While I tend to favor iShares an investment tool because of the wide menu and country specific options they provide investors, I have to say that I am increasingly impressed with the new and fast-growing Powershares family of ETFs and will be adding two of them to portfolios this month. Powershares also address one weakness of iShares which is that they track indexes that market cap weighted.

In other words, the weighting of a company in a particular ETF is dependent on the value of its outstanding shares. This means that the bigger companies tend to affect the ETFs performance much more than the smaller companies. Of course, big doesnt always mean better. Powershares essentially creates its own indexes based on rules-based quantative analysis that they refer to as intelligent indexes.

This seems to me to be more useful than blindly following market cap weighted indexes. There are two Powershares that I particularly like at this point. The first is a biotech Powershare (PBE) that contains 30 biotech companies. If its holdings were weighted by market cap, two companies, Amgen and Genentech would account for more than 60% of its holdings.

Instead your exposure is spread among 30 different companies with no company accounting for more than 5% of the total. 30% of your exposure is to large cap companies, 26% is to mid-cap companies and 43% is to small cap companies. The biotech Powershare is an aggressive position so dont get carried away. I think it is a smart play on the tremendous opportunities for capital appreciation in the biotech industry which is showing some momentum after trading sideways since early 2004. The annual fee is only 0.60%.

The other Powershare that I like is the International Dividend Achievers Powershare which contains 42 ADRs traded on U.S. exchanges. I am usually not a big fan of ADRs since they usually trade at a premium to the underlying security but they do offer some comfort to investors since they meet U.S. reporting requirements and can be easily purchased on U.S. exchanges.

The ADRs in this Powershare have to pass a stiff test: five fiscal years in a row of increased dividends. Again the top holdings are no more than 5% of the total index and so you get great diversification. One problem with the most widely used international index, the MSCI Europe Asia & Far East Index (EAFE) is its concentration in Japan and the United Kingdom which account for almost 50% of the total index.

Meanwhile exposure to promising countries such as Ireland and Hong Kong are less than 2%. Last year, the Powershares index beat the MSCI EAFE index by 7% and companies in the index averaged a 29% return on equity. The index is re-balanced quarterly and has an annual fee of 0.50%. Right now 67% of the companies in the index are large cap, 20% are mid-cap and 13% are small cap companies.

For an unconventional approach that challeges market cap indexing, tap into the Powershares edge.