy Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of oil and gas companies and at least 90% of its total assets in common stocks that comprise the FTSE Energy Sector Index. The Adviser will seek to match the performance of the FTSE Energy Sector Index. The FTSE Energy Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of oil and gas companies. These are companies that are principally engaged in the drilling of oil and gas wells; manufacturing oil and gas field machinery and equipment; or providing services to the oil and gas industry, including well analysis, platform and pipeline engineering and construction, logistics and transportation services and oil and gas well emergency management. The FTSE Energy Sector Index is designed to track the performance of the largest U.S. equity stocks of oil and gas companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Energy Sector Index included companies with a market capitalization range of between $424 million and $380.3 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Energy Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Energy Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Energy Sector Index in proportion to their weightings in the FTSE Energy Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Energy Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Energy Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Energy Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Energy Sector Index, purchase securities not in the FTSE Energy Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Energy Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Energy Sector Index. The Fund may sell stocks that are represented in the FTSE Energy Sector Index in anticipation of their removal from the FTSE Energy Sector Index, or purchase stocks not represented in the FTSE Energy Sector Index in anticipation of their addition to the FTSE Energy Sector Index.

 

11



 

Index Methodology

 

The FTSE Energy Sector Index is designed to track the performance of the largest U.S. oil and gas equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. oil and gas equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Energy Sector Index is comprised of oil and gas companies incorporated in the United States. The largest U.S. oil and gas equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Energy Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Energy Sector Index, dividend payments will be reinvested in the FTSE Energy Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Energy Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Energy Sector Index. In the event of a merger between a company in the FTSE Energy Sector Index and a company not in the FTSE

 

12



 

Energy Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Energy Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Energy Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Energy Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Energy Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Energy Sector Index is suspended, the FTSE Energy Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Energy Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Energy Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Energy Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Energy Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Energy Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Energy Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Energy Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Energy Sector Index, as would be the case if it purchased all of the stocks in the FTSE Energy Sector Index with the same weightings as the FTSE Energy Sector Index.

 

13



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Energy Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Energy Sector Concentration Risk

 

Companies in the energy sector may be adversely affected by changes in worldwide energy prices, exploration and production spending. Companies in this sector are also affected by changes in government regulation, world events and economic conditions. In addition, these companies are at risk for environmental damage claims. Companies in this sector could be adversely affected by commodity price volatility, changes in exchange rates, interest rates, imposition of import controls, increased competition, depletion of resources, natural disasters, technological developments and labor relations.

 

FTSE Energy Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Energy Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Energy Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

14



 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

15



 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

16



 

POWERSHARES FTSE RAFI BASIC MATERIALS SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Basic Materials Sector Index (the “FTSE Basic Materials Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of companies that produce basic materials and at least 90% of its total assets in common stocks that comprise the FTSE Basic Materials Sector Index. The Adviser will seek to match the performance of the FTSE Basic Materials Sector Index. The FTSE Basic Materials Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of basic materials companies. These are companies that are principally engaged in the production and mining of basic materials, including metals, minerals, chemicals, water, forest products and precious metals, or provide materials, products or services to such companies. The FTSE Basic Materials Sector Index is designed to track the performance of the largest U.S. equity stocks of basic materials companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Basic Materials Sector Index included companies with a market capitalization range of between $414 million and $42.2 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Basic Materials Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Basic Materials Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Basic Materials Sector Index in proportion to their weightings in the FTSE Basic Materials Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Basic Materials Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Basic Materials Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Basic Materials Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Basic Materials Sector Index, purchase securities not in the FTSE Basic Materials Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Basic Materials Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Basic Materials Sector Index. The Fund may sell stocks that are represented in the FTSE Basic Materials Sector Index in anticipation of their removal from the FTSE Basic Materials Sector Index, or purchase stocks not represented in the FTSE Basic Materials Sector Index in anticipation of their addition to the FTSE Basic Materials Sector Index.

 

17



 

Index Methodology

 

The FTSE Basic Materials Sector Index is designed to track the performance of the largest U.S. basic materials equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Basic Materials Sector Index is comprised of companies that produce basic materials incorporated in the United States. The largest U.S. basic materials equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Basic Materials Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Basic Materials Sector Index, dividend payments will be reinvested in the FTSE Basic Materials Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Basic Materials Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Basic Materials Sector Index. In the event of a merger between a company in the FTSE Basic Materials Sector Index and a company not in the FTSE Basic Materials Sector Index, the common shares of the surviving issuer will

 

18



 

continue to be represented in the FTSE Basic Materials Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Basic Materials Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Basic Materials Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Basic Materials Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Basic Materials Sector Index is suspended, the FTSE Basic Materials Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Basic Materials Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Basic Materials Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Basic Materials Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Basic Materials Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Basic Materials Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Basic Materials Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Basic Materials Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Basic Materials Sector Index, as would be the case if it purchased all of the stocks in the FTSE Basic Materials Sector Index with the same weightings as the FTSE Basic Materials Sector Index.

 

19



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Basic Materials Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Basic Materials Sector Concentration Risk

 

Companies in this sector may be adversely affected by changes in world events, political and economic conditions, energy conservation and environmental policies. In addition, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition and depletion of resources may also significantly affect these companies. Other risks may include liability for environmental damage and mandated expenditures for safety and pollution control.

 

FTSE Basic Materials Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Basic Materials Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Basic Materials Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

20



 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

21



 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

22



 

POWERSHARES FTSE RAFI INDUSTRIALS SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Industrials Sector Index (the “FTSE Industrials Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of industrial companies and at least 90% of its total assets in common stocks that comprise the FTSE Industrials Sector Index. The Adviser will seek to match the performance of the FTSE Industrials Sector Index. The FTSE Industrials Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of industrial companies. These are companies that are principally engaged in the production, construction and distribution of industrial goods, materials and services, including industrial engineering equipment, heavy machinery and industrial transportation, construction, electronic and electrical equipment, aerospace and defense and services related to such industries and materials. The FTSE Industrials Sector Index is designed to track the performance of the largest U.S. equity stocks of industrial companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31 2006, the FTSE Industrials Sector Index included companies with a market capitalization range of between $110 million and $367.3 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Industrials Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Industrials Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Industrials Sector Index in proportion to their weightings in the FTSE Industrials Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Industrials Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Industrials Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Industrials Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Industrials Sector Index, purchase securities not in the FTSE Industrials Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Industrials Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Industrials Sector Index. The Fund may sell stocks that are represented in the FTSE Industrials Sector Index in anticipation of their removal from the FTSE Industrials Sector Index, or purchase stocks not represented in the FTSE Industrials Sector Index in anticipation of their addition to the FTSE Industrials Sector Index.

 

23



 

Index Methodology

 

The FTSE Industrials Sector Index is designed to track the performance of the largest U.S. industrial equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Industrials Sector Index is comprised of industrial companies incorporated in the United States. The largest U.S. industrial equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Industrials Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Industrials Sector Index, dividend payments will be reinvested in the FTSE Industrials Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Industrials Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Industrials Sector Index. In the event of a merger between a company in the FTSE Industrials Sector Index and a company

 

24



 

not in the FTSE Industrials Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Industrials Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Industrials Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Industrials Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Industrials Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Industrials Sector Index is suspended, the FTSE Industrials Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Industrials Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Industrials Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Industrials Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Industrials Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Industrials Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Industrials Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Industrials Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Industrials Sector Index, as would be the case if it purchased all of the stocks in the FTSE Industrials Sector Index with the same weightings as the FTSE Industrials Sector Index.

 

25



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Industrials Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Industrials Sector Concentration Risk

 

Companies in the industrials sector may be adversely affected by changes in government regulation, world events and economic conditions. In addition, these companies are at risk for environmental damage claims. Companies in this sector could be adversely affected by commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources, technological developments and labor relations. Stock prices for industrial companies may be significantly affected by supply and demand for their specific product and for industrials sector products in general. Other risks may include liability for environmental damage and mandated expenditures for safety and pollution control.

 

FTSE Industrials Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Industrials Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Industrials Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

26



 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

27



 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

28



 

POWERSHARES FTSE RAFI CONSUMER GOODS SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Consumer Goods Sector Index (the “FTSE Consumer Goods Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of consumer goods companies and at least 90% of its total assets in common stocks that comprise the FTSE Consumer Goods Sector Index. The Adviser will seek to match the performance of the FTSE Consumer Goods Sector Index. The FTSE Consumer Goods Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of consumer companies. These are companies that are principally engaged in the production and distribution of consumer goods, including automobiles and related parts, food and beverage, and personal and household products. The FTSE Industrials Sector Index is designed to track the performance of the largest U.S. equity stocks of consumer goods companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Consumer Goods Sector Index included companies with a market capitalization range of between $610 million and $189.6 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Consumer Goods Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Consumer Goods Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Consumer Goods Sector Index in proportion to their weightings in the FTSE Consumer Goods Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Consumer Goods Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Consumer Goods Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Consumer Goods Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Consumer Goods Sector Index, purchase securities not in the FTSE Consumer Goods Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Consumer Goods Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Consumer Goods Sector Index. The Fund may sell stocks that are represented in the FTSE Consumer Goods Sector Index in anticipation of their removal from the FTSE Consumer Goods Sector Index, or purchase stocks not represented in the FTSE Consumer Goods Sector Index in anticipation of their addition to the FTSE Consumer Goods Sector Index.

 

29



 

Index Methodology

 

The FTSE Consumer Goods Sector Index is designed to track the performance of the largest U.S. Consumer Goods Sector equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Consumer Goods Sector Index is comprised of Consumer Goods Sector companies incorporated in the United States. The largest U.S. consumer goods equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Consumer Goods Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Consumer Goods Sector Index, dividend payments will be reinvested in the FTSE Consumer Goods Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Consumer Goods Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Consumer Goods Sector Index. In the event of a merger between a company in the FTSE Consumer Goods Sector Index and a company not in the FTSE Consumer Goods Sector Index, the common shares of the surviving

 

30



 

issuer will continue to be represented in the FTSE Consumer Goods Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Consumer Goods Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Consumer Goods Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Consumer Goods Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Consumer Goods Sector Index is suspended, the FTSE Consumer Goods Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Consumer Goods Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Consumer Goods Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Consumer Goods Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Consumer Goods Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Consumer Goods Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Consumer Goods Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Consumer Goods Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Consumer Goods Sector Index, as would be the case if it purchased all of the stocks in the FTSE Consumer Goods Sector Index with the same weightings as the FTSE Consumer Goods Sector Index.

 

31



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Consumer Goods Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Consumer Goods Sector Concentration Risk

 

Companies engaged in the manufacture and distribution of consumer goods are subject to vast fluctuations in supply and demand. These companies may also be adversely affected by changes in consumer spending as a result of world events, political and economic conditions, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.

 

FTSE Consumer Goods Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Consumer Goods Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Consumer Goods Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

32



 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

33



 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

34



 

POWERSHARES FTSE RAFI HEALTH CARE SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Health Care Sector Index (the “FTSE Health Care Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of healthcare companies and at least 90% of its total assets in common stocks that comprise the FTSE Health Care Sector Index. The Adviser will seek to match the performance of the FTSE Health Care Sector Index. The FTSE Health Care Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of healthcare companies. These are companies that are principally engaged in the healthcare industry, including companies that manufacture and distribute healthcare equipment and supplies, companies that provide healthcare-related services and companies involved in the research, development, production and marketing of pharmaceuticals and biotechnology products. The FTSE Health Care Sector Index is designed to track the performance of the largest U.S. equity stocks of healthcare companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Health Care Sector Index included companies with a market capitalization range of between $994 million and $185.7 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Health Care Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Health Care Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Health Care Sector Index in proportion to their weightings in the FTSE Health Care Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Health Care Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Health Care Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Health Care Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Health Care Sector Index, purchase securities not in the FTSE Health Care Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Health Care Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Health Care Sector Index. The Fund may sell stocks that are represented in the FTSE Health Care Sector Index in anticipation of their removal from the FTSE Health Care Sector Index, or purchase stocks not represented in the FTSE Health Care Sector Index in anticipation of their addition to the FTSE Health Care Sector Index.

 

35



 

Index Methodology

 

The FTSE Health Care Sector Index is designed to track the performance of the largest U.S. healthcare equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Health Care Sector Index is comprised of healthcare companies incorporated in the United States. The largest U.S. healthcare equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Health Care Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Health Care Sector Index, dividend payments will be reinvested in the FTSE Health Care Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Health Care Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Health Care Sector Index. In the event of a merger between a company in the FTSE Health Care Sector Index and a company not in the FTSE Health Care Sector Index, the common shares of the surviving issuer will

 

36



 

continue to be represented in the FTSE Health Care Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Health Care Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Health Care Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Health Care Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Health Care Sector Index is suspended, the FTSE Health Care Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Health Care Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Health Care Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Health Care Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Health Care Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Health Care Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Health Care Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Health Care Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Health Care Sector Index, as would be the case if it purchased all of the stocks in the FTSE Health Care Sector Index with the same weightings as the FTSE Health Care Sector Index.

 

37



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Health Care Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Healthcare Sector Concentration Risk

 

Companies in the healthcare sector may be adversely affected by patent protection, government regulation, research and development costs, technological developments and increased competition. These companies may also be at risk for environmental damage claims and to extensive litigation based on product liability and similar claims. In addition, the industry may be significantly affected by rapid obsolescence and research and development of new products.

 

FTSE Health Care Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Health Care Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Health Care Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

38



 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

39



 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

40



 

POWERSHARES FTSE RAFI CONSUMER SERVICES SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Consumer Services Sector Index (the “FTSE Consumer Services Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of consumer service companies and at least 90% of its total assets in common stocks that comprise the FTSE Consumer Services Sector Index. The Adviser will seek to match the performance of the FTSE Consumer Services Sector Index. The FTSE Consumer Services Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of consumer service companies. These are companies that are principally engaged in providing various services involving the food, drug, entertainment, media, travel, leisure and media industries. The FTSE Consumer Services Sector Index is designed to track the performance of the largest U.S. equity stocks of consumer service companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Consumer Services Sector Index included companies with a market capitalization range of between $245 million and $198.4 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Consumer Services Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Consumer Services Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Consumer Services Sector Index in proportion to their weightings in the FTSE Consumer Services Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Consumer Services Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Consumer Services Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Consumer Services Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Consumer Services Sector Index, purchase securities not in the FTSE Consumer Services Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Consumer Services Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Consumer Services Sector Index. The Fund may sell stocks that are represented in the FTSE Consumer Services Sector Index in anticipation of their removal from the FTSE Consumer Services Sector Index, or purchase stocks not represented in the FTSE Consumer Services Sector Index in anticipation of their addition to the FTSE Consumer Services Sector Index.

 

41



 

Index Methodology

 

The FTSE Consumer Services Sector Index is designed to track the performance of the largest U.S. consumer service equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Consumer Services Sector Index is comprised of consumer service companies incorporated in the United States. The largest U.S. consumer services equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Consumer Services Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Consumer Services Sector Index, dividend payments will be reinvested in the FTSE Consumer Services Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Consumer Services Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Consumer Services Sector Index. In the event of a merger between a company in the FTSE Consumer Services Sector Index and a company not in the FTSE Consumer Services Sector Index, the common shares of the

 

42



 

surviving issuer will continue to be represented in the FTSE Consumer Services Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Consumer Services Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Consumer Services Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Consumer Services Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Consumer Services Sector Index is suspended, the FTSE Consumer Services Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Consumer Services Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Consumer Services Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Consumer Services Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Consumer Services Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Consumer Services Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Consumer Services Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Consumer Services Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Consumer Services Sector Index, as would be the case if it purchased all of the stocks in the FTSE Consumer Services Sector Index with the same weightings as the FTSE Consumer Services Sector Index.

 

43



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Consumer Services Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Consumer Services Sector Concentration Risk

 

Companies in the consumer services sector may be adversely affected by changes in the worldwide economy, disposable income, consumer spending, competition, demographics and consumer preferences,  exploration and production spending. Companies in this sector are also affected by changes in government regulation, world events and economic conditions.

 

FTSE Consumer Services Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Consumer Services Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Consumer Services Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

44



 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

45



 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

46



 

POWERSHARES FTSE RAFI TELECOMMUNICATIONS & TECHNOLOGY SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Telecommunications & Technology Sector Index (the “FTSE Telecommunications & Technology Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of telecommunications and technology companies and at least 90% of its total assets in common stocks that comprise the FTSE Telecommunications & Technology Sector Index. The Adviser will seek to match the performance of the FTSE Telecommunications & Technology Sector Index. The FTSE Telecommunications & Technology Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of telecommunications and technology companies. These include companies that are principally engaged in providing services designed to promote or enhance the transmission of voice, data and video over various communications media and/or in the research, design, development or manufacturing of technology products, including software and computer services companies and technology hardware and equipment companies. The FTSE Telecommunications & Technology Sector Index is designed to track the performance of the largest U.S. equity stocks of telecommunications and technology companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Telecommunications & Technology Sector Index included companies with a market capitalization range of between $182 million and $281.4 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Telecommunications & Technology Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Telecommunications & Technology Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Telecommunications & Technology Sector Index in proportion to their weightings in the FTSE Telecommunications & Technology Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Telecommunications & Technology Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Telecommunications & Technology Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Telecommunications & Technology Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Telecommunications & Technology Sector Index, purchase securities not in the FTSE Telecommunications & Technology Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Telecommunications & Technology Sector Index or utilize various combinations of other available investment techniques, in seeking to track the

 

47



 

FTSE Telecommunications & Technology Sector Index. The Fund may sell stocks that are represented in the FTSE Telecommunications & Technology Sector Index in anticipation of their removal from the FTSE Telecommunications & Technology Sector Index, or purchase stocks not represented in the FTSE Telecommunications & Technology Sector Index in anticipation of their addition to the FTSE Telecommunications & Technology Sector Index.

 

Index Methodology

 

The FTSE Telecommunications & Technology Sector Index is designed to track the performance of the largest U.S. telecommunications and technology equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Telecommunications & Technology Sector Index is comprised of telecommunications and technology companies incorporated in the United States. The largest U.S. telecommunications and technology equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Telecommunications & Technology Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

48



 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Telecommunications & Technology Sector Index, dividend payments will be reinvested in the FTSE Telecommunications & Technology Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Telecommunications & Technology Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Telecommunications & Technology Sector Index. In the event of a merger between a company in the FTSE Telecommunications & Technology Sector Index and a company not in the FTSE Telecommunications & Technology Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Telecommunications & Technology Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Telecommunications & Technology Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Telecommunications & Technology Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Telecommunications & Technology Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Telecommunications & Technology Sector Index is suspended, the FTSE Telecommunications & Technology Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Telecommunications & Technology Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Telecommunications & Technology Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Telecommunications & Technology Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Telecommunications & Technology Sector Index.

 

49



 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Telecommunications & Technology Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Telecommunications & Technology Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Telecommunications & Technology Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Telecommunications & Technology Sector Index, as would be the case if it purchased all of the stocks in the FTSE Telecommunications & Technology Sector Index with the same weightings as the FTSE Telecommunications & Technology Sector Index.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Telecommunications & Technology Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Telecommunications and Technology Sector Concentration Risk

 

The telecommunications and technology sector can be significantly affected by the failure to obtain, or delays in obtaining, financing or regulatory approval, intense competition, product compatibility, consumer preferences, corporate capital expenditure, rapid obsolescence and research and development of new products. The telecommunications and technology sector is subject to extensive regulation at the federal, state and local levels. The costs of complying with this regulation, delays or failures to receive required regulatory approvals or the enactment of new, adverse regulatory requirements may adversely affect the business of telecommunications companies.

 

Companies in traditional telecommunications services also face competition or potential competition with numerous alternative technologies. The telecommunications industry is experiencing significant technological change. In addition, the telecommunications and technology industries are highly

 

50



 

competitive, and this competition may cause the prices for wireless products and services to decline in the future.

 

The telecommunications and technology industries are subject to rapid and significant changes in technology that are evidenced by the increasing pace of technological upgrades, evolving industry standards, the availability of new radio frequency spectrum allocations for wireless services, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements, developments in emerging wireless transmission technologies, and changes in customer requirements and preferences. The success of the industry participants depends in substantial part on the timely and successful introduction of new products.

 

FTSE Telecommunications & Technology Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Telecommunications & Technology Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Telecommunications & Technology Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 

51



 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

52



 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).* APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

53



 

POWERSHARES FTSE RAFI UTILITIES SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Utilities Sector Index (the “FTSE Utilities Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of utilities companies and at least 90% of its total assets in common stocks that comprise the FTSE Utilities Sector Index. The Adviser will seek to match the performance of the FTSE Utilities Sector Index. The FTSE Utilities Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of utilities companies. These companies are principally engaged in providing either energy, water or natural gas utilities. These companies may include companies that generate and supply electricity, including electricity wholesalers, distribute natural gas to customers and provide water to customers, as well as deal with associated wastewater. The FTSE Utilities Sector Index is designed to track the performance of the largest U.S. equity stocks of utility companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Utilities Sector Index included companies with a market capitalization range of between $762 million and $35.6 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Utilities Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Utilities Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Utilities Sector Index in proportion to their weightings in the FTSE Utilities Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Utilities Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Utilities Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Utilities Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Utilities Sector Index, purchase securities not in the FTSE Utilities Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Utilities Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Utilities Sector Index. The Fund may sell stocks that are represented in the FTSE Utilities Sector Index in anticipation of their removal from the FTSE Utilities Sector Index, or purchase stocks not represented in the FTSE Utilities Sector Index in anticipation of their addition to the FTSE Utilities Sector Index.

 

54



 

Index Methodology

 

The FTSE Utilities Sector Index is designed to track the performance of the largest U.S. utility equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Utilities Sector Index is comprised of Utilities Sector companies incorporated in the United States. The largest U.S. utilities equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Utilities Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Utilities Sector Index, dividend payments will be reinvested in the FTSE Utilities Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Utilities Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Utilities Sector Index. In the event of a merger between a company in the FTSE Utilities Sector Index and a company not in the FTSE Utilities Index, the common shares of the surviving issuer will continue to be represented in the FTSE Utilities Sector Index until further evaluation on the reconstitution date.

 

55



 

Acquisitions

 

A company will be dropped from the FTSE Utilities Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Utilities Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Utilities Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Utilities Sector Index is suspended, the FTSE Utilities Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Utilities Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Utilities Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Utilities Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Utilities Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Utilities Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Utilities Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Utilities Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Utilities Sector Index, as would be the case if it purchased all of the stocks in the FTSE Utilities Sector Index with the same weightings as the FTSE Utilities Sector Index.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Utilities Sector Index.

 

56



 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Utilities Sector Concentration Risk

 

The Fund’s emphasis on securities of utility issuers makes it more susceptible to adverse conditions affecting such sector than a fund that does not have its assets invested to a similar degree in such issuers. Certain segments of this sector and individual companies within such segments may not perform as well as the industry as a whole. Issuers in the utility sector are subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction and improvement programs; difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets; governmental regulation of rates charged to customers; costs associated with compliance with and changes in environmental and other regulations; effects of economic slowdowns and surplus capacity; increased competition from other providers of utility services; inexperience with and potential losses resulting from a developing deregulatory environment; costs associated with the reduced availability of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, and the effects of energy conservation policies; effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes; technological innovations that may render existing plants, equipment or products obsolete; and potential impact of terrorist activities on the utility industry and its customers and the impact of natural or man-made disasters.

 

Issuers in the utility sector also may be subject to regulation by various governmental authorities and may be affected by the imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards. In addition, there are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time.

 

FTSE Utilities Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Utilities Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Utilities Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

57



 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

58



 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).* APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

59



 

the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 

60



 

POWERSHARES FTSE RAFI FINANCIALS SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the FTSE Research Affiliates Fundamentals Financials Sector Index (the “FTSE Financials Sector Index” or “Underlying Sector Index”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of financial service companies and at least 90% of its total assets in common stocks that comprise the FTSE Financials Sector Index. The Adviser will seek to match the performance of the FTSE Financials Sector Index. The FTSE Financials Sector Index is comprised of stocks of approximately 1,000 U.S. stocks of financial service companies. These are companies that are principally engaged in the financial services industry, including commercial banks, investment banks, savings and loan associations, thrifts, finance companies, brokerage and advisory firms, insurance companies, real estate companies and related companies. The FTSE Financials Sector Index is designed to track the performance of the largest U.S. equity stocks of financial service companies based on the following four fundamental measures of firm size:  book value, cash flow, sales and dividends. As of March 31, 2006, the FTSE Financials Sector Index included companies with a market capitalization range of between $681 million and $235.5 billion. FTSE is the index provider for the Fund (the “Index Provider”). The Fund’s investment objective and the 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE Financials Sector Index. The Adviser seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the FTSE Financials Sector Index; a figure of 1.00 would represent perfect correlation. The Fund expects to generally invest in the stocks comprising the FTSE Financials Sector Index in proportion to their weightings in the FTSE Financials Sector Index. However, it is possible that the Adviser may determine to utilize a “sampling” methodology in seeking to achieve the Fund’s objective. In those circumstances, the Fund may purchase a sample of stocks in the FTSE Financials Sector Index as a whole. Sampling means that the Adviser uses quantitative analysis to select stocks from the FTSE Financials Sector Index universe to obtain a representative sample of stocks that resemble the FTSE Financials Sector Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization and other financial characteristics of stocks. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. In addition, there may be instances in which the Adviser may choose to overweight another stock in the FTSE Financials Sector Index, purchase securities not in the FTSE Financials Sector Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE Financials Sector Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE Financials Sector Index. The Fund may sell stocks that are represented in the FTSE Financials Sector Index in anticipation of their removal from the FTSE Financials Sector Index, or purchase stocks not represented in the FTSE Financials Sector Index in anticipation of their addition to the FTSE Financials Sector Index.

 

61



 

Index Methodology

 

The FTSE Financials Sector Index is designed to track the performance of the largest U.S. financial service equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The U.S. equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each fundamental measure. For companies that have never paid dividends, that measure will be excluded from the average. Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Construction

 

(1)                                  The FTSE Financials Sector Index is comprised of financial service companies incorporated in the United States. The largest U.S. financial service equities are selected based on the following four fundamental measures of firm size:

 

                  Sales averaged over the prior five years;

 

                  Cash flow averaged over the prior five years;

 

                  Latest available book value; and

 

                  Total dividend distributions averaged over the prior five years.

 

(2)                                  The universe of companies is ranked by equally-weighting each fundamental measure.

 

(3)                                  Each of the 1,000 equities with the highest fundamental weight is then selected and assigned a weight equal to its fundamental weight.

 

Index Rebalancing and Reconstitution

 

The FTSE Financials Sector Index is reconstituted on an annual basis.

 

Index Maintenance

 

Share adjustments to reflect a split, a reverse split or stock dividend will be made on the action’s effective date. Such changes do not require an adjustment to the divisor and are processed automatically. For changes in a company’s shares outstanding due to a merger, acquisition or spin-off, an adjustment to the stock’s Index shares will be made effective after the close on the effective date of the corporate action.

 

Dividend Payments

 

For purposes of calculation of the value of the FTSE Financials Sector Index, dividend payments will be reinvested in the FTSE Financials Sector Index on the ex-date.

 

Mergers

 

In the event of a merger between two companies included in the FTSE Financials Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Financials Sector Index. In the event of a merger between a company in the FTSE Financials Sector Index and a company

 

62



 

not in the FTSE Financials Sector Index, the common shares of the surviving issuer will continue to be represented in the FTSE Financials Sector Index until further evaluation on the reconstitution date.

 

Acquisitions

 

A company will be dropped from the FTSE Financials Sector Index in the case of its acquisition. The next largest company not currently included in the FTSE Financials Sector Index and as identified at reconstitution will replace the acquired company.

 

Bankruptcy or Prolonged Trading Suspension

 

In the event of a bankruptcy, a company will be removed from the FTSE Financials Sector Index effective after the close on the date of the filing. In the event that trading in a company included in the FTSE Financials Sector Index is suspended, the FTSE Financials Sector Index calculation agent, which is FTSE, shall decide whether the company will be removed from the FTSE Financials Sector Index as soon as applicable. For purposes of minimizing the impact to the FTSE Financials Sector Index, the company to be deleted will be removed at the value at which it last traded. The next largest company not currently included in the FTSE Financials Sector Index and as identified at reconstitution will replace the company.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE Financials Sector Index.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the FTSE Financials Sector Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the FTSE Financials Sector Index, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the FTSE Financials Sector Index.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the FTSE Financials Sector Index, as would be the case if it purchased all of the stocks in the FTSE Financials Sector Index with the same weightings as the FTSE Financials Sector Index.

 

63



 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the FTSE Financials Sector Index.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Financial Services Sector Concentration Risk

 

The Fund may be susceptible to adverse economic or regulatory occurrences affecting the financial services sector. Investing in the financial services sector involves risks, including the following: financial services companies are subject to extensive government regulation, and as a result, their profitability may be affected by new regulations or regulatory interpretations; unstable interest rates can have a disproportionate effect on the financial services industry; financial services companies whose securities the Fund may purchase may themselves have concentrated portfolios which makes them vulnerable to economic conditions that affect that sector; and financial services companies have been affected by increased competition, which could adversely affect the profitability or viability of such companies. In addition, the financial services sector is undergoing numerous changes, including continuing consolidations, development of new products and structures and changes to its regulatory framework.

 

FTSE Financials Sector Index Universe Risk

 

At times, the segment of the equity markets represented by the FTSE Financials Sector Index universe may be out of favor and underperform other segments. A significant percentage of the FTSE Financials Sector Index may be comprised of issuers in a single industry or sector of the economy. Since the Fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.

 

Non-Diversified Fund Risk

 

In addition, the Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of securities of smaller issuers can be more volatile than that of larger issuers.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is

 

64



 

not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.25

%

Total Gross Annual Fund Operating Expenses

 

0.75

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.70

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set

 

65



 

forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

77

 

 

$

240

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $5,000 per transaction (assuming 1,000 stocks in each Creation Unit). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $5,000 for each redemption transaction (assuming 1,000 stocks in each Creation Unit).* APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $5,000,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $48,297 if the Creation Unit is redeemed after one year, and $129,843 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

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ADDITIONAL INVESTMENT STRATEGIES

 

Each Fund will normally invest at least 90% of its total assets in component securities that comprise its respective Underlying Sector Index or Underlying Index. Each Fund may invest its remaining assets in money market instruments, including repurchase agreements or other funds which invest exclusively in money market instruments (subject to applicable limitations under the Investment Company Act of 1940, as amended (the “1940 Act”), or exemptions therefrom), convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors, such as the movement of a particular stock or stock index) and in options and futures contracts. Options and futures contracts (and convertible securities and structured notes) may be used by a Fund in seeking performance that corresponds to its respective Underlying Sector Index or Underlying Index, and in managing cash flows. The Funds will not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines. The Adviser anticipates that it may take approximately three business days (i.e., each day the NYSE is open) for additions and deletions to each Fund’s Underlying Sector Index or Underlying Index to be reflected in the portfolio composition of each Fund.

 

Each of the policies described herein, including the investment objective of each Fund, constitutes a non-fundamental policy that may be changed by the Board of Trustees without shareholder approval. Certain fundamental policies of the Funds are set forth in the Statement of Additional Information under “Investment Restrictions.”

 

Borrowing Money

 

Each Fund may borrow money from a bank up to a limit of 10% of the value of its assets, but only for temporary or emergency purposes.

 

Securities Lending

 

Each Fund may lend its portfolio securities. In connection with such loans, each Fund receives liquid collateral equal to at least 102% of the value of the portfolio securities being lent. This collateral is marked to market on a daily basis.

 

ADDITIONAL RISKS

 

Trading Issues

 

Trading in Shares on the [        ] may be halted due to market conditions or for reasons that, in the view of the [        ] , make trading in Shares inadvisable. In addition, trading in Shares on the [        ]  is subject to trading halts caused by extraordinary market volatility pursuant to the [        ] “circuit breaker” rules. There can be no assurance that the requirements of the [        ] necessary to maintain the listing of a Fund will continue to be met or will remain unchanged.

 

Fluctuation of Net Asset Value

 

The net asset value of a Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate in accordance with changes in net asset value as well as the relative supply of and demand for the Shares on the [        ]. The Adviser cannot predict whether the Shares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the Shares will be closely related to, but not identical to, the same forces influencing the prices

 

67



 

of the stocks of a Fund’s Underlying Sector Index or Underlying Index trading individually or in the aggregate at any point in time. However, given that the Shares can be purchased and redeemed in Creation Units (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), the Adviser believes that large discounts or premiums to the net asset value of the Shares should not be sustained.

 

Securities Lending

 

Although each Fund will receive collateral in connection with all loans of its securities holdings, a Fund would be exposed to a risk of loss should a borrower default on its obligation to return the borrowed securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Fund). In addition, a Fund will bear the risk of loss of any cash collateral that it invests.

 

PORTFOLIO HOLDINGS

 

A description of the Trust’s policies and procedures with respect to the disclosure of the Funds’ portfolio holdings is available in the Funds’ Statement of Additional Information.

 

MANAGEMENT OF THE FUNDS

 

PowerShares Capital Management LLC is a registered investment adviser with its offices at 301 West Roosevelt Road, Wheaton, Illinois 60187. PowerShares Capital Management LLC serves as the investment adviser and sponsor of the Trust, also known as PowerShares XTF, a family of exchange-traded funds, with combined assets under management of approximately $6.1 billion as of May 31, 2006. PowerShares XTF is currently comprised of forty-seven exchange-traded funds.

 

On January 23, 2006, AMVESCAP PLC announced that it had entered into a definitive agreement to acquire PowerShares Capital Management LLC. The transaction is expected to be completed, subject to satisfaction of certain conditions, including the requisite shareholder approvals, in the second or third quarter of 2006.

 

PowerShares Capital Management LLC has overall responsibility as the Funds’ investment adviser for the selection and ongoing monitoring of the Funds’ investments, managing the Funds’ business affairs and providing certain clerical, bookkeeping and other administrative services.

 

The portfolio manager who is currently responsible for the day-to-day management of the Funds’ portfolios is John W. Southard Jr., CFA, MBA. Mr. Southard is a Managing Director at the Adviser, and has been with the Adviser since its inception in August 2002. Mr. Southard has also been with each Fund since inception. Prior to his current position, he was a Senior Equity Analyst at Charles A. Schwab & Company Securities from May 2001 to August 2002. Prior to his work at Charles A. Schwab & Company Securities, Mr. Southard was a portfolio manager and equity analyst at First Trust Portfolios LP (formerly, Niké Securities LP) from October 1992 to May 2001. The Funds’ Statement of Additional Information provides additional information about the portfolio manager’s compensation structure, other accounts managed by the portfolio manager and the portfolio manager’s ownership of securities in the Trust.

 

The Adviser will receive fees from each Fund equal to 0.50% of the Fund’s average daily net assets. Pursuant to the Investment Advisory Agreement, until at least April 30, 2008, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions, offering costs, sub-licensing fees and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average daily net assets

 

68



 

per year. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to each Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have also entered into the Expense Agreement, applicable to each Fund, in which the Adviser has agreed to waive its management fees and/or pay certain other operating expenses of each Fund in order to maintain the Expense Cap. Expenses borne by the Adviser are subject to reimbursement by each Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

Each Fund is responsible for all of its expenses, including the investment advisory fees, costs of transfer agency, custody, fund administration, legal, audit and other services, interest, taxes, brokerage commissions and other expenses connected with executions of portfolio transactions, sub-licensing fees for use of the Underlying Sector Index or Underlying Index, any distribution fees or expenses, offering fees or expenses and extraordinary expenses.

 

HOW TO BUY AND SELL SHARES

 

The Shares will be issued or redeemed by each Fund at net asset value per Share only in Creation Unit size. See “Creations, Redemptions and Transaction Fees.”

 

Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares of each Fund will be listed for trading on the secondary market on the [        ]. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “oddlots,” at no per-share price differential. When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction. The Funds have applied to list their Shares on the [        ]  under the following [        ] symbols:

 

Fund

 

[        ] Trading Symbol

 

 

 

 

 

PowerShares FTSE RAFI US 1500 Small-Mid Portfolio

 

[    ]

 

PowerShares FTSE RAFI Energy Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Basic Materials Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Industrials Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Consumer Goods Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Health Care Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Consumer Services Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Telecommunications & Technology Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Utilities Sector Portfolio

 

[    ]

 

PowerShares FTSE RAFI Financials Sector Portfolio

 

[    ]

 

 

Share prices are reported in dollars and cents per Share.

 

Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 100,000 Shares, as discussed in the “Creations, Redemptions and Transaction Fees” section below.

 

69



 

Book Entry

 

Shares are held in book-entry form, which means that no stock certificates are issued. The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes.

 

Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that you hold in book entry or “street name” form.

 

Fund Share Trading Prices

 

The trading prices of Shares of each Fund on the [        ] may differ from the Fund’s daily net asset value and can be affected by market forces of supply and demand, economic conditions and other factors.

 

The approximate value of Shares of each Fund will be disseminated every fifteen seconds. This approximate value should not be viewed as a “real-time” update of the NAV per Share of the Fund because the approximate value may not be calculated in the same manner as the NAV, which is computed once a day, generally at the end of the business day. The Funds are not involved in, or responsible for, the calculation or dissemination of the approximate value and the Funds do not make any warranty as to its accuracy.

 

Frequent Purchases and Redemptions of Fund Shares

 

The Funds impose no restrictions on the frequency of purchases and redemptions. In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by the Funds’ shareholders. The Board considered that, unlike traditional mutual funds, each Fund issues and redeems its Shares at net asset value per Share for a basket of securities intended to mirror a Fund’s portfolio, plus a small amount of cash, and a Fund’s Shares may be purchased and sold on the [        ]  at prevailing market prices. Given this structure, the Board determined that (a) it is unlikely that market timing would be attempted by the Funds’ shareholders or (b) any attempts to market time the Funds by shareholders would result in negative impact to the Funds or their shareholders.

 

CREATIONS, REDEMPTIONS AND TRANSACTION FEES

 

Creation Units

 

Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement. Set forth below is a brief description of the procedures applicable to purchase and redemption of Creation Units. For more detailed information, see “Creation and Redemption of Creation Unit Aggregations” in the Statement of Additional Information.

 

70



 

Purchase

 

In order to purchase Creation Units of a Fund, an investor must generally deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in the relevant Fund’s Underlying Sector Index or Underlying Index (the “Deposit Securities”) and generally make a small cash payment referred to as the “Cash Component.”  The list of the names and the numbers of shares of the Deposit Securities is made available by the Fund’s custodian through the facilities of the National Securities Clearing Corporation, commonly referred to as NSCC, immediately prior to the opening of business each day of the [        ]. The Cash Component represents the difference between the net asset value of a Creation Unit and the market value of the Deposit Securities.

 

Orders must be placed in proper form by or through either (i) a “Participating Party” i.e., a broker-dealer or other participant in the Clearing Process of the Continuous Net Settlement System of the NSCC (the “Clearing Process”) or (ii) a participant of The Depository Trust Company (“DTC Participant”) that has entered into an agreement with the principal underwriter and the transfer agent, with respect to purchases and redemptions of Creation Units (collectively, “Authorized Participant” or “AP”). All orders must be placed for one or more whole Creation Units of Shares of a Fund and must be received by the principal underwriter in proper form no later than the close of regular trading on the [        ]  (ordinarily 4:00 p.m. New York time) (“Closing Time”) in order to receive that day’s closing net asset value per Share. In the case of custom orders, as further described in the Statement of Additional Information, the order must be received by the principal underwriter no later than 3:00 p.m. New York time. A custom order may be placed by an Authorized Participant in the event that the Trust permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which it is acting or any other relevant reason. See “Creation and Redemption of Creation Unit Aggregations” in the Statement of Additional Information.

 

A fixed creation transaction fee of $5,000 (assuming 1,000 stocks in each Creation Unit) (the “Creation Transaction Fee”) is applicable to each transaction regardless of the number of Creation Units purchased in the transaction. An additional charge of up to four times the Creation Transaction Fee may be imposed with respect to transactions effected outside of the Clearing Process (through a DTC Participant) or to the extent that cash is used in lieu of securities to purchase Creation Units. See “Creation and Redemption of Creation Unit Aggregations”  in the Statement of Additional Information. The price for each Creation Unit will equal the daily net asset value per Share times the number of Shares in a Creation Unit plus the fees described above and, if applicable, any transfer taxes.

 

Shares of a Fund may be issued in advance of receipt of all Deposit Securities subject to various conditions, including a requirement to maintain on deposit with the Fund cash at least equal to 115% of the market value of the missing Deposit Securities. See “Creation and Redemption of Creation Unit Aggregations” in the Statement of Additional Information.

 

Legal Restrictions on Transactions in Certain Stocks

 

An investor subject to a legal restriction with respect to a particular stock required to be deposited in connection with the purchase of a Creation Unit may, at a Fund’s discretion, be permitted to deposit an equivalent amount of cash in substitution for any stock which would otherwise be included in the Deposit Securities applicable to the purchase of a Creation Unit. For more details, see “Creation and Redemption of Creation Unit Aggregations” in the Statement of Additional Information.

 

71



 

Redemption

 

Each Fund’s custodian makes available immediately prior to the opening of business each day of the [        ], through the facilities of the NSCC, the list of the names and the numbers of shares of the Fund’s portfolio securities that will be applicable that day to redemption requests in proper form (“Fund Securities”). Fund Securities received on redemption may not be identical to Deposit Securities which are applicable to purchases of Creation Units. Unless cash redemptions are available or specified for a Fund, the redemption proceeds consist of the Fund Securities, plus cash in an amount equal to the difference between the net asset value of Shares being redeemed as next determined after receipt by the transfer agent of a redemption request in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”), less the applicable redemption fee and, if applicable, any transfer taxes. Should the Fund Securities have a value greater than the net asset value of Shares being redeemed, a compensating cash payment to the Trust equal to the differential, plus the applicable redemption fee and, if applicable, any transfer taxes will be required to be arranged for by or on behalf of the redeeming shareholder. For more details, see “Creation and Redemption of Creation Unit Aggregations”  in the Statement of Additional Information.

 

An order to redeem Creation Units of a Fund may only be effected by or through an Authorized Participant. An order to redeem must be placed for one or more whole Creation Units and must be received by the transfer agent in proper form no later than the close of regular trading on the [        ] (ordinarily 4:00 p.m. New York time) in order to receive that day’s closing net asset value per Share. In the case of custom orders, as further described in the Statement of Additional Information, the order must be received by the transfer agent no later than 3:00 p.m. New York time.

 

A fixed redemption transaction fee of $5,000 (assuming 1,000 stocks in each Creation Unit) (the “Redemption Transaction Fee”) is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. An additional charge of up to four times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by the Trust with respect to redemptions effected outside of the Clearing Process or to the extent that redemptions are for cash. Each Fund reserves the right to effect redemptions in cash. A shareholder may request a cash redemption in lieu of securities, however, each Fund may, in its discretion, reject any such request. See “Creation and Redemption of Creation Unit Aggregations” in the Statement of Additional Information.

 

DIVIDENDS, DISTRIBUTIONS AND TAXES

 

Dividends from net investment income, if any, are declared and paid quarterly. Each Fund distributes its net realized capital gains, if any, to shareholders annually.

 

Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares makes such option available.

 

Taxes

 

As with any investment, you should consider how your investment in Shares will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in Shares.

 

Unless your investment in Shares is made through a tax-exempt entity or tax-deferred retirement account, such as an IRA plan, you need to be aware of the possible tax consequences when:

 

                                          Your Fund makes distributions,

 

72



 

                                          You sell your Shares listed on the [        ], and

 

                                          You purchase or redeem Creation Units.

 

Taxes on Distributions

 

Dividends from net investment income, if any, are declared and paid quarterly. Each Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements. In general, your distributions are subject to federal income tax when they are paid, whether you take them in cash or reinvest them in a Fund. Dividends paid out of a Fund’s income and net short-term gains, if any, are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess of net short-term capital losses are taxable as long-term capital gains, regardless of how long you have held the Shares.

 

Long-term capital gains of noncorporate taxpayers are generally taxed at a maximum rate of 15% for taxable years beginning before January 1, 2011. In addition, for these taxable years, some ordinary dividends declared and paid by a Fund to noncorporate shareholders may qualify for taxation at the lower reduced tax rates applicable to long-term capital gains, provided that holding period and other requirements are met by the Fund and the shareholder.

 

Distributions in excess of a Fund’s current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. A distribution will reduce a Fund’s net asset value per Share and may be taxable to you as ordinary income or capital gain even though, from an investment standpoint, the distribution may constitute a return of capital.

 

By law, each Fund must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number.

 

Taxes on Exchange-Listed Share Sales

 

Currently, any capital gain or loss realized upon a sale of Shares is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if the Shares have been held for one year or less. The ability to deduct capital losses may be limited.

 

Taxes on Purchase and Redemption of Creation Units

 

An AP who exchanges equity securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the exchanger’s aggregate basis in the securities surrendered and the Cash Component paid. A person who exchanges Creation Units for equity securities will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might be deductible.

 

Under current federal tax laws, any capital gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.

 

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If you purchase or redeem Creation Units, you will be sent a confirmation statement showing how many Shares you purchased or sold and at what price.

 

The foregoing discussion summarizes some of the possible consequences under current federal tax law of an investment in a Fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on Fund distributions, and sales of Fund Shares. Consult your personal tax advisor about the potential tax consequences of an investment in Fund Shares under all applicable tax laws.

 

DISTRIBUTION PLAN

 

ALPS Distributors, Inc. serves as the Distributor of Creation Units for each Fund on an agency basis. The Distributor does not maintain a secondary market in Shares.

 

The Board of Trustees of the Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain distribution-related activities.

 

No 12b-1 fees are currently paid by either Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because these fees are paid out of each Fund’s assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.

 

NET ASSET VALUE

 

The Bank of New York Company, Inc. (“BONY”) calculates each Fund’s NAV at the close of regular trading (normally 4:00 p.m. New York time) every day the NYSE is open. NAV is calculated by deducting all of the Fund’s liabilities from the total value of its assets and dividing the result by the number of Shares outstanding, rounding to the nearest cent. All valuations are subject to review by the Trust’s Board of Trustees or its delegate.

 

In determining NAV, expenses are accrued and applied daily and securities and other assets for which market quotations are available are valued at market value. Common stocks and other equity securities are valued at the last sales price that day based on the official closing price of the exchange where the security is primarily traded. Securities regularly traded in an over-the-counter market are valued at the latest quoted sale price in such market, or in the case of the NASDAQ, at the NASDAQ official closing price. When price quotes are not readily available, securities will be valued at fair value. Investments that may be valued at fair value include, among others, an unlisted security related to corporate actions, a restricted security, a security whose trading has been suspended from trading on its primary trading exchange, a security that is thinly traded, a security in default or bankruptcy proceedings for which there is no current market quotation and a security affected by a significant event, which event includes acts of terrorism, natural disasters, government action, armed conflict and significant market fluctuations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security.

 

FUND SERVICE PROVIDERS

 

BONY is the administrator, custodian and fund accounting and transfer agent for each Fund. Clifford Chance US LLP, 31 West 52nd Street, New York, NY 10019, serves as legal counsel to the Funds.

 

74



 

[               ], serves as the Funds’ independent registered public accounting firm. The independent registered public accounting firm is responsible for auditing the annual financial statements of the Funds.

 

INDEX PROVIDER

 

FTSE is the Index Provider for the Funds. The Index Provider is not affiliated with the Trust, the Adviser or the Distributor. The Adviser has entered into a license agreement with the Index Provider to use the Indexes. The Funds are entitled to use the respective Index pursuant to a sub-licensing arrangement with the Adviser.

 

DISCLAIMERS

 

The FTSE US 1500 Small-Mid Index, FTSE Research Affiliates Fundamentals Energy Sector Index, FTSE Research Affiliates Fundamentals Basic Materials Sector Index, FTSE Research Affiliates Fundamentals Industrials Sector Index, FTSE Research Affiliates Fundamentals Consumer Goods Sector Index, FTSE Research Affiliates Fundamentals Health Care Sector Index, FTSE Research Affiliates Fundamentals Consumer Services Sector Index, FTSE Research Affiliates Fundamentals Telecommunications & Technology Sector Index, FTSE Research Affiliates Fundamentals Utilities Sector Index and FTSE Research Affiliates Fundamentals Financials Sector Index are trademarks of FTSE and have been licensed for use for certain purposes by the Adviser. Set forth below is a list of each Fund and the Underlying Sector Index or Underlying Index upon which it is based:

 

Fund

 

Underlying Sector Index or Underlying Index

 

 

 

PowerShares FTSE RAFI US 1500 Small-Mid Portfolio

 

FTSE Research Affiliates Fundamentals US 1500 Small-Mid Index

 

 

 

PowerShares FTSE RAFI Energy Sector Portfolio

 

FTSE Research Affiliates Fundamentals Energy Sector Index

 

 

 

PowerShares FTSE RAFI Basic Materials Sector Portfolio

 

FTSE Research Affiliates Fundamentals Basic Materials Sector Index

 

 

 

PowerShares FTSE RAFI Industrials Sector Portfolio

 

FTSE Research Affiliates Fundamentals Industrials Sector Index

 

 

 

PowerShares FTSE RAFI Consumer Goods Sector Portfolio

 

FTSE Research Affiliates Fundamentals Consumer Goods Sector Index

 

 

 

PowerShares FTSE RAFI Health Care Sector Portfolio

 

FTSE Research Affiliates Fundamentals Health Care Sector Index

 

 

 

PowerShares FTSE RAFI Consumer Services Sector Portfolio

 

FTSE Research Affiliates Fundamentals Consumer Services Sector Index

 

 

 

PowerShares FTSE RAFI Telecommunications & Technology Sector Portfolio

 

FTSE Research Affiliates Fundamentals Telecommunications & Technology Sector Index

 

 

 

PowerShares FTSE RAFI Utilities Sector Portfolio

 

FTSE Research Affiliates Fundamentals Utilities

 

75



 

Fund

 

Underlying Sector Index or Underlying Index

 

 

 

 

 

Sector Index

 

 

 

PowerShares FTSE RAFI Financials Sector Portfolio

 

FTSE Research Affiliates Fundamentals Financials Sector Index

 

The Underlying Sector Indexes and Underlying Index have been licensed for use for certain purposes by the Adviser.

 

The Shares of the Funds are not in any way sponsored, endorsed, sold or promoted by FTSE or by the London Stock Exchange Plc (the “Exchange”) or by The Financial Times Limited (“FT”) or by Research Affiliates LLC (“RA”) and neither FTSE nor Exchange nor FT nor RA makes any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Underlying Sector Indexes or Underlying Index and/or the figure at which the said Underlying Sector Indexes or Underlying Index stand at any particular time on any particular day or otherwise. The Underlying Sector Indexes and Underlying Index are compiled and calculated by FTSE in conjunction with RA. However, neither FTSE nor the Exchange nor FT nor RA shall be liable (whether in negligence or otherwise) to any person for any error in the Underlying Sector Indexes or the Underlying Index and neither FTSE nor the Exchange nor FT nor RA shall be under any obligation to advise any person of any error therein.

 

“FTSE®” is trademark of the Exchange and FT and is used by the Adviser under license. “Research Affiliates” and “Fundamental Index” are trademarks of RA.

 

The Adviser does not guarantee the accuracy and/or the completeness of the Underlying Sector Indexes, Underlying Index or any data included therein, and the Adviser shall have no liability for any errors, omissions, or interruptions therein. The Adviser makes no warranty, express or implied, as to results to be obtained by the Funds, owners of the Shares of the Funds or any other person or entity from the use of the Underlying Sector Indexes, Underlying Index or any data  included therein. The Adviser makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Underlying Sector Indexes, Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall the Adviser have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the Underlying Sector Indexes or Underlying Index even if notified of the possibility of such damages.

 

OTHER INFORMATION

 

For purposes of the 1940 Act, each Fund is treated as a registered investment company and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act.

 

Continuous Offering

 

The method by which Creation Unit Aggregations of Fund Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of Shares are issued and sold by the Funds on an ongoing basis, a “distribution,” as such term is used in the Securities Act of 1933, as amended (the “Securities Act”), may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in

 

76



 

a distribution in a manner which could render them statutory underwriters and subject them to the prospectus-delivery requirement and liability provisions of the Securities Act.

 

For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with the Distributor, breaks them down into constituent Shares and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a characterization as an underwriter.

 

Broker-dealer firms should also note that dealers who are not “underwriters” but are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of an overallotment within the meaning of Section 4(3)(a) of the Securities Act would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. The Trust, however, has received from the Securities and Exchange Commission an exemption from the prospectus delivery obligation in ordinary secondary market transactions under certain circumstances, on the condition that purchasers are provided with a product description of the Shares. Firms that incur a prospectus delivery obligation with respect to Shares are reminded that, under the Securities Act Rule 153, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the [        ]  is satisfied by the fact that the prospectus is available at the [        ] upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.

 

77



 

For More Information

 

For more detailed information on the Trust, Funds and Shares, you may request a copy of the Funds’ Statement of Additional Information (“SAI”). The SAI provides detailed information about the Funds, and is incorporated by reference into this Prospectus. This means that the SAI, for legal purposes, is a part of this Prospectus. If you have questions about the Funds or Shares or you wish to obtain the SAI free of charge, please:

 

Call:

 

ALPS Distributors, Inc. at 1-800-843-2639

 

Monday through Friday

 

8:00 a.m. to 5:00 p.m. Mountain Time

 

Write:               PowerShares Exchange-Traded Fund Trust

c/o ALPS Distributors, Inc.

1625 Broadway, Suite 2200

Denver, Colorado 80202

 

Visit: www.powershares.com

 

Information about the Funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission’s Public Reference Room, 100 F Street NE, Washington, D.C. 20549, and information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-551-8090. Reports and other information about the Funds are available on the EDGAR Database on the Commission’s Internet site at www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address:

 

publicinfo@sec.gov

 

or by writing the Commission’s Public Reference Section, Washington, D.C. 20549. The Trust’s registration number under the 1940 Act is 811-21265.

 

No person is authorized to give any information or to make any representations about the Funds and their Shares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference.

 

DEALERS EFFECTING TRANSACTIONS IN THE FUNDS’ SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, ARE GENERALLY REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO ANY OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.

 

78



 

The information in this Prospectus is not complete and may be changed. The Trust may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated June 6, 2006

 

PowerSHARES xtf

 

xchange traded funds

 

POWERSHARES EXCHANGE-TRADED FUND TRUST

 

 

PowerShares Dynamic MagniQuant Portfolio –

PowerShares Dynamic Large Cap Portfolio –

PowerShares Dynamic Mid Cap Portfolio –

PowerShares Dynamic Small Cap Portfolio –

PowerShares Dynamic Basic Materials Sector Portfolio –

PowerShares Dynamic Consumer Discretionary Sector Portfolio–

PowerShares Dynamic Consumer Staples Sector Portfolio –

PowerShares Dynamic Energy Sector Portfolio –

PowerShares Dynamic Financial Sector Portfolio –

PowerShares Dynamic Industrials Sector Portfolio –

PowerShares Dynamic Healthcare Sector Portfolio –

PowerShares Dynamic Technology Sector Portfolio –

PowerShares Dynamic Banking Sector Portfolio –

PowerShares Dynamic Healthcare Services Sector Portfolio –

PowerShares Dynamic Deep Value Portfolio –

PowerShares Dynamic Aggressive Growth Portfolio –

PowerShares Buyback Achievers™ Portfolio –

PowerShares Cleantech™ Portfolio –

PowerShares NASDAQ® Dividend Achievers™  Portfolio –

PowerShares India Tiger Portfolio –

PowerShares Autonomic Allocation Research Affiliates Portfolio –

 



 

PowerShares Exchange-Traded Fund Trust (the “Trust”) is a registered investment company consisting of fifty-eight separate exchange-traded index funds. Additional funds may be offered in the future. This Prospectus relates to twenty-one funds of the Trust, PowerShares Dynamic MagniQuant Portfolio, PowerShares Dynamic Large Cap Portfolio, PowerShares Dynamic Mid Cap Portfolio, PowerShares Dynamic Small Cap Portfolio, PowerShares Dynamic Basic Materials Sector Portfolio, PowerShares Dynamic Consumer Discretionary Sector Portfolio, PowerShares Dynamic Consumer Staples Sector Portfolio, PowerShares Dynamic Energy Sector Portfolio, PowerShares Dynamic Financial Sector Portfolio, PowerShares Dynamic Industrials Sector Portfolio, PowerShares Dynamic Healthcare Sector Portfolio, PowerShares Dynamic Technology Sector Portfolio, PowerShares Dynamic Banking Sector Portfolio, PowerShares Dynamic Healthcare Services Sector Portfolio, PowerShares Dynamic Deep Value Portfolio, PowerShares Dynamic Aggressive Growth Portfolio, PowerShares Buyback Achievers™ Portfolio, PowerShares Cleantech™ Portfolio, PowerShares NASDAQ® Dividend Achievers™  Portfolio, PowerShares India Tiger Portfolio and PowerShares Autonomic Allocation Research Affiliates Portfolio (each a “Fund” and together, the “Funds”).

 

The Funds anticipate that their shares (the “Shares”) will be listed on the American Stock Exchange. Market prices for Shares may be different from their net asset value (“NAV”). Each Fund will issue and redeem Shares only in large blocks consisting of 100,000 Shares (“Creation Units”). Creation Units are issued and redeemed principally in-kind for securities included in a specified index.

 

Except when aggregated in Creation Units, the Shares are not redeemable securities of the Funds.

 

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense.

 

Prospectus Dated              , 2006

 

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

 

2



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

 

INTRODUCTION – THE POWERSHARES EXCHANGE-TRADED FUND TRUST

 

5

 

 

 

 

 

WHO SHOULD INVEST IN THE FUNDS

 

5

 

 

 

 

 

TAX ADVANTAGED PRODUCT STRUCTURE

 

5

 

 

 

 

 

POWERSHARES DYNAMIC MAGNIQUANT PORTFOLIO

 

6

 

 

 

 

 

POWERSHARES DYNAMIC LARGE CAP PORTFOLIO

 

11

 

 

 

 

 

POWERSHARES DYNAMIC MID CAP PORTFOLIO

 

16

 

 

 

 

 

POWERSHARES DYNAMIC SMALL CAP PORTFOLIO

 

21

 

 

 

 

 

POWERSHARES DYNAMIC BASIC MATERIALS SECTOR PORTFOLIO

 

26

 

 

 

 

 

POWERSHARES DYNAMIC CONSUMER DISCRETIONARY SECTOR PORTFOLIO

 

32

 

 

 

 

 

POWERSHARES DYNAMIC CONSUMER STAPLES SECTOR PORTFOLIO

 

38

 

 

 

 

 

POWERSHARES DYNAMIC ENERGY SECTOR PORTFOLIO

 

44

 

 

 

 

 

POWERSHARES DYNAMIC FINANCIAL SECTOR PORTFOLIO

 

50

 

 

 

 

 

POWERSHARES DYNAMIC INDUSTRIALS SECTOR PORTFOLIO

 

56

 

 

 

 

 

POWERSHARES DYNAMIC HEALTHCARE SECTOR PORTFOLIO

 

62

 

 

 

 

 

POWERSHARES DYNAMIC TECHNOLOGY SECTOR PORTFOLIO

 

68

 

 

 

 

 

POWERSHARES DYNAMIC BANKING SECTOR PORTFOLIO

 

74

 

 

 

 

 

POWERSHARES DYNAMIC HEALTHCARE SERVICES SECTOR PORTFOLIO

 

80

 

 

 

 

 

POWERSHARES DYNAMIC DEEP VALUE PORTFOLIO

 

85

 

 

 

 

 

POWERSHARES DYNAMIC AGGRESSIVE GROWTH PORTFOLIO

 

90

 

 

 

 

 

POWERSHARES BUYBACK ACHIEVERSTM PORTFOLIO

 

95

 

 

 

 

 

POWERSHARES CLEANTECHTM PORTFOLIO

 

100

 

 

 

 

 

POWERSHARES NASDAQ® DIVIDEND ACHIEVERSTM PORTFOLIO

 

106

 

 

 

 

 

POWERSHARES INDIA TIGER PORTFOLIO

 

111

 

 

 

 

 

POWERSHARES AUTONOMIC ALLOCATION RESEARCH AFFILIATES PORTFOLIO

 

117

 

 

 

 

 

ADDITIONAL INVESTMENT STRATEGIES

 

127

 

 

 

 

 

ADDITIONAL RISKS

 

127

 

 

 

 

 

PORTFOLIO HOLDINGS

 

128

 

 

 

 

 

MANAGEMENT OF THE FUNDS

 

128

 

 

 

 

 

HOW TO BUY AND SELL SHARES

 

129

 

 

 

 

 

CREATIONS, REDEMPTIONS AND TRANSACTION FEES

 

131

 

 

 

 

 

DIVIDENDS, DISTRIBUTIONS AND TAXES

 

132

 

 

 

 

 

DISTRIBUTION PLAN

 

134

 

 

 

 

 

NET ASSET VALUE

 

134

 

 

3



 

FUND SERVICE PROVIDERS

 

135

 

 

 

 

 

INTELLIDEX PROVIDER AND INDEX PROVIDERS

 

135

 

 

 

 

 

DISCLAIMERS

 

136

 

 

 

 

 

OTHER INFORMATION

 

138

 

 

4



 

INTRODUCTION – THE POWERSHARES EXCHANGE-TRADED FUND TRUST

 

The Trust is an investment company consisting of fifty-eight separate exchange-traded “index funds.” The investment objective of each of the funds is to replicate as closely as possible, before expenses, the price and yield of a specified market index. This Prospectus relates to the Funds listed on the cover page. PowerShares Capital Management LLC (the “Adviser”) is the investment adviser for the funds.

 

The Funds anticipate that the Shares will be listed on the American Stock Exchange (“AMEX”) at market prices that may differ to some degree from the NAV of the Shares. Unlike conventional mutual funds, each fund issues and redeems shares on a continuous basis, at NAV, only in large specified blocks, each called a “Creation Unit.”  Creation Units are issued and redeemed principally in-kind for securities included in the relevant index. Except when aggregated in Creation Units, shares are not redeemable securities of the funds.

 

WHO SHOULD INVEST IN THE FUNDS

 

The funds are designed for investors who seek a relatively low-cost approach for investing in a portfolio of equity securities of companies in a specified index. The funds may be suitable for long-term investment in the market represented in the relevant index and may also be used as an asset allocation tool or as a speculative trading instrument.

 

TAX ADVANTAGED PRODUCT STRUCTURE

 

Unlike interests in conventional mutual funds, the shares are traded throughout the day on a national securities exchange, whereas mutual fund interests are typically only bought and sold at closing net asset values. The shares have been designed to be tradable in the secondary market on a national securities exchange on an intra-day basis, and to be created and redeemed principally in-kind in Creation Units at each day’s next calculated NAV. These arrangements are designed to protect ongoing shareholders from adverse effects on the portfolio of each fund that could arise from frequent cash creation and redemption transactions. In a conventional mutual fund, redemptions can have an adverse tax impact on taxable shareholders because of the mutual fund’s need to sell portfolio securities to obtain cash to meet fund redemptions. These sales may generate taxable gains for the shareholders of the mutual fund, whereas the shares’ in-kind redemption mechanism generally will not lead to a tax event for the funds or their ongoing shareholders.

 

5



 

POWERSHARES DYNAMIC MAGNIQUANT PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Dynamic MagniQuant Intellidex(SM) Index (the “MagniQuant Intellidex” or “Underlying Intellidex”).

 

Principal Investment Strategies

 

The Adviser will seek to match the performance of the MagniQuant Intellidex. The MagniQuant Intellidex is comprised of 200 U.S. stocks selected principally on the basis of their capital appreciation potential as identified by the AMEX (the “Intellidex Provider”) pursuant to a proprietary Intellidex methodology. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the MagniQuant Intellidex. The Fund’s investment objective and 90% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The MagniQuant Intellidex is adjusted quarterly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the MagniQuant Intellidex. The Adviser seeks  correlation over time of 0.95 or better between the Fund’s performance and the performance of the MagniQuant Intellidex; a figure of 1.00 would represent perfect correlation. The Fund generally will invest in the stocks comprising the MagniQuant Intellidex in proportion to their weightings in the MagniQuant Intellidex. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Fund may purchase a sample of stocks in the MagniQuant Intellidex as a whole. There may also be instances in which the Adviser may choose to overweight another stock in the MagniQuant Intellidex, purchase securities not in the MagniQuant Intellidex which the Adviser believes are appropriate to substitute for certain securities in the MagniQuant Intellidex or utilize various combinations of other available investment techniques, in seeking to track the MagniQuant Intellidex. The Fund may sell stocks that are represented in the MagniQuant Intellidex in anticipation of their removal from the MagniQuant Intellidex, or purchase stocks not represented in the MagniQuant Intellidex in anticipation of their addition to the MagniQuant Intellidex.

 

Intellidex Methodology

 

The MagniQuant Intellidex methodology is designed to objectively identify those stocks from among the 2,000 largest U.S. stocks that have the greatest potential for capital appreciation. The methodology evaluates companies quarterly, based on a variety of criteria, including fundamental growth, stock valuation, investments and risk factors, and then ranks and sorts them based on their cumulative scores. Component stocks for the MagniQuant Intellidex are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

 

Index Construction

 

(1)                                  The 2,000 largest U.S. stocks (by market capitalization) traded on the New York Stock Exchange (the “NYSE”), the AMEX and the NASDAQ are ranked for capital appreciation potential using a proprietary AMEX Intellidex model.

 

6



 

(2)                                  The 200 stocks selected are the stocks with the best Model Score. The 200 components are equally weighted (on average each receives 0.5%).

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the MagniQuant Intellidex.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the MagniQuant Intellidex for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the MagniQuant Intellidex, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the MagniQuant Intellidex.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return of the MagniQuant Intellidex as would be the case if it purchased all of the stocks in the MagniQuant Intellidex with the same weightings as the MagniQuant Intellidex.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the MagniQuant Intellidex.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

7



 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.18

%

Total Gross Annual Fund Operating Expenses

 

0.68

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.63

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and

 

8



 

other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) Securities and Exchange Commission (“SEC”) and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

69

 

 

$

218

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $500 for each redemption transaction (regardless of the number of Creation Units involved).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $2,500,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $19,367 if the Creation Unit is redeemed after one year, and $56,385 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

9



 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 

10



 

POWERSHARES DYNAMIC LARGE CAP PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Dynamic Large Cap Intellidex(SM) Index (the “Large Cap Intellidex” or “Underlying Intellidex”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of large capitalization companies. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Intellidex. The Adviser will seek to match the performance of the Large Cap Intellidex. The Large Cap Intellidex is comprised of stocks of 100 U.S. large capitalization companies. Stocks are selected principally on the basis of their capital appreciation potential as identified by the AMEX (the “Intellidex Provider”) pursuant to a proprietary Intellidex methodology. The Fund’s investment objective and 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Large Cap Intellidex is adjusted quarterly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the Large Cap Intellidex. The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the Large Cap Intellidex; a figure of 1.00 would represent perfect correlation. The Fund generally will invest in all of the stocks comprising the Large Cap Intellidex in proportion to their weightings in the Large Cap Intellidex. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Fund may purchase a sample of stocks in the Large Cap Intellidex as a whole. There may also be instances in which the Adviser may choose to overweight another stock in the Large Cap Intellidex, purchase securities not in the Large Cap Intellidex which the Adviser believes are appropriate to substitute for certain securities in the Large Cap Intellidex or utilize various combinations of other available investment techniques, in seeking to track the Large Cap Intellidex. The Fund may sell stocks that are represented in the Large Cap Intellidex in anticipation of their removal from the Large Cap Intellidex or purchase stocks not represented in the Large Cap Intellidex in anticipation of their addition to the Large Cap Intellidex.

 

Intellidex Methodology

 

The Large Cap Intellidex methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The methodology evaluates companies quarterly, based on a variety of criteria, including fundamental growth, stock valuation, investments and risk factors, and then ranks and sorts them based on their cumulative scores. Component stocks for the Large Cap Intellidex are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within their respective sub-groups.

 

Intellidex Construction

 

(1)                                  The 2,000 largest U.S. stocks (by market capitalization) traded on the NYSE, the AMEX and the NASDAQ are ranked for capital appreciation potential using a proprietary AMEX Intellidex model.

 

(2)                                  The universe of companies is divided into groups based on size and sub-size group in the following manner:

 

11



 

(a)                                  The universe of stocks is segregated into three size groups, large cap, mid cap and small cap, by selecting the 250 largest (large cap), the next 750 largest (mid cap) and the remaining 1,000 stocks (small cap).

 

(b)                                 Stocks within the size groups are further divided into two market-cap groupings, larger and smaller, creating six size groups (the “Size Groups”) and sub-groups (the “Sub-Groups”). Larger and smaller are split into quintiles using market capitalization. Larger stocks are defined by inclusion in the top quintile and smaller are the bottom four quintiles.

 

(3)                                  Within each of these six Size Groups, a defined number of the top-ranked larger and smaller stocks are selected for inclusion in the Large Cap Intellidex. Selected stocks are equally weighted within their Sub-Groups.

 

The number of stocks selected from a Size and Sub-Group is predetermined and is as follows:

 

(a)                                  Large cap includes 100 stocks and is divided as follows:

 

(i)                                     Thirty of the top-ranked larger large cap stocks are selected and collectively receive 50% of the total index weight (each larger stock receives on average 1.67%). The thirty component stocks selected are the components with the best Model Score in the Sub-Group.

 

(ii)                                  Seventy of the top-ranked smaller large cap stocks are selected and collectively receive 50% of the total index weight (each smaller stock receives on average 0.71%). The seventy component stocks selected are the components with the best Model Score in that Sub-Group.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Large Cap Intellidex.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the Large Cap Intellidex for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Large Cap Intellidex, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Large Cap Intellidex.

 

12



 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the Large Cap Intellidex, as would be the case if it purchased all of the stocks in the Large Cap Intellidex with the same weightings as the Large Cap Intellidex.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the Large Cap Intellidex.

 

Large-Sized Company Risk

 

Returns on investments of large U.S. companies could trail the returns on investments in stocks of smaller companies.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.18

%

Total Gross Annual Fund Operating Expenses

 

0.68

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.63

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

13



 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

69

 

 

$

218

 

 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a

 

14



 

standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $500 for each redemption transaction (regardless of the number of Creation Units involved).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $2,500,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $19,367 if the Creation Unit is redeemed after one year, and $56,385 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

15



 

POWERSHARES DYNAMIC MID CAP PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Dynamic Mid Cap Intellidex(SM) Index (the “Mid Cap Intellidex” or “Underlying Intellidex”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of mid capitalization companies. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Mid Cap Intellidex. The Adviser will seek to match the performance of the Mid Cap Intellidex. The Mid Cap Intellidex is comprised of stocks of 150 U.S. mid capitalization companies. Stocks are selected principally on the basis of their capital appreciation potential as identified by the AMEX (the “Intellidex Provider”) pursuant to a proprietary Intellidex methodology. The Fund’s investment objective and 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Mid Cap Intellidex is adjusted quarterly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the Mid Cap Intellidex. The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the Mid Cap Intellidex; a figure of 1.00 would represent perfect correlation. The Fund generally will invest in all of the stocks comprising the Mid Cap Intellidex in proportion to their weightings in the Mid Cap Intellidex. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Fund may purchase a sample of stocks in the Mid Cap Intellidex as a whole. There may also be instances in which the Adviser may choose to overweight another stock in the Mid Cap Intellidex, purchase securities not in the Mid Cap Intellidex which the Adviser believes are appropriate to substitute for certain securities in the Mid Cap Intellidex or utilize various combinations of other available investment techniques, in seeking to track the Mid Cap Intellidex. The Fund may sell stocks that are represented in the Mid Cap Intellidex in anticipation of their removal from the Mid Cap Intellidex or purchase stocks not represented in the Mid Cap Intellidex in anticipation of their addition to the Mid Cap Intellidex.

 

Intellidex Methodology

 

The Mid Cap Intellidex methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The methodology evaluates companies quarterly, based on a variety of criteria, including fundamental growth, stock valuation, investments and risk factors, and then ranks and sorts them based on their cumulative scores. Component stocks for the Mid Cap Intellidex are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within their respective sub-groups.

 

Intellidex Construction

 

(1)                                  The 2,000 largest U.S. stocks (by market capitalization) traded on the NYSE, the AMEX and the NASDAQ are ranked for capital appreciation potential using a proprietary AMEX Intellidex model.

 

(2)                                  The universe of companies is divided into groups based on size and sub-size group in the following manner:

 

16



 

(a)                                  The universe of stocks is segregated into three size groups, large cap, mid cap and small cap, by selecting the 250 largest (large cap), the next 750 largest (mid cap) and the remaining 1,000 stocks (small cap).

 

(b)                                 Stocks within the size groups are further divided into two market-cap groupings, larger and smaller, creating six size groups (the “Size Groups”) and sub-groups (the “Sub-Groups”). Larger and smaller are split into quintiles using market capitalization. Larger stocks are defined by inclusion in the top quintile and smaller are the bottom four quintiles.

 

(3)                                  Within each of these six Size Groups, a defined number of the top-ranked larger and smaller stocks are selected for inclusion in the Mid Cap Intellidex. Selected stocks are equally weighted within their Sub-Groups.

 

The number of stocks selected from a Sub-Group is predetermined and is as follows:

 

(a)                                  Mid cap includes 150 stocks and is divided as follows:

 

(i)                                     Forty-four of the top-ranked larger mid cap stocks are selected and collectively receive 70% of the total index weight (each larger stock receives on average 1.59%). The forty-four component stocks selected are the components with the best Model Score in the Sub-Group.

 

(ii)                                  One hundred six of the top-ranked smaller mid cap stocks are selected and collectively receive 30% of the total index weight (each smaller stock receives on average 0.28%). The one hundred six component stocks selected are the components with the best Model Score in that Sub-Group.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Mid Cap Intellidex.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the Mid Cap Intellidex for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Mid Cap Intellidex, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Mid Cap Intellidex.

 

17



 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the Mid Cap Intellidex, as would be the case if it purchased all of the stocks in the Mid Cap Intellidex with the same weightings as the Mid Cap Intellidex.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the Mid Cap Intellidex.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)

 

 

 

(fees paid directly from your investments)

 

None

Annual Fund Operating Expenses(4)

 

 

 

(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.18

%

Total Gross Annual Fund Operating Expenses

 

0.68

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.63

%

 

18



 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

69

 

 

$

218

 

 

19



 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $500 for each redemption transaction (regardless of the number of Creation Units involved).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $2,500,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $19,367 if the Creation Unit is redeemed after one year, and $56,385 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

20



 

POWERSHARES DYNAMIC SMALL CAP PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Dynamic Small Cap Intellidex(SM) Index (the “Small Cap Intellidex” or “Underlying Intellidex”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of small capitalization companies. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Small Cap Intellidex. The Adviser will seek to match the performance of the Small Cap Intellidex. The Small Cap Intellidex is comprised of stocks of 100 U.S. small capitalization companies. Stocks are selected principally on the basis of their capital appreciation potential as identified by the AMEX (the “Intellidex Provider”) pursuant to a proprietary Intellidex methodology. The Fund’s investment objective and 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The Small Cap Intellidex is adjusted quarterly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the Small Cap Intellidex. The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the Small Cap Intellidex; a figure of 1.00 would represent perfect correlation. The Fund generally will invest in all of the stocks comprising the Small Cap Intellidex in proportion to their weightings in the Small Cap Intellidex. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Fund may purchase a sample of stocks in the Small Cap Intellidex as a whole. There may also be instances in which the Adviser may choose to overweight another stock in the Small Cap Intellidex, purchase securities not in the Small Cap Intellidex which the Adviser believes are appropriate to substitute for certain securities in the Small Cap Intellidex or utilize various combinations of other available investment techniques, in seeking to track the Small Cap Intellidex. The Fund may sell stocks that are represented in the Small Cap Intellidex in anticipation of their removal from the Small Cap Intellidex or purchase stocks not represented in the Small Cap Intellidex in anticipation of their addition to the Small Cap Intellidex.

 

Intellidex Methodology

 

The Small Cap Intellidex methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The methodology evaluates companies quarterly, based on a variety of criteria, including fundamental growth, stock valuation, investments and risk factors, and then ranks and sorts them based on their cumulative scores. Component stocks for the Small Cap Intellidex are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within their respective sub-groups.

 

Intellidex Construction

 

(1)                                  The 2,000 largest U.S. stocks (by market capitalization) traded on the NYSE, the AMEX and the NASDAQ are ranked for capital appreciation potential using a proprietary AMEX Intellidex model.

 

(2)                                  The universe of companies is divided into groups based on size and sub-size group in the following manner:

 

21



 

(a)                                  The universe of stocks is segregated into three size groups, large cap, mid cap and small cap, by selecting the 250 largest (large cap), the next 750 largest (mid cap) and the remaining 1,000 stocks (small cap).

 

(b)                                 Stocks within the size groups are further divided into two market-cap groupings, larger and smaller, creating six size groups (the “Size Groups”) and sub-groups (the “Sub-Groups”). Larger and smaller are split into quintiles using market capitalization. Larger stocks are defined by inclusion in the top quintile and smaller are the bottom four quintiles.

 

(3)                                  Within each of these six Size Groups, a defined number of the top-ranked larger and smaller stocks are selected for inclusion in the Small Cap Intellidex. Selected stocks are equally weighted within their Sub-Groups.

 

The number of stocks selected from a Sub-Group is predetermined and is as follows:

 

(a)                                  Small cap includes 100 stocks and is divided as follows:

 

(i)                                     Sixty of the top-ranked larger small cap stocks are selected and collectively receive 70% of the total index weight (each larger stock receives on average 1.167%). The sixty component stocks selected are the components with the best Model Score in the Sub-Group.

 

(ii)                                  Forty of the top-ranked smaller small cap stocks are selected and collectively receive 30% of the total index weight (each smaller stock receives on average 0.21%). The forty component stocks selected are the components with the best Model Score in that Sub-Group.

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Small Cap Intellidex.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the Small Cap Intellidex for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Small Cap Intellidex, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Small Cap Intellidex.

 

22



 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the Small Cap Intellidex, as would be the case if it purchased all of the stocks in the Small Cap Intellidex with the same weightings as the Small Cap Intellidex.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the Small Cap Intellidex.

 

Small Company Risk

 

Investing in securities of small sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)
(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)
(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.18

%

Total Gross Annual Fund Operating Expenses

 

0.68

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.63

%

 

23



 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).                            The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the Fund’s average daily net assets. However, no such fee is currently paid by the Fund.

 

(6).                            Pursuant to the Investment Advisory Agreement with the Trust, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, sub-licensing fees, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.60% of average net assets per year, at least until April 30, 2008. The offering costs excluded from the 0.60% expense cap are:  (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. The Trust and the Adviser have entered into an Excess Expense Agreement (the “Expense Agreement”) in which the Adviser has agreed to waive its management fees and/or pay certain operating expenses of the Fund in order to maintain the expense ratio of the Fund at or below 0.60% (excluding the expenses set forth above) (the “Expense Cap”). Expenses borne by the Adviser are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap.

 

* See “Creation Transaction Fees and Redemption Transaction Fees” below.

 

Example

 

This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s gross operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:

 

1 Year

 

3 Years

 

$

69

 

 

$

218

 

 

24



 

CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES

 

The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 Shares called a “Creation Unit”) or multiples thereof. As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements and called Authorized Participants (“APs”) can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Fee of $500 for each redemption transaction (regardless of the number of Creation Units involved).*  APs who hold Creation Units in inventory will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $2,500,000 and a 5% return each year, and assuming that the Fund’s gross operating expenses remain the same, the total costs would be $19,367 if the Creation Unit is redeemed after one year, and $56,385 if the Creation Unit is redeemed after three years.

 

If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction.

 

The creation fee, redemption fee and variable fee are not expenses of the Fund and do not impact the Fund’s expense ratio.

 


* See “Creations, Redemptions and Transaction Fees” later in this Prospectus.

 

25



 

POWERSHARES DYNAMIC BASIC MATERIALS SECTOR PORTFOLIO

 

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

 

The Fund seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Dynamic Basic Materials Sector Intellidex(SM) Index (the “Basic Materials Sector Intellidex” or “Underlying Intellidex”).

 

Principal Investment Strategies

 

The Fund will normally invest at least 80% of its total assets in common stocks of basic materials companies. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Basic Materials Sector Intellidex. The Adviser will seek to match the performance of the Basic Materials Sector Intellidex. The  Basic Materials Sector Intellidex is comprised of stocks of 60 U.S. basic materials companies. These are companies that are generally engaged in the business of producing raw materials, including paper or wood products, chemicals, construction materials, and mining and metals. Stocks are selected principally on the basis of their capital appreciation potential as identified by the AMEX (the “Intellidex Provider”) pursuant to a proprietary Intellidex methodology. The Fund’s investment objective and 80% investment policy noted above are non-fundamental and require 60 days’ prior written notice to shareholders before they can be changed.

 

The  Basic Materials Sector Intellidex is adjusted quarterly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the Basic Materials Sector Intellidex. The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the Basic Materials Sector Intellidex; a figure of 1.00 would represent perfect correlation. The Fund generally will invest in all of the stocks comprising the Basic Materials Sector Intellidex in proportion to their weightings in the Basic Materials Sector Intellidex. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Fund may purchase a sample of stocks in the Basic Materials Sector Intellidex as a whole. There may also be instances in which the Adviser may choose to overweight another stock in the Basic Materials Sector Intellidex, purchase securities not in the Basic Materials Sector Intellidex which the Adviser believes are appropriate to substitute for certain securities in the Basic Materials Sector Intellidex or utilize various combinations of other available investment techniques, in seeking to track the Basic Materials Sector Intellidex. The Fund may sell stocks that are represented in the Basic Materials Sector Intellidex in anticipation of their removal from the Basic Materials Sector Intellidex or purchase stocks not represented in the Basic Materials Sector Intellidex in anticipation of their addition to the Basic Materials Sector Intellidex.

 

Intellidex Methodology

 

The Basic Materials Sector Intellidex methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The methodology evaluates companies quarterly, based on a variety of criteria, including fundamental growth, stock valuation, investments and risk factors, and then ranks and sorts them based on their cumulative scores. Component stocks for the Basic Materials Sector Intellidex are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within their respective sub-groups.

 

26



 

Intellidex Construction

 

(1)                                  Basic materials stocks are selected from the 2,000 largest U.S. stocks (by market capitalization) traded on the NYSE, the AMEX and the NASDAQ and are ranked for capital appreciation potential using a proprietary AMEX Basic Materials Sector Intellidex model.

 

(2)                                  The universe of companies in the Basic Materials Sector Intellidex is defined by the AMEX’s proprietary screening to identify those companies that have significant operations in the sector group (the “Basic Materials Sector Group Universe”).

 

(3)                                  Stocks within the Basic Materials Sector Group Universe are further divided into two market-cap groupings, larger and smaller, creating two sub-groups (the “Sub-Groups”). Stocks in the Basic Materials Sector Group Universe are split into quintiles based on market capitalization. Larger stocks are defined by inclusion in the top quintile and smaller are the bottom four quintiles.

 

(4)                                  Within the Basic Materials Sector Group Universe, a defined number of the top-ranked larger and smaller stocks are selected for inclusion in the Basic Materials Sector Intellidex. Selected stocks are equally weighted within their Sub-Groups. The number of stocks selected from the Basic Materials Sector Group Universe is predetermined and is as follows:

 

(a)                                  The Basic Materials Sector Intellidex includes 60 stocks that are selected from the Basic Materials Sector Group Universe based on their Model Score as follows:

 

(i)                                     Sixteen of the top-ranked relatively larger stocks are selected and collectively receive 40% of the total Basic Materials Sector Intellidex weight (each larger stock receives on average 2.5%). The sixteen component stocks selected are the components with the best Model Score in the Sub-Group.

 

(ii)                                  Forty-four of the top-ranked relatively smaller stocks are selected and collectively receive 60% of the total Basic Materials Sector Intellidex weight (each smaller stock receives on average 1.36%). The forty-four component stocks selected are the components with the best Model Score in that Sub-Group.

 

(b)                                 In the event that the Basic Materials Sector Group Universe consists of less than 90 stocks at the time of a quarterly review, the 60 component stocks with the best Model Score in the Basic Materials Sector Group Universe are selected, and the weighting for the 60 selected stocks is determined as follows:

 

(i)                                     The sixteen largest stocks by market capitalization are selected and collectively receive 40% of the total Basic Materials Sector Intellidex weight (each of the sixteen largest stocks receives on average 2.5%).

 

(ii)                                  The other forty-four of the selected stocks collectively receive 60% of the total Basic Materials Sector Intellidex weight (each of the forty-four smaller stocks receives on average 1.36%).

 

Principal Risks of Investing in the Fund

 

The following specific risk factors have been identified for the Fund. See also the section on Additional Risks for other risk factors.

 

27



 

Market Trading Risk

 

Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Basic Materials Sector Intellidex.

 

Market Risk

 

The Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments.

 

Non-Correlation Risk

 

The Fund’s return may not match the return of the Basic Materials Sector Intellidex for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Basic Materials Sector Intellidex, and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Basic Materials Sector Intellidex.

 

The Fund may not be fully invested at times, either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and expenses. If the Fund utilizes a sampling approach or futures or other derivative positions, its return may not correlate as well with the return on the Basic Materials Sector Intellidex, as would be the case if it purchased all of the stocks in the Basic Materials Sector Intellidex with the same weightings as the Basic Materials Sector Intellidex.

 

Replication Management Risk

 

Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell a stock because the stock’s issuer was in financial trouble unless that stock is removed from the Basic Materials Sector Intellidex.

 

Small and Medium-Sized Company Risk

 

Investing in securities of small and medium-sized companies involves greater risk than is customarily associated with investing in more established companies. These companies’ stocks may be more volatile and less liquid than those of more established companies. These stocks may have returns that vary, sometimes significantly, from the overall stock market. Often small and medium capitalization companies and the industries in which they are focused are still evolving and, while this may offer better growth potential than larger, more established companies, it also may make them more sensitive to changing market conditions.

 

Basic Materials Sector Risk

 

Companies engaged in the production and distribution of basic materials may be adversely affected by changes in world events, political and economic conditions, energy conservation, environmental policies, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.

 

28



 

Issuer-Specific Changes

 

The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

 

The Fund’s Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its objective. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

HOW THE FUND HAS PERFORMED

 

The Fund has not yet commenced operations and therefore does not have a performance history.

 

WHAT ARE THE COSTS OF INVESTING?

 

This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund.(1)

 

Shareholder Transaction Expenses(2)(3)
(fees paid directly from your investments)

 

None

*

Annual Fund Operating Expenses(4)
(expenses that are deducted from the Fund’s assets)

 

 

 

Management Fees

 

0.50

%

Distribution and Service (12b-1) Fees(5)

 

%

Other Expenses

 

0.18

%

Total Gross Annual Fund Operating Expenses

 

0.68

%

Fee Waivers and Expense Assumption(6)

 

0.05

%

Total Net Annual Fund Operating Expenses

 

0.63

%

 


(1).                            The Fund had not commenced operations as of the date of this Prospectus. The expenses listed in the table are estimates based on the expenses the Fund expects to incur for the fiscal year ending April 30, 2007.

 

(2).                            When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges.

 

(3).                            If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

 

(4).                            Expressed as a percentage of average net assets.

 

(5).