N-1A 1 a06-23310_1n1a.htm REGISTRATION STATEMENT FOR OPEN-END MANAGEMENT INVESTMENT COMPANIES

 

As filed with the Securities and Exchange Commission on November 7, 2006.

No. 333-                
No. 811-                

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM N-1A

 

 

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

x

 

Pre-Effective Amendment No.

o

 

Post-Effective Amendment No.

o

 

 

and/or

 

 

 

 

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY
ACT OF 1940

x

Amendment No.

(Check appropriate box or boxes)


 

PowerShares Global 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:  As soon as
practicable after the effective date of this registration statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that the registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

 




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 November 7, 2006

PowerSHARES xtf

xchange traded funds

POWERSHARES GLOBAL EXCHANGE-TRADED FUND TRUST

PowerShares Dynamic QSG Asia-Pacific Opportunities Portfolio –

PowerShares Dynamic QSG Australia Portfolio –

PowerShares Dynamic QSG Canada Portfolio –

PowerShares Dynamic QSG Europe Portfolio –

PowerShares Dynamic QSG France Portfolio –

PowerShares Dynamic QSG Germany Portfolio –

PowerShares Dynamic QSG Developed International Growth Portfolio –

PowerShares Dynamic QSG Developed International Opportunities Portfolio –

PowerShares Dynamic QSG Developed International Value Portfolio –

PowerShares Dynamic QSG Japan Portfolio –

PowerShares Dynamic QSG UK Portfolio –

PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio –

PowerShares FTSE RAFI Asia Pacific ex-Japan Small Portfolio –

PowerShares FTSE RAFI Australia Portfolio –

PowerShares FTSE RAFI Brazil Portfolio –

PowerShares FTSE RAFI Canada Portfolio –

PowerShares FTSE RAFI China Portfolio –

PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio –

PowerShares FTSE RAFI Developed Markets ex-U.S. Small Portfolio –

PowerShares FTSE RAFI Emerging Markets Portfolio –

PowerShares FTSE RAFI Europe Portfolio –

PowerShares FTSE RAFI Europe Small Portfolio –

PowerShares FTSE RAFI France Portfolio –

PowerShares FTSE RAFI Germany Portfolio –

PowerShares FTSE RAFI Hong Kong Portfolio –

PowerShares FTSE RAFI Japan Portfolio –

PowerShares FTSE RAFI Latin America Portfolio –

PowerShares FTSE RAFI Mexico Portfolio –

PowerShares FTSE RAFI South Africa Portfolio –

PowerShares FTSE RAFI South Korea Portfolio –

PowerShares FTSE RAFI Taiwan Portfolio –

PowerShares FTSE RAFI United Kingdom Portfolio –

PowerShares International Listed Private Equity Portfolio –

PowerShares Palisades Global Water Portfolio –

PowerShares WilderHill New Energy Global Innovation Portfolio –




PowerShares Global Exchange-Traded Fund Trust (the “Trust”) is a registered investment company that currently consists of thirty-five separate exchange-traded index fundsAdditional funds may be offered in the future.  This Prospectus relates to the thirty-five funds of the Trust identified on the cover page of this Prospectus (each a “Fund” and, together, the “Funds”).

The Funds anticipate that their shares (the “Shares”) will be listed on the [         ] 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                     , 2007

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




TABLE OF CONTENTS

 

Page

Introduction – Powershares Global Exchange-Traded Fund Trust

 

1

Who Should Invest in the Funds

 

1

Tax Advantaged Product Structure

 

1

Powershares Dynamic QSG Asia-Pacific Opportunities Portfolio

 

2

Powershares Dynamic QSG Australia Portfolio

 

7

Powershares Dynamic QSG Canada Portfolio

 

12

Powershares Dynamic QSG Europe Portfolio

 

17

Powershares Dynamic QSG France Portfolio

 

23

Powershares Dynamic QSG Germany Portfolio

 

28

Powershares Dynamic QSG Developed International Growth Portfolio

 

33

Powershares Dynamic QSG Developed International Opportunities Portfolio

 

39

Powershares Dynamic QSG Developed International Value Portfolio

 

44

Powershares Dynamic QSG Japan Portfolio

 

49

Powershares Dynamic QSG UK Portfolio

 

54

Powershares FTSE RAFI Asia Pacific Ex-Japan Portfolio

 

59

Powershares FTSE RAFI Asia Pacific Ex-Japan Small Portfolio

 

65

Powershares FTSE RAFI Australia Portfolio

 

71

Powershares FTSE RAFI Brazil Portfolio

 

76

Powershares FTSE RAFI Canada Portfolio

 

82

Powershares FTSE RAFI China Portfolio

 

88

Powershares FTSE RAFI Developed Markets Ex-US Portfolio

 

94

Powershares FTSE RAFI Developed Markets Ex-US Small Portfolio

 

100

Powershares FTSE RAFI Emerging Markets Portfolio

 

106

PowerShares FTSE RAFI Europe Portfolio

 

112

PowerShares FTSE RAFI Europe Small Portfolio

 

118

PowerShares FTSE RAFI France Portfolio

 

124

PowerShares FTSE RAFI Germany Portfolio

 

130

PowerShares FTSE RAFI Hong Kong Portfolio

 

136

PowerShares FTSE RAFI Japan Portfolio

 

142

PowerShares FTSE RAFI Latin America Portfolio

 

148

PowerShares FTSE RAFI Mexico Portfolio

 

154

PowerShares FTSE RAFI South Africa Portfolio

 

160

PowerShares FTSE RAFI South Korea Portfolio

 

166

 

i




 

PowerShares FTSE RAFI Taiwan Portfolio

 

172

PowerShares FTSE RAFI United Kingdom Portfolio

 

178

Powershares International Listed Private Equity Portfolio

 

190

Powershares Palisades Global Water Portfolio

 

196

Powershares WilderHill New Energy Global Innovation Portfolio

 

203

Additional Risks

 

209

Portfolio Holdings

 

210

Management of the Funds

 

210

How to Buy and Sell Shares

 

211

Frequent Purchases and Redemptions of Fund Shares

 

213

Creations, Redemptions and Transaction Fees

 

213

Dividends, Distributions and Taxes

 

215

Distribution Plan

 

216

Net Asset Value

 

217

Fund Service Providers

 

217

Index Providers

 

218

Disclaimers

 

218

Other Information

 

222

 

ii




INTRODUCTION – POWERSHARES GLOBAL EXCHANGE-TRADED FUND TRUST

The Trust is an investment company consisting of thirty-five 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 [                       ] Exchange (“[                    ]”) 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.

1




POWERSHARES DYNAMIC QSG ASIA-PACIFIC OPPORTUNITIES PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

 

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Asia-Pacific Opportunities Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Asia-Pacific Opportunities Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Asia Pacific countries or primarily listed on an exchange in such countries.  The QSG Asia-Pacific Opportunities Index is comprised of 125 stocks selected principally on the basis of their capital appreciation potential as identified by the Quantitative Services Group, LLC (“QSG” or the “Index Provider”) pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                  ], 2006, the QSG Asia-Pacific Opportunities Index consisted of stocks of companies with a market capitalization of between $[   ] and $[   ] that were domiciled in Australia, Hong Kong, New Zealand and Singapore or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Asia-Pacific Opportunities Index.  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 QSG Asia-Pacific Opportunities Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Asia-Pacific Opportunities Index.  The Adviser seeks  correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Asia-Pacific Opportunities Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Asia-Pacific Opportunities Index in proportion to their weightings in the QSG Asia-Pacific Opportunities Index.  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 QSG Asia-Pacific Opportunities Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Asia-Pacific Opportunities Index, purchase securities not in the QSG Asia-Pacific Opportunities Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Asia-Pacific Opportunities Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Asia-Pacific Opportunities Index.  The Fund may sell stocks that are represented in the QSG Asia-Pacific Opportunities Index in anticipation of their removal from the QSG Asia-Pacific Opportunities Index, or purchase stocks not represented in the QSG Asia-Pacific Opportunities Index in anticipation of their addition to the QSG Asia-Pacific Opportunities Index.

2




Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Asia-Pacific Opportunities Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

Index Construction

(1)                                  The 500 largest stocks (by liquidity-adjusted market capitalization) traded across developed markets of Asian Pacific companies are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 125 stocks with the best Model Score from the universe.  The 125 components are equally weighted (on average each receives 0.80%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Asia-Pacific Opportunities 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 QSG Asia-Pacific Opportunities Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Asia-Pacific Opportunities 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 QSG Asia-Pacific Opportunities 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 of the QSG Asia-Pacific Opportunities Index as would be the case if it purchased all of the stocks in the QSG Asia-Pacific Opportunities Index with the same weightings as the QSG Asia-Pacific Opportunities Index.

3




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 QSG Asia-Pacific Opportunities Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risk of Investing in Asia Pacific Countries

The development of the economies of countries in the Asia Pacific region varies greatly.  Furthermore, since the economies of the countries in the region are largely intertwined, if an economic recession is experienced by any of these countries, it will likely adversely impact the economic performance of other countries in the region.  The smaller economies in the region may be adversely affected by increased competition, high inflation rates, undeveloped financial services sectors, currency fluctuations or restrictions, political and social instability and increased economic volatility.  Due to heavy reliance on international trade, a decrease in demand, due to recession or otherwise, in the United States, Europe or Asia would adversely affect economic performance in the region.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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.

4




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 commenced operations on [                   ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [       ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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

5




“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 [     ]% (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

 

$[    ]

 

$

[    ]

 

 

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 $[             ] 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 $[              ] 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 $[        ] if the Creation Unit is redeemed after one year, and $[        ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

6




POWERSHARES DYNAMIC QSG AUSTRALIA PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active Australia Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active Australia Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Australia or primarily listed on an Australian exchange.  The QSG Active Australia Index is comprised of 75 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                        ], 2006, the QSG Active Australia Index consisted of stocks of companies with a market capitalization of between $[   ] and $[   ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active Australia Index.  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 QSG Active Australia Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active Australia Index.  The Adviser seeks  correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active Australia Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active Australia Index in proportion to their weightings in the QSG Active Australia Index. 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 QSG Active Australia Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active Australia Index, purchase securities not in the QSG Active Australia Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active Australia Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active Australia Index.  The Fund may sell stocks that are represented in the QSG Active Australia Index in anticipation of their removal from the QSG Active Australia Index, or purchase stocks not represented in the QSG Active Australia Index in anticipation of their addition to the QSG Active Australia Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active Australia Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

7




Index Construction

(1)                                  The 300 largest stocks (by liquidity-adjusted market capitalization) traded across the Australian market are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 75 stocks with the best Model Score from the universe.  The 75 components are equally weighted (on average each receives 1.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active Australia 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 QSG Active Australia Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active Australia 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 QSG Active Australia 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 of the QSG Active Australia Index as would be the case if it purchased all of the stocks in the QSG Active Australia Index with the same weightings as the QSG Active Australia 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 QSG Active Australia Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers

8




are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [                ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

9




 


(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[           ]

 

$

[         ]

 

 

10




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 $[   ] 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 $[   ] 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 $[         ] if the Creation Unit is redeemed after one year, and $[         ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

11




POWERSHARES DYNAMIC QSG CANADA PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active Canada Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active Canada Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Canada or primarily listed on a Canadian exchange.  The QSG Active Canada Index is comprised of 75 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                 ], 2006, the QSG Active Canada Index consisted of stocks of companies with a market capitalization of between $[     ] and $[     ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active Canada Index.  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 QSG Active Canada Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active Canada Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active Canada Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active Canada Index in proportion to their weightings in the QSG Active Canada Index. 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 QSG Active Canada Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active Canada Index, purchase securities not in the QSG Active Canada Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active Canada Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active Canada Index.  The Fund may sell stocks that are represented in the QSG Active Canada Index in anticipation of their removal from the QSG Active Canada Index, or purchase stocks not represented in the QSG Active Canada Index in anticipation of their addition to the QSG Active Canada Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active Canada Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

12




Index Construction

(1)                                  The 300 largest stocks (by liquidity-adjusted market capitalization) traded across the Canadian market are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 75 stocks with the best Model Score from the universe.  The 75 components are equally weighted (on average each receives 1.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active Canada 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 QSG Active Canada Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active Canada 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 QSG Active Canada 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 of the QSG Active Canada Index as would be the case if it purchased all of the stocks in the QSG Active Canada Index with the same weightings as the QSG Active Canada 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 QSG Active Canada Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers

13




are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Canadian Securities Risk

The Canadian economy is highly dependent on foreign trade. Canada exports are largely concentrated in the natural resources sector, as Canada exports forest products, agricultural products, energy related products and mines and metals.  Therefore, changes in demand for natural resources, and the price levels of Canadian exports, may greatly affect the performance of the Canadian economy.  In addition, the United States is Canada’s largest trading partner and the largest investor in Canada.  As a result, the performance of the Canadian economy is dependent on the performance of the economy in the United States.  The Province of Quebec has demanded sovereignty from the Canadian government in the past, negatively impacting Canadian equity valuations and currency valuations, and there is not guarantee that the Province of Quebec will not make any further such demands in the future.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [                ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [      ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [      ]% 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 [      ]% (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.

15




 

* 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

 

$[      ]

 

$

[     ]

 

 

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 $[     ] 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 $[   ] 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 $[             ] if the Creation Unit is redeemed after one year, and $[         ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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 DYNAMIC QSG EUROPE PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active Europe Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active Europe Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Europe or primarily listed on a European exchange.  The QSG Active Europe Index is comprised of 250 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                 ], 2006, QSG Active Europe Index consisted of stocks of companies with a market capitalization of between $[     ] and $[      ] that were domiciled in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active Europe Index.  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 QSG Active Europe Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active Europe Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active Europe Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active Europe Index in proportion to their weightings in the QSG Active Europe Index.  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 QSG Active Europe Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active Europe Index, purchase securities not in the QSG Active Europe Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active Europe Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active Europe Index.  The Fund may sell stocks that are represented in the QSG Active Europe Index in anticipation of their removal from the QSG Active Europe Index, or purchase stocks not represented in the QSG Active Europe Index in anticipation of their addition to the QSG Active Europe Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality, and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks

17




for the QSG Active Europe Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

Index Construction

(1)                                  The 1,000 largest stocks (by liquidity-adjusted market capitalization) traded across European developed markets are ranked for investment potential using a proprietary QSG Index model. 

(2)                                  The Index selects the 250 stocks with the best Model Score from the universe.  The 250 components are equally weighted (on average each receives 0.40%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active Europe 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 QSG Active Europe Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active Europe 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 QSG Active Europe 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 of the QSG Active Europe Index as would be the case if it purchased all of the stocks in the QSG Active Europe Index with the same weightings as the QSG Active Europe 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 QSG Active Europe Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased

18




market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [              ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

19





(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[      ]

 

$

[      ]

 

 

20




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 $[     ] 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 $[     ] 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 $[         ] if the Creation Unit is redeemed after one year, and $[        ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

21




POWERSHARES DYNAMIC QSG FRANCE PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active France Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active France Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in France or primarily listed on a French exchange.  The QSG Active France Index is comprised of 75 international stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation. The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [           ], 2006, the QSG Active France Index consisted of stocks of companies with a market capitalization of between $[     ] and $[     ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active France Index.  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 QSG Active France Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active France Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active France Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active France Index in proportion to their weightings in the QSG Active France Index. 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 QSG Active France Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active France Index, purchase securities not in the QSG Active France Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active France Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active France Index.  The Fund may sell stocks that are represented in the QSG Active France Index in anticipation of their removal from the QSG Active France Index, or purchase stocks not represented in the QSG Active France Index in anticipation of their addition to the QSG Active France Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active France Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

22




Index Construction

(1)                                  The 300 largest stocks (by liquidity-adjusted market capitalization) traded across the French market are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 75 stocks with the best Model Score from the universe.  The 75 components are equally weighted (on average each receives 1.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active France 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 QSG Active France Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active France 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 QSG Active France 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 of the QSG Active France Index as would be the case if it purchased all of the stocks in the QSG Active France Index with the same weightings as the QSG Active France 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 QSG Active France Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers

23




are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [              ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

24





(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[     ]

 

$

[     ]

 

 

25




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 $[   ] 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 $[   ] 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 $[         ] if the Creation Unit is redeemed after one year, and $[         ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

26




POWERSHARES DYNAMIC QSG GERMANY PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active Germany Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active Germany Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Germany or primarily listed on a German exchange.  QSG Active Germany Index is comprised of 75 international stocks selected principally on the basis of their capital appreciation potential as identified by the QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [               ], 2006, the QSG Active Germany Index consisted of stocks of companies with a market capitalization of between $[     ] and $[    ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active Germany Index.  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 QSG Active Germany Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active Germany Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active Germany Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active Germany Index in proportion to their weightings in the QSG Active Germany Index. 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 QSG Active Germany Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active Germany Index, purchase securities not in the QSG Active Germany Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active Germany Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active Germany Index.  The Fund may sell stocks that are represented in the QSG Active Germany Index in anticipation of their removal from the QSG Active Germany Index, or purchase stocks not represented in the QSG Active Germany Index in anticipation of their addition to the QSG Active Germany Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active Germany Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

27




Index Construction

(1)                                  The 300 largest stocks (by liquidity-adjusted market capitalization) traded across the German Market are ranked for investment potential using a proprietary QSG Active Germany Index model.

(2)                                  The Index selects the 75 stocks with the best Model Score from the universe.  The 75 components are equally weighted (on average each receives 1.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active Germany 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 QSG Active Germany Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active Germany 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 QSG Active Germany 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 of the QSG Active Germany Index as would be the case if it purchased all of the stocks in the QSG Active Germany Index with the same weightings as the QSG Active Germany 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 QSG Active Germany Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers

28




are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [             ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

29





(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[      ]

 

$

[      ]

 

 

30




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 $[   ] 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 $[   ] 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 $[        ] if the Creation Unit is redeemed after one year, and $[        ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

31




POWERSHARES DYNAMIC QSG DEVELOPED
INTERNATIONAL GROWTH PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Developed International Growth Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Developed International Growth Index.  The Fund will normally invest at least 80% of its total assets in common stocks of non-U.S. companies.  The QSG Developed International Growth Index is comprised of 300 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                ], 2006, the QSG Developed International Growth Index consisted of stocks of companies with a market capitalization of between $[      ] and $[      ] that were domiciled in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Developed International Growth Index.  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 QSG Developed International Growth Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Developed International Growth Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Developed International Growth Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Developed International Growth Index in proportion to their weightings in the QSG Developed International Growth Index.  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 QSG Developed International Growth Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Developed International Growth Index, purchase securities not in the QSG Developed International Growth Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Developed International Growth Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Developed International Growth Index.  The Fund may sell stocks that are represented in the QSG Developed International Growth Index in anticipation of their removal from the QSG Developed International Growth Index, or purchase stocks not represented in the QSG Developed International Growth Index in anticipation of their addition to the QSG Developed International Growth Index.

32




Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation and consists of those securities classified by QSG as most representing the growth style.  Securities classified as the growth style generally tend to have higher forecasted growth rates, lower book value to price ratios, lower forward earnings to price ratios and lower dividend yields than securities representing the value style.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Developed International Growth Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

Index Construction

(1)                                  The 1,200 largest stocks (by liquidity-adjusted market capitalization) traded across developed markets that are ranked for investment potential using a proprietary QSG Index model and are divided between value and growth universes through a series of earnings and valuation screens.

(2)                                  The Index selects the 300 stocks with the best Model Score from the universe.  The 300 components are equally weighted (on average each receives 0.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Developed International Growth 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 QSG Developed International Growth Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Developed International Growth 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 QSG Developed International Growth 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 of the QSG

33




Developed International Growth Index as would be the case if it purchased all of the stocks in the QSG Developed International Growth Index with the same weightings as the QSG Developed International Growth 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 QSG Developed International Growth Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Growth Investing Risk

The Fund emphasizes a “growth” style of investing. The market values of such securities may be more volatile than other types of investments. The returns on “growth” securities may or may not move in tandem with the returns on other styles of investing or the overall stock markets.

Non-Diversified Fund Risk

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.

34




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 commenced operations on [           ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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

35




other trading expenses, taxes and extraordinary expenses) from exceeding [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[      ]

 

$

[      ]

 

 

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 $[      ] 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 $[      ] 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 $[      ] if the Creation Unit is redeemed after one year, and $[      ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

36




POWERSHARES DYNAMIC QSG DEVELOPED
INTERNATIONAL OPPORTUNITIES PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Developed International Opportunities Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Developed International Opportunities Index.  The Fund will normally invest at least 80% of its total assets in common stocks of non-U.S. companies.  The QSG Developed International Opportunities Index is comprised of 300 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                    ], 2006, the QSG Developed International Opportunities Index consisted of stocks of companies with a market capitalization of between $[   ] and $[     ] that were domiciled in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Developed International Opportunities Index.  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 QSG Developed International Opportunities Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Developed International Opportunities Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Developed International Opportunities Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Developed International Opportunities Index in proportion to their weightings in the QSG Developed International Opportunities Index.  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 QSG Developed International Opportunities Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Developed International Opportunities Index, purchase securities not in the QSG Developed International Opportunities Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Developed International Opportunities Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Developed International Opportunities Index.  The Fund may sell stocks that are represented in the QSG Developed International Opportunities Index in anticipation of their removal from the QSG Developed International Opportunities Index, or purchase stocks not represented in the QSG Developed International Opportunities Index in anticipation of their addition to the QSG Developed International Opportunities Index.

37




Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected out performance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Developed International Opportunities Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

Index Construction

(1)                                  The 1,200 largest stocks (by liquidity-adjusted market capitalization) traded across developed markets are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 300 stocks with the best Model Score from the universe.  The 300 components are equally weighted (on average each receives 0.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Developed International Opportunities 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 QSG Developed International Opportunities Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Developed International Opportunities 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 QSG Developed International Opportunities 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 of the QSG Developed International Opportunities Index as would be the case if it purchased all of the stocks in the QSG Developed International Opportunities Index with the same weightings as the QSG Developed International Opportunities Index.

38




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 QSG Developed International Opportunities Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [             ], 2007 and therefore does not have a performance history for a full calendar year.

39




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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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.

40




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

 

$     ]

 

$

[     ]

 

 

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 $[      ] 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 $[      ] 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 $[      ] if the Creation Unit is redeemed after one year, and $[      ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

41




POWERSHARES DYNAMIC QSG DEVELOPED
INTERNATIONAL VALUE PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Developed International Value Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Developed International Value Index.  The Fund will normally invest at least 80% of its total assets in common stocks of non-U.S. companies.  The QSG Developed International Value Index is comprised of 300 international stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [               ], 2006, the QSG Developed International Value Index consisted of stocks of companies with a market capitalization of between $[    ] and $[    ] that were domiciled in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Developed International Value Index.  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 QSG Developed International Value Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Developed International Value Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Developed International Value Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Developed International Value Index in proportion to their weightings in the QSG Developed International Value Index. 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 QSG Developed International Value Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Developed International Value Index, purchase securities not in the QSG Developed International Value Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Developed International Value Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Developed International Value Index.  The Fund may sell stocks that are represented in the QSG Developed International Value Index in anticipation of their removal from the QSG Developed International Value Index, or purchase stocks not represented in the QSG Developed International Value Index in anticipation of their addition to the QSG Developed International Value Index.

42




Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation and consists of those securities classified by QSG as most representing the value style.  Securities classified as the value style generally tend to have lower forecasted growth rates, higher book value to price ratios, higher forward earnings to price ratios and higher dividend yields than securities representing the growth style.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Developed International Value Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

Index Construction

(1)                                  The 1,200 largest stocks (by liquidity-adjusted market capitalization) traded across developed markets are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 300 stocks with the best Model Score from the universe.  The 300 components are equally weighted (on average each receives 0.33%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Developed International Value 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 QSG Developed International Value Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Developed International Value 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 QSG Developed International Value 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 of the QSG Developed International Value Index as would be the case if it purchased all of the stocks in the QSG

43




Developed International Value Index with the same weightings as the QSG Developed International Value 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 QSG Developed International Value Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Value Investing Style Risk

A “value” style of investing emphasizes undervalued companies with characteristics for improved valuations.  This style of investing is subject to the risk that the valuations never improve or that the returns on “value” equity securities are less than returns on other styles of investing or the overall stock market.  Different types of stocks tend to shift in and out of favor depending on market and economic conditions.  Thus, the value of the Fund’s investments will vary and at times may be lower or higher than that of other types of investments.

Non-Diversified Fund Risk

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.

44




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 commenced operations on [             ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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

45




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 [     ]% (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:

1Year

 

3 Years

 

$[     ]

 

$

[     ]

 

 

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 $[      ] 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 $[      ] 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 $[      ] if the Creation Unit is redeemed after one year, and $[      ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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 DYNAMIC QSG JAPAN PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active Japan Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active Japan Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in Japan or primarily listed on an exchange in Japan.  The QSG Active Japan Index is comprised of 250 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [                     ], 2006, the QSG Active Japan Index consisted of stocks with a market capitalization of between $[   ] and $[     ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active Japan Index.  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 QSG Active Japan Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active Japan Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active Japan Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active Japan Index in proportion to their weightings in the QSG Active Japan Index.  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 QSG Active Japan Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active Japan Index, purchase securities not in the QSG Active Japan Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active Japan Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active Japan Index.  The Fund may sell stocks that are represented in the QSG Active Japan Index in anticipation of their removal from the QSG Active Japan Index, or purchase stocks not represented in the QSG Active Japan Index in anticipation of their addition to the QSG Active Japan Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance:  balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active Japan Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

47




Index Construction

(1)                                  The 1,000 largest stocks (by liquidity-adjusted market capitalization) traded across the Japanese market are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 250 stocks with the best Model Score from the universe.  The 250 components are equally weighted (on average each receives 0.40%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active Japan 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 QSG Active Japan Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active Japan 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 QSG Active Japan 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 of the QSG Active Japan Index as would be the case if it purchased all of the stocks in the QSG Active Japan Index with the same weightings as the QSG Active Japan 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 QSG Active Japan Index.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers

48




are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risk of Investing in Japanese Securities

The Japanese economy is highly dependent on trade, and may be adversely impacted by the implementation of tariffs and protectionist measures by various governments, the increased costs of raw materials, an aging workforce, large government deficits or fundamental changes in the Japanese labor market.  Furthermore, Japanese corporations often engage in high levels of corporate leveraging, extensive cross-purchases of the stock of other corporations and are subject to a changing corporate governance structure.  Japanese financial reporting, accounting and auditing standards are different than those in the United States and Japanese companies are not required under existing securities laws to timely provide the disclosure required under U.S. securities laws.  Therefore, information regarding Japanese corporations may be less reliable and all material information may not be available to the Fund. In addition, it may difficult for the Fund to obtain a judgement in a Japanese court.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [           ], 2007 and therefore does not have a performance history for a full calendar year.

49




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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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.

50




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

 

$[     ]

 

$

[     ]

 

 

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 $[      ] 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 $[      ] 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 $[      ] if the Creation Unit is redeemed after one year, and $[      ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

51




POWERSHARES DYNAMIC QSG UK PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the QSG Active UK Index (the “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the QSG Active UK Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies domiciled in the United Kingdom or primarily listed on an exchange in the United Kingdom.  The QSG Active UK Index is comprised of 100 stocks selected principally on the basis of their capital appreciation potential as identified by QSG pursuant to a proprietary quantitative methodology.  The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality and price momentum and then ranks and sorts them based on their cumulative scores.  As of [              ], 2006, the QSG Active UK Index consisted of stocks with a market capitalization of between $[   ] and $[   ].  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the QSG Active UK Index.  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 QSG Active UK Index is adjusted monthly and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the QSG Active UK Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the QSG Active UK Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the QSG Active UK Index in proportion to their weightings in the QSG Active UK Index.  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 QSG Active UK Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the QSG Active UK Index, purchase securities not in the QSG Active UK Index which the Adviser believes are appropriate to substitute for certain securities in the QSG Active UK Index or utilize various combinations of other available investment techniques, in seeking to track the QSG Active UK Index.  The Fund may sell stocks that are represented in the QSG Active UK Index in anticipation of their removal from the QSG Active UK Index, or purchase stocks not represented in the QSG Active UK Index in anticipation of their addition to the QSG Active UK Index.

Index Methodology

The QSG Methodology is designed to objectively identify those stocks within a particular market segment that have the greatest potential for capital appreciation.  The QSG Methodology evaluates companies monthly, using a proprietary multi-factor model based on the following measures of expected outperformance: balance sheet strength, capital structure, leverage, earnings growth, earnings quality, and price momentum and then ranks and sorts them based on their cumulative scores. Component stocks for the QSG Active UK Index are selected from among the companies with the highest-ranking cumulative score (“Model Score”) within the universe.

52




Index Construction

(1)                                  The 400 largest stocks (by liquidity-adjusted market capitalization) traded across the markets in the United Kingdom are ranked for investment potential using a proprietary QSG Index model.

(2)                                  The Index selects the 100 stocks with the best Model Score from the universe.  The 100 components are equally weighted (on average each receives 1.00%).

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the QSG Active UK 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 QSG Active UK Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the QSG Active UK 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 QSG Active UK 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 of the QSG Active UK Index as would be the case if it purchased all of the stocks in the QSG Active UK Index with the same weightings as the QSG Active UK 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 QSG Active UK Index.

Foreign Investment Risk

Investments in the securities of issuers in the United Kingdom involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by the British government, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in pounds and Euros, changes in currency exchange rates may negatively impact the Fund’s

53




returns.  Issuers in the United Kingdom are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges in the United Kingdom or the British government may adopt rules or regulations that may negatively impact the Fund’s ability to invest in securities in the United Kingdom or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [               ] , 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

54





(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[    ]

 

$

[    ]

 

 

55




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 $[      ] 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 $[      ] 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 $[      ] if the Creation Unit is redeemed after one year, and $[      ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

56




POWERSHARES FTSE RAFI ASIA PACIFIC EX-JAPAN PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Fundamental Asia Pacific ex-Japan Index (the “FTSE RAFI Asia Pacific ex-Japan Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Asia Pacific ex-Japan Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as Asia Pacific within FTSE’s country classification definition, excluding Japanese companies.  The FTSE RAFI Asia Pacific ex-Japan Index is designed to track the performance of Asian Pacific companies with the largest fundamental value, selected from the constituents of the FTSE Asia Pacific ex-Japan Developed Large/Mid-Cap Indexes as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                  ], 2006, the FTSE RAFI Asia Pacific ex-Japan Index consisted of approximately [    ] large and mid cap stocks of companies with a market capitalization of between $[   ] and $[   ] that were domiciled in Australia, Hong Kong, New Zealand and Singapore or primarily listed on an exchange such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Asia Pacific ex-Japan Index.  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 FTSE RAFI Asia Pacific ex-Japan Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Asia Pacific ex-Japan Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Asia Pacific ex-Japan Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Asia Pacific ex-Japan Index in proportion to their weightings in the FTSE RAFI Asia Pacific ex-Japan Index. 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 FTSE RAFI Asia Pacific ex-Japan Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Asia Pacific ex-Japan Index, purchase securities not in the FTSE RAFI Asia Pacific ex-Japan Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Asia Pacific ex-Japan Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Asia Pacific ex-Japan Index.  The Fund may sell stocks that are represented in the FTSE RAFI Asia Pacific ex-Japan Index in anticipation of their removal from the FTSE RAFI Asia Pacific ex-Japan Index, or purchase stocks not represented in the FTSE RAFI Asia Pacific ex-Japan Index in anticipation of their addition to the FTSE RAFI Asia Pacific ex-Japan Index.

Index Methodology

The FTSE RAFI Asia Pacific ex-Japan Index methodology is designed to track the performance of the stocks represented amongst the constituents of the FTSE Asia Pacific ex-Japan Developed Large/Mid-Cap Indexes with the largest fundamental value.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  Equities are

57




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.  Component stocks for the FTSE RAFI Asia Pacific ex-Japan Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Asia Pacific ex-Japan Index is comprised of Asian Pacific companies with the largest fundamental value, selected from the constituents of the FTSE Asia Pacific ex-Japan Developed Large/Mid-Cap Indexes.

(2)                                  Using the stock universe of companies of the Asia Pacific ex-Japan Developed Large/Mid-Cap Indexes, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization. The largest Asian Pacific companies, excluding Japanese companies, are then selected.  These will be the FTSE RAFI Asia Pacific ex-Japan Index constituents. Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Asia Pacific ex-Japan 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 RAFI Asia Pacific ex-Japan Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE

58




RAFI Asia Pacific ex-Japan 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 RAFI Asia Pacific ex-Japan 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 of the FTSE RAFI Asia Pacific ex-Japan Index as would be the case if it purchased all of the stocks in the FTSE RAFI Asia Pacific ex-Japan Index with the same weightings as the FTSE RAFI Asia Pacific ex-Japan 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 RAFI Asia Pacific ex-Japan Index.

Medium-Sized Company Risk

Investing in securities of 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 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.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risks of Investing in Asian Pacific Companies

The development of the economies of countries in the Asia Pacific region varies greatly.  Furthermore, since the economies of the countries in the region are largely intertwined, if an economic recession is experienced by any of these countries, it will likely adversely impact the economic performance of other countries in the region.  The smaller economies in the region may be adversely affected by increased competition, high inflation rates, undeveloped financial services sectors, currency fluctuations or restrictions, political and social instability and increased economic volatility.  Due to heavy reliance on international trade, a decrease in demand, due to recession or otherwise, in the United States, Europe or Asia would adversely affect economic performance in the region.

59




Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [      ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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.

60




(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[     ]

 

$

[      ]

 

 

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 $[        ] 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

61




Redemption Fee of $[        ] 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 $[            ] if the Creation Unit is redeemed after one year, and $[              ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

62




POWERSHARES FTSE RAFI ASIA PACIFIC EX-JAPAN SMALL PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Asia Pacific ex-Japan Small Index (the “RAFI Asia Pacific ex-Japan Small Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Asia Pacific ex-Japan Small Index.  The Fund will normally invest at least 80% of its total assets in common stocks of small capitalization companies that are classified as Asia Pacific within FTSE’s country classification definition, excluding Japanese small capitalization companies.  The FTSE RAFI Asia Pacific ex-Japan Small Index is designed to track the performance of small capitalization Asian Pacific companies with the largest fundamental value, selected from the constituents of the FTSE Asia Pacific ex-Japan Developed Small-Cap Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [              ], 2006, the FTSE RAFI Asia Pacific ex-Japan Small Index consisted of approximately [        ] small capitalization stocks of companies with market capitalizations of between $[     ] and $[      ] that were domiciled in Australia, Hong Kong, New Zealand and Singapore or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Asia Pacific ex-Japan Small Index.  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 FTSE RAFI Asia Pacific ex-Japan Small Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Asia Pacific ex-Japan Small Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Asia Pacific ex-Japan Small Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Asia Pacific ex-Japan Small Index in proportion to their weightings in the FTSE RAFI Asia Pacific ex-Japan Small Index. 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 FTSE RAFI Asia Pacific ex-Japan Small Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Asia Pacific ex-Japan Small Index, purchase securities not in the FTSE RAFI Asia Pacific ex-Japan Small Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Asia Pacific ex-Japan Small Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Asia Pacific ex-Japan Small Index.  The Fund may sell stocks that are represented in the FTSE RAFI Asia Pacific ex-Japan Index in anticipation of their removal from the FTSE RAFI Asia Pacific ex-Japan Small Index, or purchase stocks not represented in the FTSE RAFI Asia Pacific ex-Japan Small Index in anticipation of their addition to the FTSE RAFI Asia Pacific ex-Japan Small Index.

Index Methodology

The FTSE RAFI Asia Pacific ex-Japan Small Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Asia

63




Pacific ex-Japan Developed Small-Cap Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Asia Pacific ex-Japan Small Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Asia Pacific ex-Japan Small Index is comprised of Asian Pacific small capitalization companies with the largest fundamental value, selected from the constituents of the FTSE Asia Pacific ex-Japan Developed Small-Cap Index.

(2)                                  Using the stock universe of companies of the FTSE Asia Pacific ex-Japan Developed Small-Cap Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest Asian Pacific companies, excluding Japanese companies, are then selected.  These will be the FTSE RAFI Asia Pacific ex-Japan Small Index constituents. Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Asia Pacific ex-Japan Small 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.

64




Non-Correlation Risk

The Fund’s return may not match the return of the FTSE RAFI Asia Pacific ex-Japan Small Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Asia Pacific ex-Japan Small 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 RAFI Asia Pacific ex-Japan Small 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 of the FTSE RAFI Asia Pacific ex-Japan Small Index as would be the case if it purchased all of the stocks in the FTSE RAFI Asia Pacific ex-Japan Small Index with the same weightings as the FTSE RAFI Asia Pacific ex-Japan Small 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 RAFI Asia Pacific ex-Japan Small Index.

Small Company Risk

Investing in securities of small 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.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risks of Investing in Asia Pacific Companies

The development of the economies of countries in the Asia Pacific region varies greatly.  Furthermore, since the economies of the countries in the region are largely intertwined, if an economic recession is experienced by any of these countries, it will likely adversely impact the economic performance of other countries in the region.  The smaller economies in the region may be adversely affected by increased competition, high inflation rates, undeveloped financial services sectors, currency fluctuations or

65




restrictions, political and social instability and increased economic volatility.  Due to heavy reliance on international trade, a decrease in demand, due to recession or otherwise, in the United States, Europe or Asia would adversely affect economic performance in the region.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [     ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

66





(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[    ]

 

$

[    ]

 

 

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

67




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 $[        ] 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 $[        ] 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 $[        ] if the Creation Unit is redeemed after one year, and $[        ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

68




POWERSHARES FTSE RAFI AUSTRALIA PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Australia Index (the “RAFI Australia Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Australia Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as Australian within FTSE’s country classification definition.  The FTSE RAFI Australia Index is designed to track the performance of Australian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [            ], 2006, the FTSE RAFI Australia Index consisted of approximately [            ] stocks of companies with market capitalizations of between $[    ] and $[    ] that were domiciled in Australia or primarily listed on an exchange in Australia.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Australia Index.  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 FTSE RAFI Australia Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Australia Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Australia Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Australia Index in proportion to their weightings in the FTSE RAFI Australia Index. 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 FTSE RAFI Australia Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Australia Index, purchase securities not in the FTSE RAFI Australia Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Australia Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Australia Index.  The Fund may sell stocks that are represented in the FTSE RAFI Australia Index in anticipation of their removal from the FTSE RAFI Australia Index, or purchase stocks not represented in the FTSE RAFI Australia Index in anticipation of their addition to the FTSE RAFI Australia Index.

Index Methodology

The FTSE RAFI Australia Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Australia Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

69




Index Construction

(1)                                  The FTSE RAFI Australia Index is comprised of Australian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.

(2)                                  Using the stock universe of the Australian companies of the FTSE RAFI Developed ex US 1000 Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest Australian stocks are then selected.  These will be the FTSE RAFI Australia Index constituents.  Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Australia 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 RAFI Australia Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Australia 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 RAFI Australia 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 of the FTSE RAFI Australia Index as would be the case if it purchased all of the stocks in the FTSE RAFI Australia Index with the same weightings as the FTSE RAFI Australia Index.

70




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 RAFI Australia 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.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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.

71




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 commenced operations on [      ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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

72




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 [     ]% (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

 

$[     ]

 

$

[     ]

 

 

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

If a Creation Unit is purchased or redeemed 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.

73




POWERSHARES FTSE RAFI BRAZIL PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Brazil Index (the “RAFI Brazil Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Brazil Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as Brazilian within FTSE’s country classification definition.  The FTSE RAFI Brazil Index is designed to track the performance of Brazilian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [            ], 2006, the FTSE RAFI Brazil Index consisted of approximately [     ] stocks of companies with market capitalizations of between $[    ] and $[    ] that were domiciled in Brazil or primarily listed on an exchange in Brazil.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Brazil Index.  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 FTSE RAFI Brazil Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Brazil Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Brazil Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Brazil Index in proportion to their weightings in the FTSE RAFI Brazil Index. 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 FTSE RAFI Brazil Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Brazil Index, purchase securities not in the FTSE RAFI Brazil Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Brazil Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Brazil Index.  The Fund may sell stocks that are represented in the FTSE RAFI Brazil Index in anticipation of their removal from the FTSE RAFI Brazil Index, or purchase stocks not represented in the FTSE RAFI Brazil Index in anticipation of their addition to the FTSE RAFI Brazil Index.

Index Methodology

The FTSE RAFI Brazil Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Brazil Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

74




Index Construction

(1)                                  The FTSE RAFI Brazil Index is comprised of Brazilian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index.

(2)                                  Using the stock universe of Brazilian companies of the FTSE RAFI Emerging Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest Asian stocks are then selected.  These will be the FTSE RAFI Brazil Index constituents.  Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Brazil 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 RAFI Brazil Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Brazil 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 RAFI Brazil 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 of the FTSE RAFI Brazil Index as would be the case if it purchased all of the stocks in the FTSE RAFI Brazil Index with the same weightings as the FTSE RAFI Brazil Index.

75




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 RAFI Brazil 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 this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risks of Investing in Brazilian Companies

The Brazilian government exercises significant control over the Brazilian economy.  Political and economic conditions in Brazil could adversely affect the performance of the Brazilian economy, and in turn, the securities in which the Fund invests.  The Brazilian government has historically actively intervened in the Brazilian economy, adjusting monetary policy, instituting price controls, conducting currency devaluations, instituting capital controls and limits on imports and exports to control inflation.  It is uncertain future reforms will be implemented by the Brazilian government with regard to monetary policy.  Such uncertainty may lead to increased volatility in the Brazilian securities markets.  In addition, the Brazilian economy is subject to currency fluctuation, and historically, Brazilian currency has periodically been devalued.  Brazil has historically experience high levels of inflation.  The Brazilian government has implemented various economic reforms and policies in attempt to control currency devaluation and inflation, however, there can be no assurance that inflation can be controlled or that Brazilian currency will not continue to devaluate relative to global currencies in the future and resulting uncertainty may contribute to volatility in the Brazilian securities markets.  Under Brazilian law, the government may impose temporary restrictions on currency conversion and repatriation of investments under certain economic conditions.  There is no assurance that the government will not take similar measures in the future.

76




Emerging Market Risk

 Investment in securities in emerging market countries involves risks not associated with investments in securities in developed countries.  Emerging markets are subject to greater market volatility, lower trading volume, political and economic instability, uncertainty regarding the existence of trading markets and more governmental limitations on foreign investment than more developed markets. In addition, securities in emerging markets may be subject to greater price fluctuations than securities in more developed markets.  There may be less information publicly available with regard to emerging market issuers and such issuers are not subject to the uniform accounting, auditing and financial reporting standards applicable to U.S. issuers.  There may be no single centralized securities exchange on which securities are traded in emerging market countries and the systems of corporate governance to which companies in emerging markets are subject may be less advanced than that to which U.S. issuers are subject, and therefore, shareholders such companies may not receive many of the protections available to shareholders in U.S. issuers.  Securities law in many emerging markets countries is relatively new and unsettled.  Therefore, laws regarding foreign investment in emerging market securities, securities regulation, title to securities, and shareholder rights may change quickly and unpredictably.  In addition, the enforcement of systems of taxation at federal, regional and local levels in emerging market countries may be inconsistent, and subject to sudden change.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [    ], 2007 and therefore does not have a performance history for a full calendar year.

77




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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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.

78




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

 

$[     ]

 

$

[     ]

 

 

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

If a Creation Unit is purchased or redeemed 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.

79




POWERSHARES FTSE RAFI CANADA PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Canada Index (the “RAFI Canada Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Canada Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as Canadian within FTSE’s country classification definition.  The FTSE RAFI Canada Index is designed to track the performance of Canadian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [            ], 2006, the FTSE RAFI Canada Index consisted of approximately [          ] stocks of companies with market capitalizations of between $[    ] and $[    ] that were domiciled in Canada or primarily listed on an exchange in Canada.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Canada Index.  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 FTSE RAFI Canada Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Canada Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Canada Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Canada Index in proportion to their weightings in the FTSE RAFI Canada Index. 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 FTSE RAFI Canada Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Canada Index, purchase securities not in the FTSE RAFI Canada Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Canada Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Canada Index.  The Fund may sell stocks that are represented in the FTSE RAFI Canada Index in anticipation of their removal from the FTSE RAFI Canada Index, or purchase stocks not represented in the FTSE RAFI Canada Index in anticipation of their addition to the FTSE RAFI Canada Index.

Index Methodology

The FTSE RAFI Canada Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Canada Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

80




Index Construction

(1)                                  The FTSE RAFI Canada Index is comprised of Canadian companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.

(2)                                  Using the stock universe of companies of the FTSE RAFI Developed ex US 1000 Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest Canadian stocks are then selected.  These will be the FTSE RAFI Canada Index constituents.  Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Canada 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 RAFI Canada Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Canada 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 RAFI Canada 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 of the FTSE RAFI Canada Index as would be the case if it purchased all of the stocks in the FTSE RAFI Canada Index with the same weightings as the FTSE RAFI Canada Index.

81




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 RAFI Canada 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, this may make them more sensitive to changing market conditions.]

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Canadian Securities Risk

The Canadian economy is highly dependent on foreign trade. Canada exports are largely concentrated in the natural resources sector, as Canada exports forest products, agricultural products, energy related products and mines and metals.  Therefore, changes in demand for natural resources, and the price levels of Canadian exports, may greatly affect the performance of the Canadian economy.  In addition, the United States is Canada’s largest trading partner and the largest investor in Canada.  As a result, the performance of the Canadian economy is dependent on the performance of the economy in the United States.  The Province of Quebec has demanded sovereignty from the Canadian government in the past, negatively impacting Canadian equity valuations and currency valuations, and there is not guarantee that the Province of Quebec will not make any further such demands in the future. 

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

82




Non-Diversified Fund Risk

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 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 commenced operations on [    ], 2007 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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.

83




(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 [     ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [     ]% 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 [     ]% (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

 

$[     ]

 

$

[     ]

 

 

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 $       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 $      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 $[            ] if the Creation Unit is redeemed after one year, and $[            ] if the Creation Unit is redeemed after three years.


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

84




If a Creation Unit is purchased or redeemed 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.

85




POWERSHARES FTSE RAFI CHINA PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates China Index (the “RAFI China Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI China Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as Chinese within FTSE’s country classification definition.  The FTSE RAFI China Index is designed to track the performance of Chinese companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                  ], 2006, the FTSE RAFI China Index consisted of approximately [             ] stocks of companies with market capitalizations of between $[    ] and $[    ] that were domiciled in China or primarily listed on an exchange in China.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI China Index.  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 FTSE RAFI China Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI China Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI China Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI China Index in proportion to their weightings in the FTSE RAFI China Index. 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 FTSE RAFI China Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI China Index, purchase securities not in the FTSE RAFI China Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI China Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI China Index.  The Fund may sell stocks that are represented in the FTSE RAFI China Index in anticipation of their removal from the FTSE RAFI China Index, or purchase stocks not represented in the FTSE RAFI China Index in anticipation of their addition to the FTSE RAFI China Index.

Index Methodology

The FTSE RAFI China Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI China Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

86




Index Construction

(1)                                  The FTSE RAFI China Index is comprised of B-shares, H-Shares and Red Chips of Chinese companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Emerging Index.

(2)                                  Using the stock universe of companies of the FTSE RAFI Emerging Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization. The largest Chinese stocks are then selected. These will be the FTSE RAFI China Index constituents. Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI China 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 RAFI China Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI China 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 RAFI China 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 of the FTSE RAFI China Index as would be the case if it purchased all of the stocks in the FTSE RAFI China Index with the same weightings as the FTSE RAFI China Index.

87




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 RAFI China 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, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Risks of Investing in Chinese Securities

The value of the securities of companies which derive the majority of their revenues from China is likely to be more volatile than that of other issuers.  The economy of China differs, often unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others.  Under China’s political and economic system, the central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership.  Since 1978, the Chinese government has been, and is expected to continue, reforming its economic policies, which has resulted in less direct central and local government control over the business and production activities of Chinese enterprises and companies.  Notwithstanding the economic reforms instituted by the Chinese government and the Chinese Communist Party, actions of the Chinese central and local government authorities continue to have a substantial effect on economic conditions in China, which could affect the public and private sector companies in which the Fund invests.  In the past, the Chinese government has from time to time taken actions that influence the prices at which certain goods may be sold, encourage companies to invest or concentrate in particular industries, induce mergers between companies in certain industries and induce private companies to publicly offer their securities to increase or continue the rate of economic growth, control the rate of inflation or otherwise regulate economic expansion.  It may do so in the future as well.  Such actions and a variety of other centrally planned or determined activities by the Chinese government could have a significant adverse effect on economic conditions in China, the economic prospects for, and the market prices and liquidity of, the securities of China companies and the payments of dividends and interest by China

88




companies.  In addition, expropriation, including nationalization, confiscatory taxation, political, economic or social instability or other developments could adversely affect the assets held by the China companies in which the Fund invests.

From time to time, certain of the companies comprising the Index may operate in, or have dealings with, countries subject to sanctions or embargoes imposed by the U.S. government and the United Nations and/or in countries identified by the U.S. government as state sponsors of terrorism.  One or more of these companies may be subject to constraints under U.S. law or regulations which could negatively affect the company’s performance, and/or could suffer damage to its reputation if it is identified as a company which invests or deals with countries which are identified as a company which are identified by the U.S. government as state sponsors of terrorism or subject to sanctions.  As an investor in such companies, the Fund will be indirectly subject to those risks.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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 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 commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 

89





(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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:

90




 

1 Year

 

3 Years

 

$[    ]

 

$[     ]

 

 

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 $[        ] 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 $[        ] 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 $[        ] if the Creation Unit is redeemed after one year, and $[        ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.]

91




POWERSHARES FTSE RAFI DEVELOPED MARKETS EX-US PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Developed Markets ex US 1000 Index (the “RAFI Developed Markets ex US Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Developed Markets ex US Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies originating in countries that are classified as “developed” within FTSE’s country classification definition, excluding the United States.  The FTSE RAFI Developed Markets ex US Index is designed to track the performance of the companies domiciled in developed markets with the largest fundamental value, selected from the constituents of the FTSE Developed ex US Large/Mid-Cap Indexes as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                  ], 2007, the FTSE RAFI Developed Markets ex US Index consisted of approximately [    ] stocks of companies with market capitalizations of between $[    ] and $[    ] that were domiciled in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Developed Markets ex US Index.  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 FTSE RAFI Developed Markets ex US Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Developed Markets ex US Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Developed Markets ex US Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Developed Markets ex US Index in proportion to their weightings in the FTSE RAFI Developed Markets ex US Index. 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 FTSE RAFI Developed Markets ex US Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Developed Markets ex US Index, purchase securities not in the FTSE RAFI Developed Markets ex US Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Developed Markets ex US Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Developed Markets ex US Index.  The Fund may sell stocks that are represented in the FTSE RAFI Developed Markets ex US Index in anticipation of their removal from the FTSE RAFI Developed Markets ex US Index, or purchase stocks not represented in the FTSE RAFI Developed Markets ex US Index in anticipation of their addition to the FTSE RAFI Developed Markets ex US Index.

92




Index Methodology

The FTSE RAFI Developed Markets ex US Index methodology is designed to track the performance of the companies with the largest fundamental value, selected from the constituents of the FTSE Developed ex US Large/Mid-Cap Indexes.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Developed Markets ex US Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Developed Markets ex US 1000 Index is comprised of companies with the largest fundamental value, selected from the constituents of the FTSE Developed ex US Large/Mid-Cap Indexes.

(2)                                  Using the stock universe of companies of the FTSE Developed ex US Large/Mid-Cap Indexes, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization. The largest stocks are then selected. These will be the FTSE RAFI Developed Markets ex US Index constituents. Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Developed Markets ex US Index.

93




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 RAFI Developed Markets ex US Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Developed Markets ex US 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 RAFI Developed Markets ex US 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 of the FTSE RAFI Developed Markets ex US Index as would be the case if it purchased all of the stocks in the FTSE RAFI Developed Markets ex US Index with the same weightings as the FTSE RAFI Developed Markets ex US 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 RAFI Developed Markets ex US Index.

Medium-Sized Company Risk

Investing in securities of 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 medium capitalization companies and the industries in which they are focused are still evolving and, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

94




Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

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 commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

95




(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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[    ]

 

$

[    ]

 

 

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 $       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 $[     ] 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


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

96




be $[                ] if the Creation Unit is redeemed after one year, and $[                ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

97




POWERSHARES FTSE RAFI DEVELOPED MARKETS EX-US SMALL PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Developed Markets ex-US Small Index (the “RAFI Developed Markets ex-US Small Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Developed Markets ex-US Small Index.  The Fund will normally invest at least 80% of its total assets in common stock of small capitalization companies originating in countries that are classified as “developed” within FTSE’s country classification definition.  The FTSE RAFI Developed Markets ex-US Small Index is designed to track the performance of non US-listed companies represented amongst the constituents of the FTSE Developed ex US Small Cap Index with the largest fundamental value, selected from the constituents of the FTSE Developed ex US Small Cap Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [               ], 2007, the FTSE RAFI Developed Markets ex-US Small Index consisted of approximately [          ] small capitalization stocks of companies with market capitalizations of between $[   ] and $[   ] that were domiciled in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Developed Markets ex-US Small Index.  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 FTSE RAFI Developed Markets ex-US Small Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Developed Markets ex-US Small Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Developed Markets ex-US Small Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Developed Markets ex-US Small Index in proportion to their weightings in the FTSE RAFI Developed Markets ex-US Small Index. 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 FTSE RAFI Developed Markets ex-US Small Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Developed Markets ex-US Small Index, purchase securities not in the FTSE RAFI Developed Markets ex-US Small Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Developed Markets ex-US Small Index or utilize various combinations of other available investment techniques, in seeking to track RAFI Developed Markets ex-US Small Index.  The Fund may sell stocks that are represented in the FTSE RAFI Developed Markets ex-US Small Index in anticipation of their removal from the FTSE RAFI Developed Markets ex-US Small Index, or purchase stocks not represented in the FTSE RAFI Developed Markets ex-US Small Index in anticipation of their addition to the FTSE RAFI Developed Markets ex-US Small Index.

98




Index Methodology

The FTSE RAFI Developed Markets ex-US Small Index methodology is designed to track the performance of the non U.S.-listed companies represented amongst the constituents of the FTSE Developed ex US Small Cap Index with the largest fundamental value.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Developed Markets ex-US Small Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Developed Markets ex-US Small Index is comprised of non US-listed companies with the largest fundamental value, selected from the constituents of the FTSE Developed ex US Small Cap Index.

(2)                                  Using the stock universe of companies of the FTSE Developed ex US Small Cap Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The smallest non-U.S. stocks are then selected.  These will be the FTSE RAFI Developed Markets ex-US Small Index.  Their weights in this Index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Developed Markets ex-US Small Index.

99




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 RAFI Developed Markets ex-US Small Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Developed Markets ex-US Small 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 RAFI Developed Markets ex-US Small 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 of the FTSE RAFI Developed Markets ex-US Small Index as would be the case if it purchased all of the stocks in the FTSE RAFI Developed Markets ex-US Small Index with the same weightings as the FTSE RAFI Developed Markets ex-US Small 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 RAFI Developed Markets ex-US Small Index.

Small Company Risk

Investing in securities of small capitalization 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, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

100




Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

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 commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged.

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(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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[        ]

 

$

[        ]

 

 

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 $         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 $         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


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

102




be $[                  ] if the Creation Unit is redeemed after one year, and $[                  ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

103




POWERSHARES FTSE RAFI EMERGING MARKETS PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Fundamental Emerging Markets Index (the “RAFI Emerging Markets Index “ or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Emerging Markets Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as emerging market within FTSE’s country classification definition.  The FTSE RAFI Emerging Markets Index is designed to track the performance of emerging market companies with the largest fundamental value, selected from the constituents of the FTSE Emerging Large/Mid-Cap Indexes as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [               ], 2007, the FTSE RAFI Emerging Markets Index consisted of approximately [             ] large and mid capitalization stocks of companies with market capitalizations between $[   ] and $[   ] that were domiciled in Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Emerging Markets Index.  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 FTSE RAFI Emerging Markets Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Emerging Markets Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Emerging Markets Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Emerging Markets Index in proportion to their weightings in the FTSE RAFI Emerging Markets Index. 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 FTSE RAFI Emerging Markets Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Emerging Markets Index, purchase securities not in the FTSE RAFI Emerging Markets Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Emerging Markets Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI Emerging Markets Index.  The Fund may sell stocks that are represented in the FTSE RAFI Emerging Markets Index in anticipation of their removal from the FTSE RAFI Emerging Markets Index, or purchase stocks not represented in the FTSE RAFI Emerging Markets Index in anticipation of their addition to the FTSE RAFI Emerging Markets Index.

Index Methodology

The FTSE RAFI Emerging Markets Index methodology is designed to track the performance of the emerging market companies with the largest fundamental value, selected from the constituents of the FTSE Emerging Large/Mid-Cap Indexes.  The equities are selected annually based on the following four

104




fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI Emerging Markets Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Emerging Markets Index is comprised of the emerging market companies with the largest fundamental value, selected from the constituents of the FTSE Emerging Large/Mid-Cap Indexes.

(2)                                  Using the stock universe of companies of the FTSE Emerging Large/Mid-Cap Indexes, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization. The largest emerging market stocks are then selected. These will be the FTSE RAFI Emerging Markets Index. Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Emerging Markets 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 RAFI Emerging Markets Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI

105




Emerging Markets 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 RAFI Emerging Markets 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 of the FTSE RAFI Emerging Markets Index as would be the case if it purchased all of the stocks in the FTSE RAFI Emerging Markets Index with the same weightings as the FTSE RAFI Emerging Markets 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 RAFI Emerging Markets Index.

Medium-Sized Company Risk

Investing in securities of 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 medium capitalization companies and the industries in which they are focused are still evolving and, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Emerging Markets Risk

The markets in which the FTSE RAFI Emerging Markets Index invests are considered by FTSE to be emerging markets.  Investment in securities in emerging market countries involves risks not associated with investments in securities in developed countries.  Emerging markets are subject to greater market volatility, lower trading volume, political and economic instability, uncertainty regarding the existence of trading markets and more governmental limitations on foreign investment than more developed markets. In addition, securities in emerging markets may be subject to greater price fluctuations than securities in more developed markets.  There may be less information publicly available with regard to emerging market issuers and such issuers are not subject to the uniform accounting, auditing and financial reporting standards applicable to U.S. issuers.  There may be no single centralized securities exchange on which securities are traded in emerging market countries and the systems of corporate governance to which

106




companies in emerging markets are subject may be less advanced than that to which U.S. issuers are subject, and therefore, shareholders such companies may not receive many of the protections available to shareholders in U.S. issuers.  Securities law in many emerging markets countries is relatively new and unsettled.  Therefore, laws regarding foreign investment in emerging market securities, securities regulation, title to securities, and shareholder rights may change quickly and unpredictably.  In addition, the enforcement of systems of taxation at federal, regional and local levels in emerging market countries may be inconsistent, and subject to sudden change.

In addition, the registration, clearing and settlement of securities transactions involving Russian issuers are subject to risks not normally associated with securities transactions in the United States and more developed markets.  Ownership of securities in Russian companies is evidenced by entries in a company’s share register (except where shares are held through depositories that meet the requirements of the Investment Company Act of 1940, as amended (the “1940 Act”)) and the issuance of extracts from the register or, in certain limited cases, by formal share certificates.  However, Russian share registers are frequently unreliable and the Fund could lose its registration through oversight, negligence or fraud.  Moreover, Russia lacks a centralized registry to record securities transactions and registrars located throughout Russia or the companies themselves maintain share registers.  Registrars are under no obligation to provide extracts to potential purchasers in a timely manner or at all and are not necessarily subject to effective state supervision.  In addition, while registrars are liable under law for losses resulting from their errors, it may be difficult for the Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration.  Although Russian companies with more than 1,000 shareholders are required by Russian law to employ an independent registrar, in practice, such companies have not always followed this law.  Because of this lack of independence of registrars, management of a Russian company may be able to exert considerable influence over who can purchase and sell the company’s shares by illegally instructing the registrar to refuse to record transactions on the share register.  Furthermore, these practices may prevent the Fund from investing in the securities of certain Russian companies deemed suitable by the Adviser and could cause a delay in the sale of Russian Securities by the Fund if the company deems a purchaser unsuitable, which may expose the Fund to potential loss on its investment.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

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.

107




HOW THE FUND HAS PERFORMED

The Fund commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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 [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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.

108




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

 

$[        ]

 

$

[        ]

 

 

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

If a Creation Unit is purchased or redeemed 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.

109




POWERSHARES FTSE RAFI EUROPE PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Europe Index (the “RAFI Europe Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Europe Index.  The Fund will normally invest at least 80% of its total assets in common stock of companies that are classified as European within FTSE’s country classification definition. The FTSE RAFI Europe Index is designed to track the performance of the European companies represented amongst the constituents of the FTSE Europe Developed Large/Mid-Cap indexes with the largest fundamental value, selected from the constituents of the FTSE Europe Developed Large/Mid-Cap indexes as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                ], 2007, the FTSE RAFI Europe Index consisted of approximately [   ] stocks of companies with market capitalizations of between $[   ] and $[   ] that were domiciled in Austria, Belgium, Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Europe Index.  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 FTSE RAFI Europe Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the RRAFI Europe Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Europe Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Europe Index in proportion to their weightings in the FTSE RAFI Europe Index. 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 FTSE RAFI Europe Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Europe Index, purchase securities not in the FTSE RAFI Europe Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Europe Index or utilize various combinations of other available investment techniques, in seeking to track RAFI Europe Index.  The Fund may sell stocks that are represented in the FTSE RAFI Europe Index in anticipation of their removal from the FTSE RAFI Europe Index, or purchase stocks not represented in the FTSE RAFI Europe Index in anticipation of their addition to the FTSE RAFI Europe Index.

Index Methodology

The FTSE RAFI Europe Index methodology is designed to track the performance of the companies represented among the constituents of the FTSE Europe Developed Large/Mid-Cap Indexes with the largest fundamental value.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  Equities are then weighted by each of these four fundamental measures. An overall weight is calculated for each firm by equally-weighting each

110




fundamental measure.  For companies that have never paid dividends, that measure will be excluded from the average.  Component stocks for the FTSE RAFI Europe Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Europe Index is comprised of the European companies with the largest fundamental value, selected from the constituents of the FTSE Europe Developed Large/Mid-Cap Indexes.

(2)                                  Using the stock universe of companies of the FTSE Europe Developed Large/Mid-Cap Indexes, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest European stocks are then selected.  These will be the FTSE RAFI Europe Index.  Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Europe 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 RAFI Europe Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Europe 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 RAFI Europe Index.

111




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 FTSE RAFI Europe Index as would be the case if it purchased all of the stocks in the FTSE RAFI Europe Index with the same weightings as the FTSE RAFI Europe 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 RAFI Europe Index.

Medium-Sized Company Risk

Investing in securities of 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 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.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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.

112




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 commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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

113




other trading expenses, taxes and extraordinary expenses) from exceeding [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[      ]

 

$

[     ]

 

 

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 $[      ] 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 $[      ] 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 $[   ] if the Creation Unit is redeemed after one year, and $[   ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

114




POWERSHARES FTSE RAFI EUROPE SMALL PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates Europe Small Index (the “RAFI Europe Small Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI Europe Small Index.  The Fund will normally invest at least 80% of its total assets in the common stock of small capitalization companies that are classified as European within FTSE’s country classification definition. The FTSE RAFI Europe Small Index is designed to track the performance of the European companies represented amongst the constituents of the FTSE Europe Developed Small-Cap Index with the largest fundamental value, selected from the constituents of the FTSE Europe Developed Small-Cap Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                ], 2007, the FTSE RAFI Europe Small Index consisted of approximately [   ] small cap stocks of companies with market capitalizations of between $[   ] and $[   ] that were domiciled in Austria, Belgium, Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom or primarily listed on an exchange in such countries.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI Europe Small Index.  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 FTSE RAFI Europe Small Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI Europe Small Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI Europe Small Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI Europe Small Index in proportion to their weightings in the FTSE RAFI Europe Small Index. 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 FTSE RAFI Europe Small Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI Europe Small Index, purchase securities not in the FTSE RAFI Europe Small Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI Europe Small Index or utilize various combinations of other available investment techniques, in seeking to track RAFI Europe Small Index.  The Fund may sell stocks that are represented in the FTSE RAFI Europe Small Index in anticipation of their removal from the FTSE RAFI Europe Small Index, or purchase stocks not represented in the FTSE RAFI Europe Small Index in anticipation of their addition to the FTSE RAFI Europe Small Index.

Index Methodology

The FTSE RAFI Europe Small Index methodology is designed to track the performance of the European companies represented amongst the constituents of the FTSE Europe Developed Small-Cap Index with the largest fundamental value.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  Equities are then weighted

115




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.  Component stocks for the FTSE RAFI Europe Small Index are selected from among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI Europe Small Index is comprised of European companies with the largest fundamental value, selected from the constituents of the FTSE Europe Developed Small-Cap Index.

(2)                                  Using the stock universe of companies of the FTSE Europe Developed Small-Cap Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization.  The largest European stocks are then selected.  These will be the FTSE RAFI Europe Small Index.  Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI Europe Small 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 RAFI Europe Small Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI Europe Small 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 RAFI Europe Small Index.

116




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 FTSE RAFI Europe Small Index as would be the case if it purchased all of the stocks in the FTSE RAFI Europe Small Index with the same weightings as the FTSE RAFI Europe Small 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 RAFI Europe Small Index.

Small Company Risk

Investing in securities of small capitalization 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, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

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.

117




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 commenced operations on [    ], 2006 and therefore does not have a performance history for a full calendar year.

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

 

 

%

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

 

 

%

Other Expenses

 

 

%

Total Gross Annual Fund Operating Expenses

 

 

%

Fee Waivers and Expense Assumption(6)

 

 

%

Total Net Annual Fund Operating Expenses

 

 

%

 


(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 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

118




other trading expenses, taxes and extraordinary expenses) from exceeding [    ]% of average net assets per year, at least until April 30, 2008.  The offering costs excluded from the [    ]% 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 [    ]% (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

 

$[      ]

 

$

[       ]

 

 

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 $[        ] 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 $[        ] 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 $[   ] if the Creation Unit is redeemed after one year, and $[   ] if the Creation Unit is redeemed after three years.

If a Creation Unit is purchased or redeemed 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.

119




POWERSHARES FTSE RAFI FRANCE PORTFOLIO

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

Investment Objective

The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the equity index called the FTSE Research Affiliates France Index (the “RAFI France Index” or “Underlying Index”).

Principal Investment Strategies

The Adviser will seek to match the performance of the FTSE RAFI France Index.  The Fund will normally invest at least 80% of its total assets in common stocks of companies that are classified as French within FTSE’s country classification definition.  The FTSE RAFI France Index is designed to track the performance of the French companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index as determined by FTSE (the “Index Provider”).  The equities are selected and weighted based on the following four fundamental measures of firm size: book value, income, sales and dividends.  As of [                ], 2007, the FTSE RAFI France Index consisted of approximately [   ] stocks of companies with market capitalizations of between $[    ] and $[    ] issued by companies domiciled in France or primarily listed on a French exchange.  The Fund will normally invest at least 90% of its total assets in common stocks that comprise the FTSE RAFI France Index.  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 FTSE RAFI France Index is adjusted annually and the Fund, using an “indexing” investment approach, attempts to replicate, before expenses, the performance of the FTSE RAFI France Index.  The Adviser seeks correlation over time of 0.95 or better between the Fund’s performance and the performance of the FTSE RAFI France Index; a figure of 1.00 would represent perfect correlation.  The Fund generally will invest in the stocks comprising the FTSE RAFI France Index in proportion to their weightings in the FTSE RAFI France Index. 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 FTSE RAFI France Index as a whole.  There may also be instances in which the Adviser may choose to overweight another stock in the FTSE RAFI France Index, purchase securities not in the FTSE RAFI France Index which the Adviser believes are appropriate to substitute for certain securities in the FTSE RAFI France Index or utilize various combinations of other available investment techniques, in seeking to track the FTSE RAFI France Index.  The Fund may sell stocks that are represented in the FTSE RAFI France Index in anticipation of their removal from the FTSE RAFI France Index, or purchase stocks not represented in the FTSE RAFI France Index in anticipation of their addition to the FTSE RAFI France Index.

Index Methodology

The FTSE RAFI France Index methodology is designed to track the performance of the French companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.  The equities are selected annually based on the following four fundamental measures of firm size: book value, income, sales and dividends.  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.  Component stocks for the FTSE RAFI France Index are selected from

120




among the companies with the highest-ranking cumulative score (“fundamental measure”) within the universe.

Index Construction

(1)                                  The FTSE RAFI France Index is comprised of the French companies with the largest fundamental value, selected from the constituents of the FTSE RAFI Developed ex US 1000 Index.

(2)                                  Using the stock universe of companies of the FTSE RAFI Developed ex US 1000 Index, their fundamental values are calculated based on the following factors:

(a)                                  The percentage representation of each stock using only sales figures.

(b)                                 The percentage representation of each stock using cash flow figures.

(c)                                  The percentage representation of each stock using book value.

(d)                                 The percentage representation of each stock using dividends. (A stock that has not paid a dividend in the past five years will have a percentage representation of zero.)

(3)                                  The stocks are then ranked in descending order of their FTSE RAFI fundamental values and the FTSE RAFI fundamental value of each company is divided by its free-float adjusted market capitalization. The largest French stocks are then selected. These will be the FTSE RAFI France Index constituents. Their weights in this index will be set proportional to their fundamental values.

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 an exchange.  You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the FTSE RAFI France 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 RAFI France Index for a number of reasons.  For example, the Fund incurs a number of operating expenses not applicable to the FTSE RAFI France 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 RAFI France 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 of the FTSE RAFI

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France Index as would be the case if it purchased all of the stocks in the FTSE RAFI France Index with the same weightings as the FTSE RAFI France 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 RAFI France 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, this may make them more sensitive to changing market conditions.

Foreign Investment Risk

Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities.  These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability.  As the Fund will invest in securities denominated in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s returns.  Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. securities, and therefore, not all material information will be available.  Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments.  In addition, the Fund may not receive shareholder communications or be permitted to vote the depository receipts that it holds, as the issuers may be under no legal obligation to distribute them.

Industry Risk

To the extent that the Fund’s investments are concentrated within any one industry, or group of related industries, any factors detrimental to the performance of such sector will disproportionately impact the Fund’s NAV.  These detrimental factors may include additional governmental regulation, including the increased cost of compliance, inflation, an increase in the cost of raw materials, an increase in interest rates and technological advances.  Investments focused in a particular sector are subject to greater risk and are more greatly impacted by market volatility than more greatly diversified investments.

Non-Diversified Fund Risk

The Fund is considered