The cost of capital

Often ratios are used for this purpose."

This all sounds pretty impressive but let's deconstruct this approach further. Constructing indexes based on this methodology, obviously customized for proprietary Intellidex purposes, does alter typical index construction. Remember typical index construction just evaluates its constituent members by market capitalization and weights them within the index accordingly rebalancing on a schedule quarterly, semiannually, or annually.

With new PowerShares products, the Intellidex Indexes have been back-tested as to efficacy. However, back-testing can often suffer from the dangers of "data mining'' or "curve-fitting," two citizens well-represented in the densely populated computational classification of ''Garbage in, Garbage out.''

Data mining as defined by is the identification or extraction of relationships and patterns from data using computational algorithms to reduce, model, understand, or analyze data. The automated process of turning raw data into useful information by which intelligent computer systems sift and sort through data, with little or no help from humans, to look for patterns or to predict trends.

Christian Schaer, head of Risk & IT, Agora Capital Services SA, defines ''curve-fitting or data mining as the art of drawing conclusions based on past information. When applied to an investment scheme or trading strategy, history shows that [too] often such conclusions do not hold true once they are implemented.''

So, there's a fine line between optimizing and curve-fitting. For new schemes such as those utilized by PowerShares and their Intellidex Indexes it's probably the wiser course to wait and see how these indexes perform compared to conventional indexes over different market cycles. This could take years, but for investors who have a prove it attitude, that may be the most prudent choice. It's important to note that the first handful of these PowerShares products now have 3-year-plus track records and the news is good: They've outperformed their benchmarks by enough to earn a Morningstar 5-star ETF rating. But they also were launched close to the market bottom of 2000-2002.

On the other hand, PowerShares has launched some sector indexes that aren't available in conventional form. These might include Water, Alternative Energy and Microcap indexes paired with associated ETFs for example. If these types of sectors appeal to you, then these ETFs may be your only choice.

PowerShares offerings are a bridge between active management and conventional indexing. It's a sure thing Jack Bogle wouldn't care for them.

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