The advent of Non-Transparent ETFs

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1 Deutsche Bank Markets Research North America United States Synthetic Equity & Index Strategy US ETF Education Series Date 17 November 2014 The advent of Non-Transparent ETFs ETF Darwinism: Theory of ETF Evolution From small beginnings to a prosperous present, and from a prosperous present onwards. What is an ETF? ETFs are open-ended funds which are listed on an exchange and offer intraday dual liquidity to access diversified investments in a transparent, cheap, and tax efficient way. The ETF fund structure is a fund structure technology We believe that one way to think of ETFs is as a fund structure technology, therefore ETFs can be seen as the natural evolution of the fund industry, similar to what color TV was to black & white TV. However, their success has not only been due to their technological advantages, but most importantly because of the new value propositions that have been created around ETFs. Core to its efficient functionality has been the in-kind creation/redemption process. What is a Non-Transparent ETF? Non-Transparent ETFs are the latest attempt from the traditional active asset management industry to access the growing ETF industry. A non-transparent ETF seeks to overcome the limitations of Active ETFs which require managers to disclose their portfolio holdings on a daily basis, while still retaining some of the tax advantages of the ETF structure and trading capabilities. There have already been a few proposals for Non-transparent ETFs presented by asset managers such as BlackRock, Precidian investments, and Eaton Vance. Most recently, the SEC approved the proposal of Eaton Vance to introduce a new type of investment company called Exchange Traded Managed Fund (ETMF). The recent Eaton Vance proposal approval has a potential to be a game changer for mutual funds, but not for ETFs The recent Eaton Vance s SEC approval to offer ETMFs is definitely a significant development within the non-transparent ETF space. However it is not equal to a sure formula for success. ETMFs are not ETFs, and we do not believe that they will be competing against ETFs. Actually we believe that ETMFs will be competing directly with traditional active mutual funds, against which they would offer significant tax advantages. Although we believe that eventually traditional active mutual funds should migrate and evolve towards more efficient structures such as ETMFs, we do not believe that a new structure will solve all of the main structural issues affecting the active mutual fund industry such as high costs and underperformance relative to passive benchmarks. Author Sebastian Mercado Strategist (+1) sebastian.mercado@db.com Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MCI (P) 148/04/2014.

2 Table Of Contents First there were ETFs, and then?... 3 What is an Exchange Traded Fund (ETF)?... 3 Non-Transparent ETFs... 7 From passive to active ETFs... 7 Beyond Active ETFs... 8 Page 2

3 # of Users (million) $AUM (billion) 17 November 2014 First there were ETFs, and then? What is an Exchange Traded Fund (ETF)? What is really the ETF revolution? ETFs are not just a passive management phenomenon, and to think that their growth has been due to a passive revolution would be very naive. After all, there had already been index mutual funds in existence for long time before the first ETF. Alternatively, others could think that maybe the growth of ETFs was due to their ability to trade during the day, but again, there had been close-end funds in existence for a while as well. In our opinion, ETF growth has been driven by globalization. In the last 25 years or so, technology has been able to redefine the world in which we live. Nowadays, technology has allowed us to be more interconnected than ever before and information is at our fingertips in almost every moment. The way we communicate, the way we socialize, the way we purchase things, the way we study, the way doctors operate, and many other aspects of daily life have been redefined thanks to technology and the way people use it. Therefore, why is it so difficult to understand that the way people invest has also changed? If you are still wondering, the following chart should provide some food for thought it shows the correlation of ETF asset growth against global internet user growth. The correlation is an astonishing Figure 1: Historical Global Internet user growth vs. US ETF asset growth 3,000 2,500 2,000 1,500 1, # of Internet Users (lhs) ETF assets (rhs) Source: Deutsche Bank, Internet World stats, International Communications Union, Bloomberg Finance LP. ETF Definitions and Characteristics More specifically, an ETF is an open-ended investment company registered under the Investment Company Act of ETFs are similar to traditional mutual funds, but they are listed and traded on an exchange like close-end funds. However, ETFs are both different from mutual funds and close-end funds. Actually, we believe that one way to think of ETFs is as a fund structure The ETF wrapper is a fund structure technology Page 3

4 technology, therefore ETFs can be seen as the natural evolution of the fund industry, similar to what color TV was to black & white TV. As we mentioned before, ETFs are similar to mutual funds and close end funds, but they overcome some significant limitations of each of these fund structures. The following are some of the main characteristics of an ETF: Fund: First, ETFs are funds. Because ETFs are investment companies registered under the Investment Company Act of 1940, they are funded investment pool vehicles where the fund shareholders own the assets of the pool in proportion to the fund shares they own. In addition, ETFs comply with fund diversification rules and keep their assets under a third party custodian, just like other fund structures. Open-ended: ETFs allowed the continuous issuance and redemption of fund shares. This is done via a very unique process which is called the creation/redemption process. This process is different from mutual funds in the sense that creations/redemptions happen in blocks of shares and can be performed in-kind and, in few cases, in cash as well; mutual funds issue/redeem fund shares in cash and in single units. Close-end funds, as their name suggests, are closed to continuous issuance/redemption of fund shares; follow-on offerings of fund shares are a possibility, but they are more of the exception than the rule. Because creation/redemption is such a key characteristic of the ETF wrapper, we will revisit this concept in more detail later in the report. Exchange-Traded: ETFs are listed on a designated exchange and need to comply with all applicable exchange requirements. Thus unlike mutual funds, ETFs not only can be executed at end-of-day NAV but they can also be accessed during the exchange s normal market hours at a market price. ETFs intraday market price is determined by market forces of supply and demand like stock prices, however because ETFs represent a basket of securities their price is also related and dependant on the prices of the underlying securities in the basket like close-end funds; however unlike close end funds, ETFs are able to keep their price aligned with their NAV via the process of creation/redemption. Liquidity: ETFs draw liquidity from two sources. The first line of liquidity is the liquidity of the underlying stocks of the ETF basket accessed via the creation/redemption process often referred to as the primary market. The second line of liquidity comes as the ETF develops a secondary market for the trading of its shares. Moreover, because ETFs can be shorted some products can also develop significant liquidity on the short side. Tax efficiency: ETFs are a more tax-efficient fund structure because of two main reasons: (1) the in-kind creation/redemption process, and (2) passive strategies. Most fund structures face taxable events whenever they need to rebalance their portfolios or manage cash flows into or out of the fund. However, the in-kind creation/redemption process allows ETFs to avoid unnecessary taxable events and to manage the cost basis of the securities in their portfolio in a more efficient way; thus most ETFs that are managed in an efficient way are very unlikely to pay capital gains distributions. Furthermore, passive strategies usually have lower turnover than Page 4

5 active strategies, and hence generate a lower tax burden from having a lower number of taxable events; because most ETFs had been following passive strategies until now, people have made the connection of this tax advantage to ETFs, but the truth is that index mutual funds would also have this tax edge. Transparency: All ETFs are transparent. This transparency comes in many forms: (1) all ETFs like many other funds have stated investment objectives, (2) all ETFs are required to disclose their holdings on a daily basis 1, and (3) given than most ETFs followed a stated index they invest in a way that is predictable and in accordance to known methodologies. Passive and active ETFs would provide transparency by combining some or all of the previously mentioned reasons. Cost: ETFs have usually been deemed as cheap products. This has been mostly a consequence of passive strategies. Because most ETFs follow rule-based indices and try to deliver beta, their cost is much lower than active strategies that require more intensive research and employ sophisticated models to deliver alpha. Another aspect, not so obvious to many, is that ETFs also offer savings to the fund shareholders by protecting them from some of the fund s trading costs. This aspect probably requires further explanation. For example, in a mutual fund whenever the fund creates new shares or redeems existing shares the fund needs to buy or sell shares in order to fulfill the required operation; this execution has a cost which is born by the fund (i.e. at the expense of the fund shareholders). On the other hand, creation/redemption of ETF shares happens in-kind and therefore it is the new or the departing investor who bares the expense of the execution, and not the existing fund shareholders. Finally, some ETFs can develop so much liquidity on their secondary market line so that the ETF becomes cheaper to trade the asset class than the basket of securities. Given the characteristics we have reviewed, the following definition would also be appropriate: ETFs are open-ended funds which are listed on an exchange and offer intra-day dual liquidity to access diversified investments in a transparent, cheap, and tax efficient way. Reasons behind ETF success History has shown that in every industry, technology on its own is not enough to sustain long-term success; basically, you also need to create new value with the new technology. Therefore we believe that the growth of ETFs has been due to two main factors: (1) its fund structure technological advantage, and (2) the investment strategies they have allowed to implement. In the beginning ETFs allowed investors to implement strategic asset allocation strategies in transparent, liquid, and efficient ways. But as the world became more globalized and the industry developed, ETFs began to fuel the introduction of a new investment paradigm shifting away from a stock-picking alpha world to an asset-allocation-picking alpha world. Nowadays, the growth of ETFs is being significantly driven by an active management revolution that many refer to as Tactical Asset Allocation (TAA), which is nothing else than active management at the asset allocation level. In addition, along their main asset allocation usage, some few ETFs also developed some futures-like ETFs are open-ended funds which are listed on an exchange and offer intra-day dual liquidity to access diversified investments in a transparent, cheap, and tax efficient way. 1 Vanguard ETF share class is the only exception to this rule they do it monthly. However they do provide daily composition files for authorized participants. Page 5

6 characteristics and they became what we call pseudo futures 2 ETFs. The pseudo futures ETFs offer additional value propositions to investors beyond asset allocation, most frequently in the form of efficient and liquid vehicles to implement risk management and cash management functions. Thus we can see that the growth and success of ETFs goes far beyond a new fund structure technological advantage. ETF creation and redemption process The creation and redemption in-kind process is at the center of ETF technology. ETF shares are created in blocks of shares called creation units. Usually a creation unit is a group of 50,000 shares (about $2m-$10m). ETF shares can only be created in multiples of creation units, no fractional creations or redemptions are allowed. A creation unit has an equivalent basket of securities, each with specific weights, that needs to be gathered in order to process a creation (creation basket) or redemption (redemption basket). Thus, the basket of securities and the ETF shares are fungible when traded at creation unit multiples. Only Authorized Participants (AP) can request creations or redemptions of ETF shares. An AP is a large financial instution (usually a large broker dealer) that has entered into an special agreement with an ETF sponsor in order to be able to submit requests for creations and redemptions. APs receive a daily file with the respective composition of a creation unit for the day called creation basket. In most cases the creation basket is the same than the portfolio composition and the redemption basket, but in few cases the creation basket could differ both from the redemption basket and portfolio composition. The in-kind process allows APs to deliver to or receive from the ETF sponsor securities in-specie rather than cash. Because there is no cash transaction, but rather a transfer of securities only, there is no taxable event for the fund in the in-kind transactions between APs and the ETF sponsor. Furthermore, because the creation/redemption baskets are known to the APs and they are fungible with the ETF shares in the right creation unit multiple, APs can use the creation/redemption process to provide primary and secondary market liquidity, and to keep the price of the ETF in line with the NAV by performing arbitrage operations when needed. 2 A few examples of pseudo futures ETFs are: SPY, IWM, the 9 US Select Sector SPDRs, QQQ, FXI, EWZ, RSX, and EEM to name a few. Page 6

7 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 CAGR AUM $Billion as % of MF AUM Net cash flows $Billion 17 November 2014 Non-Transparent ETFs From passive to active ETFs ETFs have been one of the fastest growing areas within the asset management industry during the last 15 years. From their beginnings as passive products that provided market access all the way up to the recent developments in the active space which offer access to more sophisticated strategies, the growth of ETFs has been so significant that currently they have come to similar asset levels than hedge funds and index mutual funds in the US, while continuing to win market share away from traditional active mutual funds. Moreover, the departure of assets from active mutual funds has been so significant that it has become even harder for traditional asset managers to ignore this little and obscure new product called ETF. Therefore nothing describes the approach the traditional asset management industry has taken towards ETFs better than the following phrase: if you can t beat them, join them. Figure 2: Historical asset growth of US investment vehicles 40% 5 Year 10 Year 15 Year 35% 30% Beta Alpha 25% Figure 3: ETF assets as % of Mutual Fund assets 2, % 1, % 1,600 ETF - lhs ETV - lhs 12.0% 1,400 ETF/MF % - rhs ETP/MF % - rhs 10.0% 1,200 Figure 4: Equity ETF flows vs. Equity Long Term Mutual Fund flows 1,200 LT MF 1,000 ETF % 15% 10% 1, % 6.0% 4.0% % 0% Index MFs ETFs Total Passive Active MFs Hedge Funds % 0.0% (200) Source: Bloomberg Finance LP, Barclay Hedge, Deutsche Bank. Data as of end of 2013 Source: Deutsche Bank, ICI, Bloomberg Finance LP. Data as of end of August 2014 Source: Deutsche Bank, Bloomberg Finance LP, ICI. Data as of end of August 2014 Then, after accepting that ETFs are here to stay, the question for traditional asset managers is what would be the best way to participate in this revolution? There have been several different ways traditional asset managers have tried to enter the ETF industry, some like BlackRock and Invesco have bought their way in, others like Vanguard decided to expand their already existing model, others like Pimco, Fidelity, JP Morgan and Franklin Templeton decided to start their own from scratch, others like MFS, Western Asset Management, BlackStone, and DoubleLine have partnered with existing ETF issuers, and many others such as Goldman Sachs, Neuberger Berman, T. Rowe Price, Janus Capital, Principal Financial Group, and Columbia Management Investment Advisers have been preparing themselves by filing exemptive reliefs with the SEC to issue Active ETFs. For many the filing for exemptive relief to issue Active ETFs has been more a way of preparing themselves from a legal perspective than a way to really develop a strategy to enter the ETF industry. As a matter of fact, Active ETFs have a bit over $10bn in assets in the US and only represent a tiny fraction of the more than $1.8 trillion invested in US-listed ETFs. Furthermore, most of the traditional asset managers have built their businesses around active and secretive strategies; therefore although Active ETFs would allow them to dispose of the need to follow an index, the current active exemptive relief for active ETFs would still require them to disclose their holdings on a daily basis. Page 7

8 The latter requirement has been probably the major stumbling block for traditional asset managers, as it would require them to share their secret sauce with the public, something that would be in direct conflict with their whole reason of existence as active managers. Beyond Active ETFs Given the constrains of the Active ETF model, several asset managers have recently proposed different models for what the industry have called Non- Transparent ETFs. The main objective of the Non-Transparent ETF proposals is to be able to keep most of the benefits of the ETF fund technology, while at the same time protecting the confidentiality of the portfolio holdings. The main proposals have been those presented by BlackRock, Precidian, and Eaton Vance 3. The BlackRock and Precidian model BlackRock and Precidian Investments filed similar non-transparent ETF proposals with the SEC. In their application documents they proposed the introduction of a blind trust structure to the creation process which should allow non-transparent ETFs to avoid the requirement of daily holdings disclosure, while at the same time maintaining trading efficiency and protecting investors from any type of manipulation that would benefit one group over another. Under their model, the blind trust would act as a liaison between the fund and APs, working on behalf of the APs and undertaking the in-kind transactions at the blind trust level. On October 21st, 2014 the SEC announced that it intended to deny the proposals from Precidian and BlackRock by stating the following: the Commission preliminarily believes that the specific features proposed by the Applicants that would cause the proposed ETFs to operate without transparency fall far short of providing a suitable alternative to the arbitrage activity in ETF shares that is crucial to helping keep the market price of current ETF shares at or close to the NAV per share of the ETF. Accordingly, the Commission preliminarily believes that it is not in the public interest or consistent with the protection of investors or the purposes fairly intended by the policy and provisions of the Act to grant the exemptive relief under section 6(c) that the Applicants seek. 4 By November 14th, 2014 both BlackRock and Precidian Investments had withdrawn their applications proposing their versions of non-transparent ETFs. The Eaton Vance model: Exchange Traded Managed Fund (ETMF) Eaton Vance filed an application seeking exemptive relief for offering Exchange Traded Managed Funds (ETMFs) on March 2013, followed by two amendments in September 2013 and January The first thing we need to understand from this application is that this is not an ETF. However, the proposal seeks to maintain some of the advantages of the ETF structure, while ETMFs are not ETFs 3 For more details refer to the following SEC releases: Release No ; File No. SR-NYSEArca dated February 20th, 2014; Investment Company Act Release No ; dated October 21st, 2014; Investment Company Act Release No ; dated October 21st, 2014; Release No ; File No. SR-NASDAQ dated March 6th; 2014; Release No ; File No. SR- NASDAQ dated November 7th, Ibid. Page 8

9 at the same time providing the desired removal of the requirement of daily holdings disclosure that active managers want to avoid. ETMFs are a new type of open-end management investment company registered under the Investment Company Act of ETMF shares: (1) represent fractional ownership of the assets held by the investment company, (2) are issued and redeemed in aggregate unit quantities in exchange of a portfolio of securities and/or cash ( Composition File ) that represent a value per Share equal to the ETMF NAV, and (3) are traded on an Exchange using a new trading protocol called NAV-Based trading. The only real new feature is the concept of NAV-Based trading. The following excerpt from the notice of application from the SEC explains this process in the following way: ETMF Shares would trade on Nasdaq using a new trading protocol called NAV-Based Trading. In NAV-Based Trading, all bids, offers and execution prices would be expressed as a premium/discount (which may be zero) to the ETMF s next determined NAV (e.g., NAV-$0.01; NAV+$0.01). An ETMF s NAV would be determined each business day, normally as of 4:00 p.m. Eastern Time. Trade executions using NAV-Based Trading would be binding at the time orders are matched on Nasdaq s facilities, with the transaction prices contingent upon the determination of the ETMF s NAV at the end of the business day. Another aspect that is different, but not new 5, is the idea that the Composition File which would be provided to APs for creating or redeeming ETMF Shares would not represent exactly the portfolio membership, but rather a sample basket of securities within the portfolio with weights that do not necessarily match the weights of the same securities in the portfolio. How would an ETMF be different from an ETF? In order to understand more clearly how ETMFs would be different from ETFs, we can examine each of the ETF characteristics as described earlier in this report. Fund: ETMFs are funds, just like ETFs, and therefore there are no significant differences in this aspect. Open-ended: ETMFs are also open-ended and allow in-kind creation/redemption of shares. Hence there is no significant difference on this aspect either. Exchange-Traded: although ETMFs would be listed and traded on an exchange just like ETFs, their price would not be determined by the market forces of supply and demand, the intra-day value of its constituents, or the arbitrage activity of market participants. Actually ETMFs would trade at NAV +/- a premium or discount, which in turn would be determined by market forces of supply and demand. This trading format would basically almost guarantee an end-of-day NAV execution, and would probably remove most of the pricing discovery capabilities of ETFs. In addition, because the final execution price of an ETMF would be unknown until the end of the day, the ability to trade 5 Some ETFs provide basket of securities which do not include the full list of securities in the fund s portfolio, or the exact weights of the securities in the portfolio. Examples of this practice can be found among High Yield ETFs (e.g. JNK and HYG). Page 9

10 intra-day becomes less relevant and merely transactional, just like the current way mutual funds are transacted. Liquidity: although in theory ETMFs would also offer dual lines of liquidity, it is hard to believe that they would develop enough secondary market liquidity given that their intra-day trading ability is meaningless from a pricing perspective (i.e. they could not access intra-day prices). Actually, transacting ETMFs on an intra-day basis would be a transaction that would require the investor to assume the market risk of the transaction until the end of the day. In addition, given that the trading of ETMFs would be merely transactional, it is difficult to envision the right amount of incentives for market makers and liquidity providers to get involved in the daily trading or market making activities of ETMFs in a significant way as they have done so in the ETF space. Moreover, it is even less likely that ETMFs would develop any significant short side liquidity. Tax efficiency: we would expect ETMFs to offer most of the tax efficiencies coming from the in-kind creation/redemption process just like ETFs. However, given that they would be following active strategies they are expected to be subject to a larger number of taxable events than most ETFs, and therefore would probably be still less efficient than ETFs. ETMFs managed in an efficient way, however, should be more tax-efficient than traditional active mutual funds. Transparency: this is one of the main differences with ETFs. It is expected that ETMFs would have a stated investment objective, but they intend to be non transparent, so we would expect their holding disclosure to be more in line with current traditional active mutual funds disclosures than with ETFs ones. Cost: we would not expect ETMFs to be cheaper than ETFs, but probably somewhere in between active ETFs and active mutual funds. Given the in-kind creation/redemption process we would expect ETMFs to also offer savings to the fund shareholders by protecting them from some of the fund s trading costs. However, we do not expect ETMFs to develop the level of secondary market liquidity required for the ETMF to trade cheaper than its basket. What can we expect from ETMFs as an investment vehicle? We hope that by this point readers are able to understand that the success of ETFs has not been just because of their fund structure technological advantages, but also because of the development of the new asset allocation paradigm, and the different usages investors found for ETFs along the way. Therefore we would expect the following from ETMFs. ETMFs would not be competitors of ETFs. Both vehicles would serve different purposes and are most likely to be used by different types of investors. ETMFs would be a direct and strong competitor to traditional active mutual funds. Because ETMFs would have a similar value proposition than mutual funds, but would be more tax efficient. Putting a struggling mutual fund strategy into an ETMF format would not solve the problem. Again, we repeat that technology by itself does not equal success. You need to create new value with the technology, and in the case of active mutual funds value equals alpha. Therefore if Page 10

11 your strategy does not create alpha, your problem is not the fund structure technology. To put it in a more colloquial way, if the food is bad you are not going to make it good by serving it in a nice plate or eating it with fancy silverware. We do not expect ETMFs to develop a significant secondary market, like the one many ETFs have developed. Mostly because there doesn t seem to be enough incentives for investors or liquidity providers. We do not expect outflows from traditional active mutual funds to stop anytime soon, however we would expect that those survivor funds that truly deliver alpha would migrate to new fund structures such as ETMFs or other similar ones. Although fund structures such as ETMFs can definitely be of help in the difficult times which the traditional active management industry is experiencing, the truth is that active management needs a large overhaul beyond tax efficiency and tradability in order to remain competitive. Other issues such as cost and performance are equally or more important also. Page 11

12 Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Sebastian Mercado Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period % 47 % 51 % 38 % 2 % 24 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship North American Universe Page 12

13 Regulatory Disclosures 1.Additional Information Information on ETFs is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any fund that is described in this document. Consider carefully any fund's investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the fund's prospectus. Prospectuses about db X-trackers funds and Powershares DB funds can be obtained by calling or by visiting Read prospectuses carefully before investing. Past performance is not necessarily indicative of future results. Investing involves risk, including possible loss of principal. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products' prospectuses. Shares of ETFs may be sold throughout the day on an exchange through any brokerage account. However, shares may only be redeemed directly from an ETF by authorized participants, in very large creation/redemption units. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. ETFs are obliged to distribute portfolio gains to shareholders. Deutsche Bank may be an issuer, advisor, manager, distributor or administrator of, or provide other services to, an ETF included in this report, for which it receives compensation. db X-trackers and Powershares DB funds are distributed by ALPS Distributors, Inc. The opinions expressed are those of the authors and do not necessarily reflect the views of DB, ALPS or their affiliates. Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. 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14 West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no ) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box , Faisaliah Tower - 17th Floor, Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no ) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box , Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Page 14

15 David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee Raj Hindocha Global Chief Operating Officer Research Marcel Cassard Global Head FICC Research & Global Macro Economics Richard Smith and Steve Pollard Co-Global Heads Equity Research Michael Spencer Regional Head Asia Pacific Research Ralf Hoffmann Regional Head Deutsche Bank Research, Germany Andreas Neubauer Regional Head Equity Research, Germany Steve Pollard Regional Head Americas Research International Locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) Deutsche Bank AG Große Gallusstraße Frankfurt am Main Germany Tel: (49) Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) Deutsche Securities Inc Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo Japan Tel: (81) Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) Wall Street New York, NY United States of America Tel: (1) Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). 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