Fund industry innovator PowerShares Capital is seeking SEC approval for a new, hybrid type of fund. While PowerShares has been a specialist in ETFs, including innovations such as fixed income ETFs, the firm lacks the scale to compete with conventional ETF products. That has led it to explore new options.

This time, PowerShares is trying to create a closed-end fund that would automatically convert to an ETF if it trades at more than a 3 percent discount for more than a month. That structure promises to prevent a discount from ever developing; as arbitrageurs would be able to count on the open ending of the fund when it converted to an ETF should a discount develop.

The structure would also likely lower PowerShares' costs since it would be simpler to operate a closed-end fund in place of an ETF. PowerShares has also turned to little-known Zacks to provide the index upon which the fund will be based.

The fund is registered as the PowerShares Zacks Large Cap ACE Fund.

PowerShares already sponsors 11 ETFs with $800 million in assets.  

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