ETF Basics: An Introduction to ishares Exchange Traded Funds

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1 ETF Basics: An Introduction to ishares Exchange Traded Funds

2 Agenda Growth of ETFs and Barclays Global Investors The engine of ETFs Unique benefits of ETFs and ishares Low cost Tax efficiency Transparency Risk management Liquidity Modularity and strategies 1

3 Consistent growth of Exchange Traded Funds (ETFs) 300 US ETF AUM AUM $ B S&P 500 Levels Q S&P 500 ishares others ETFs experienced rapid growth during bear and bull markets Today, there are 336 ETFs globally covering global equity and fixed income with AUM of over US $310 billion. Source: FRC, Yahoo Finance as of 10/31/2005 Yahoo Finance- for S&P 500 index level 2

4 ishares family of funds and mutual fund markets in net new asset flows Fund family New assets ($B) /2003 (%) American Funds % Vanguard Groups % ishares Funds % Fidelity Distributors % Dodge & Cox % State Street Global Advisors % PIMCO Funds % T Rowe Price % Grantham, Mayo, Van Otterloo % Franklin Templeton Investments % > Fund families serve different market segments. Source: FRC, excludes cash and fund of funds. As of 12/31/04. 3

5 ishares Funds are brought to you by BARCLAYS GLOBAL INVESTORS Toronto San Francisco Montreal Boston London Amsterdam Hong Kong Tokyo Singapore Sydney Full service office Client service/business development Assets under management: $1.5 Trillion 1 Manages 102 of 221 US ETFs 2 1. BGI, 11/30/ BGI, 12/31/05. ishares Funds are distributed by SEI Investments Distribution Co. Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. BGFA is a subsidiary of Barclays Global Investors, N.A., a wholly owned subsidiary of Barclays Bank PLC. 4

6 Familiar ground best of both worlds Like a stock Trading flexibility intra-day on the exchange Long or short Options Like an index fund Constructed to track benchmark indexes Low expense ratios Low turnover With short sales, you risk paying more for a security than you received from its sale. Short sales subject to availability. 5

7 What sets an ETF apart? The creation/redemption process distinguishes ETFs from: Mutual Funds and Closed-end funds The creation/redemption process enables the unique benefits of ETFs 6

8 How traditional mutual funds work Buyers Fund Company Stock Exchange Sellers 7

9 Innovative mechanism of ishares ETFs Buyers Stock Exchange Sellers Financial Intermediaries Financial Intermediaries Market Makers Fund Company Mutual funds and ishares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Your own ishares Funds trading, too, will generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. 8

10 The benefits of ishares ETFs Low cost Tax efficiency Transparency Risk management Liquidity Modularity and strategies 9

11 Internal expenses matter $100,000 Investment for 10 years. 10% annualized return. 25 bps 50 bps 100 bps $259,374 Gross Value Internal Fees $4,325 Foregone Earnings $2,086 Net Value $252,962 $8,537 $16,632 $4,143 $8,168 $246,693 $234,573 Does not include commissions or sales charges. 10

12 ishares Funds low expense ratios Fund Category bps ishares ETF Large-Cap Small-Cap ishares S&P 500 ishares Russell 1000 ishares S&P 600 ishares Russell 2000 Fixed Income ishares Lehman Treasury Series ishares GS $ InvesTop Corporate ishares Lehman Aggregate & TIPS International Sector ishares MSCI Int l Series ishares MSCI EAFE ishares MSCI Emerging Markets ishares Dow Jones Sectors ishares S&P Global Sectors 1. Authority regional fund. Brazil, South America, South Korea, Taiwan 74bps. ishares Fund transactions will result in brokerage commissions. 11

13 Tax efficiency of ishares Funds Index Funds Low turnover Baskets of securities for shares Creation/redemption process Cap gain control Shareholders interact via exchange Taxed like an equity transaction ETFs can produce capital gain distributions. For example, during an underlying index reconstitution or corporate actions (esp. foreign). 12

14 Real world comparison Actively managed funds that underperformed their corresponding Russell index over a 10-year period. 12/31/94-12/31/04 Before tax % Value Blend Growth After tax % Before tax % After tax % Before tax % After tax % Large-cap Mid-cap Small-cap Source: Morningstar. US equity mutual funds. All total returns reflect 10 year annualized figures. Funds are categorized by their Morningstar objective. Past performance is no guarantee of future results. 13

15 ishares ETFs are transparent Manage the unknown know what you own ishares holdings are published daily on ishares.com Pricing of underlying holdings refreshed continually No style drift Each benchmark represents a defined market segment Benchmark providers publish methodology Manage risk ishares are designed to closely track a benchmark 14

16 ishares Funds track ishares Funds 3 Year average annual tracking as of 12/31/04 Expense ratio S&P % 0.09% Russell % 0.20% Dow Jones U.S. Total Market -0.20% 0.20% Dow Jones U.S. Technology -0.59% 0.60% MSCI Japan -0.52% 0.59% MSCI EAFE -0.17% 0.35% Source: BGI. Past tracking performance does not guarantee future performance. 15

17 Trading ingenuity of ishares Funds Trading Volume = Liquidity Printed trading volume is not indicative of ishares Funds liquidity Open-end structure makes ishares Funds as liquid as their underlying stocks or bonds 16

18 The benefits of modularity ishares Funds consist of over 100 ETFs 54% of all ETFs 1 Breadth and depth Building block format Enables implementation of strategies Indexing Pre 2000 and Post As of 10/31/05. 17

19 Modularity and portfolio completion S&P 500 S&P 1500 S&P 500 Growth S&P 500 Value US equity portfolio Large-cap stocks S&P 400 S&P 400 Growth S&P 400 Value S&P 600 S&P 600 Growth S&P 600 Value 18

20 Modularity and Core/Satellite Russell 3000 Portfolio of active funds or managers Russell 1000 Russell 1000 Growth Russell 1000 Value Large-cap growth Large-cap value Russell Midcap Russell Midcap Growth Russell Midcap Value Russell 2000 Russell 2000 Growth Russell 2000 Value Small-cap growth Small-cap value 19

21 Modularity and tactical investing Utilities Consumer Services Dow Jones U.S. Total Market Basic Materials Consumer Services Consumer Goods Energy Financial Healthcare Industrial Technology Energy Technology Telecom Utilities 20

22 Modularity and duration management Yield Duration Lehman Aggregate Lehman 1 3 Treasury Lehman 7 10 Treasury Lehman 20+ Treasury Lehman TIPS GS $ InvesTop Corporate 21

23 Additional Benefits No minimums Great for portfolio completion A scalable product Instant diversification in one easy trade 22

24 To determine if the ishares Funds ( Funds ) are an appropriate investment for you, carefully consider the Funds' investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds' prospectuses, which may be obtained by calling iShares or by visiting Read the prospectus carefully before investing. Disc

25 The ishares Funds are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. Barclays Global Investors Services (BGIS) assists in the marketing of the Funds. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., which is a wholly owned subsidiary of Barclays Bank PLC, none of which is affiliated with SEI. Shares of ishares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. There are risks involved with investing, including possible loss of principal. Mutual funds and ishares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the ishares Funds will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. Disc-001 When comparing stocks or bonds and ishares Funds, it should be remembered that management fees associated with fund investments, like ishares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of ishares Funds may be substantially less than those of most mutual funds. Buying and selling shares of ishares funds will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. 24

26 Neither Barclays Global Investors, N.A. and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. The ishares Funds are not sponsored, endorsed, or issued by Goldman Sachs & Co. or Lehman Brothers, nor are they sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., Frank Russell Company, FTSE/Xinhua Index Limited ( FXI ), KLD Research & Analytics, Inc., Morgan Stanley Capital International, Morningstar, The NASDAQ Stock Market, Inc., New York Stock Exchange, Inc., or Standard and Poor s. None of these companies makes any representation regarding the advisability of investing in the ishares Funds. Neither SEI nor BGI, nor any of their affiliates, are affiliated with the companies listed above. $ InvesTop, $ InvesTop Index, GS $ InvesTop and Goldman Sachs are trademarks of Goldman Sachs & Co. Disc-003 FTSE/Xinhua Index Limited ( FXI ) does not make any warranty regarding the FTSE/Xinhua China 25 Index. All copyright in the index values and constituent list vests in FXI. FTSE is a trade and service mark of London Stock Exchange and The Financial Times; Xinhua is a trade and service mark of Xinhua Financial Network Limited Barclays Global Investors. All rights reserved. ishares is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. Not FDIC insured Have no bank guarantee May lose value 25

27 THANK YOU For more information, visit Learn about ishares Product Information Document Library Tools & Charts strategy guides & white papers holdings, price and return information client presentations portfolio modeling tools & calculators Advisor Stories resources other advisors have found helpful ishares And over 100 funds to implement your best ideas 26

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