PowerShares Makes Big Fundamental Bet

WisdomTree Investments' recent launch of 20 exchange-traded funds that track indices weighted by fundamentals, rather than market cap, generated a lot of discussion about these new investment vehicles.

This week, the hype is mounting as PowerShares Capital Management launches 10 new products based on the FTSE RAFI fundamental indices.

The PowerShares ETFs, which began trading Wednesday on the Nasdaq, have sparked two main questions among investors: Can fundamentally weighted ETFs outperform traditional market-cap weighted ETFs, and how will this newest batch of PowerShares ETFs compare with the fundamentally weighted WisdomTree ETFs?

"This is really going to be the bottom line in what happens with the performance of these products," says Ronald DeLegge, publisher and editor of ETFguide.com.

"Backtesting has shown some stellar returns, but this is real-life performance," he adds.

While there is some actual history, there's not much to go by.

PowerShares launched a lone fundamentally weighted ETF in December, the FTSE RAFI US 1000 Portfolio(PRF Quote). Year to date, it has outperformed the S&P 500 by about 2.4 percentage points, according to Morningstar.com.

WisdomTree's 20 fundamentally weighted ETFs launched in June, so it's too early to get a good measure of their performance, though Luciano Siracusano, director of research at WisdomTree, says the indices that the ETFs track "are consistently outperforming the comparable cap-weighted indices."

But even considering their scant trading history, PowerShares president Bruce Bond says there is good reason to believe fundamentally weighted ETFs will outperform market-cap weighted ETFs.