Exchange-Traded Funds

Transcription

1 Exchange-Traded Funds US ETF Weekly Update - Weekly Flows: $6.8 Billion Net Inflows -11 th Consecutive Week of Net Inflows - ETF Assets Stand at $1.4 Trillion, up 6% YTD - Two ETF Launches Last Week - Vanguard Transitions Indices on Four ETFs NORTH AMERICA MICHAEL JABARA Michael.Jabara@mssb.com STEPHEN MINAR Stephen.Minar@mssb.com DAVID PERLMAN David.Perlman@mssb.com As with any investment, ETFs have risks. These include the general risks associated with investing in the underlying assets, potential tracking error, and the possibility that particular indices may lag other market segments or active managers. In addition, ETFs investing in international markets may include currency and geopolitical risks, while fixed income ETF risks also include credit and interest rate risk. Leveraged, Inverse, and Leveraged Inverse ETFs have unique risks, which are reviewed on slide 9. We define exchange-traded funds as encompassing passively and actively managed exchange-traded funds. This report is focused on U.S.-listed exchange-traded funds. These funds are registered with the SEC and trade as a single stock under SEC exemptions. U.S. listed, open-end fund ETFs must be offered under and sold only pursuant to a Prospectus. U.S.-listed ETFs may not be marketed or sold in a number of jurisdictions and may not be suitable for all investors. Morgan Stanley Smith Barney Sales Personnel should check with the Legal Department to clarify whether they may market the ETFs in a particular jurisdiction. Morgan Stanley Smith Barney does and seeks to do business with companies covered in Morgan Stanley Smith Barney Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Smith Barney Research. Investors should consider Morgan Stanley Smith Barney Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

2 US-Listed ETFs: Estimated Flows by Market Segment ETFs posted net inflows of $6.8 bln last week, the 11 th consecutive week of net inflows - Net inflows were led by US Sector & Industry ETFs ($2.1 bln in net inflows last week) - Fixed Income ETFs were the only category we measured to exhibit net outflows last week ($448 mln in net outflows) - Fixed Income market share has slipped to 17% from 18% over the past few weeks - ETF assets stand at $1.4 tln, up 6% YTD; $31.1 bln net inflows YTD 13-week flows were mostly positive among asset classes; combined $78.1 bln in net inflows - US Large-Cap ETFs generated net inflows of $19.3 bln over the last 13 weeks, the most of any ETF category; 52% of US Large- Cap ETF net inflows can be attributed to the SPDR S&P 500 ETF (SPY) - Over the last 13 weeks, Leveraged/Inverse ETFs posted the largest net outflows of any category ($976 mln) Net Cash Flow ($ Mil) Source: Bloomberg, Morgan Stanley Smith Barney Research. Data estimated as of 2/1/13 based on daily change in share counts and daily NAVs. Mkt Cap Market Investment Objective Funds 1-Week 4-Week 13-Week ($ Mil) Share (%) US Broad-Market ,346 2,695 39,594 3 US Large-Cap (7,670) 19, , US Mid-Cap ,558 3,959 58,169 4 US Small- & Micro-Cap ,601 55,612 4 US Sector & Industry 148 2,077 5,117 5, , US Custom ,158 2,142 15,291 1 US Dividend Income ,538 3 Leveraged/Inverse (976) 27,505 2 International - Developed 151 1,421 5,868 14, , International - Emerging ,553 18, , Global ,343 42,295 3 Fixed Income 166 (448) 1,148 3, , Commodity (423) ,534 8 Currency (200) 3,686 0 Active ,780 10,937 1 Total 1,239 6,776 15,346 78,071 1,416,

3 US-Listed ETFs: Estimated Largest Flows by Individual ETF Financials Select Sector SPDR (XLF) posted net inflows of $396 mln last week, the most of any ETF - Six out of the 10 ETFs to generate the largest net inflows last week were US Sector & Industry based and eight of 10 were US equity based - The two largest high yield bond ETFs, the ishares iboxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays High Yield Bond ETF (JNK), posted a combined $808 mln in net outflows last week - Despite modest net outflows last week, the ishares MSCI Emerging Markets Index Fund (EEM) has generated net inflows of $10.5 bln over the last 13 weeks, the most of any ETF Net Inflows Net Outflows Source: Bloomberg, Morgan Stanley Smith Barney Research. Data estimated as of 2/1/13 based on daily change in share counts and daily NAVs. Net Cash Flow ($ Mil) Mkt Cap ETF Name Symbol 1-Week 4-Week 13-Week ($ Mil) Financials Select Sector SPDR XLF ,103 10,643 SPDR Retail ETF XRT Vanguard Total Stock Market ETF VTI 327 1,043 2,064 27,016 Vanguard REIT ETF VNQ ,434 17,088 ishares Dow Jones US Real Estate Index Fund IYR (344) 4,913 WisdomTree Japan Hedged Equity Fund DXJ 275 1,229 1,842 2,647 ishares DJ US Technology Sector Index Fund IYW ,868 Materials Select Sector SPDR XLB ,121 ishares MSCI All Country Asia ex-japan Index Fund AAXJ ,645 Vanguard S&P 500 ETF VOO ,624 7,734 ishares iboxx $ High Yield Corporate Bond Fund HYG (461) (423) (1,351) 15,686 ishares JPMorgan USD Emerging Markets Bond Fund EMB (419) (407) 274 6,405 SPDR Barclays High Yield Bond ETF JNK (347) (179) ,543 ishares MSCI Brazil Index Fund EWZ (221) (286) (329) 9,310 Market Vectors Gold Miners ETF GDX (171) (799) (375) 7,821 Health Care Select Sector SPDR XLV (149) ,963 ishares MSCI Germany Index Fund EWG (148) (178) (74) 4,086 ishares MSCI EAFE Index Fund EFA (142) 274 1,126 42,162 SPDR S&P 500 ETF SPY (135) (8,734) 9, ,727 SPDR Gold Trust GLD (96) (726) (350) 71,183 3

4 US-Listed ETFs: Short Interest Data Unchanged: Based on data as of 1/15/13 Vanguard FTSE Emerging Markets ETF (VWO) had the largest increase in USD short interest at $900 mln - VWO s shares short are at their highest level of all time; we find the data point interesting because VWO is not typically the vehicle that investors use to get short emerging markets - SPDR S&P 500 ETF (SPY) shares short are at their lowest level since 10/15/12 - Aggregate ETF USD short interest decreased by $2.2 bln over the past two weeks ended 1/15/13 The average shares short/shares outstanding for ETFs is currently 5.5% - SPDR Retail ETF (XRT) shares short/shares outstanding eclipsed 1,000% on 1/15/13 as flows into and out of XRT have been very volatile the past few weeks; retail ETFs are consistently some of the most heavily shorted ETFs - Based on multiple borrowings and the ability to continuously create new shares, shares short as a % of shares outstanding can exceed 100% (only six ETFs exhibited shares short as a % of shares outstanding greater than 100%) Change in Short Interest Shares Short as % of Shares Outstanding ETF Name Symbol Last Change in USD Amount Held Short Vanguard FTSE Emerging Markets ETF VWO 899,451,680 SPDR Gold Trust GLD 692,278,927 ishares Russell 2000 Index Fund IWM 551,627,428 ishares Dow Jones US Real Estate Index Fund IYR 470,578,681 ishares Barclays Short Treasury Bond Fund SHV 321,648,715 SPDR S&P 500 ETF SPY (3,892,714,500) Financials Select Sector SPDR XLF (302,318,480) Direxion Financial Bull 3X FAS (257,770,479) SPDR Dow Jones Industrial Average ETF DIA (191,753,489) ishares Barclays 20+ Year Treasury Bond Fund TLT (190,356,457) ETF Name Symbol Shares Short / Shrs Out (%) SPDR Retail ETF XRT 1,006.3 SPDR Oil & Gas Exploration & Production ETF XOP Market Vectors Retail ETF RTH CurrencyShares Euro Trust FXE CurrencyShares Japanese Yen Trust FXY PowerShares KBW Bank Portfolio KBWB PowerShares S&P International Developed High Beta Portfolio IDHB 81.7 ishares Dow Jones US Real Estate Index Fund IYR 74.3 ishares MSCI Far East Financials Sector Index Fund FEFN 72.4 ishares Russell 2000 Index Fund IWM 71.1 Source: Bloomberg, Morgan Stanley Smith Barney Research. Short Interest data are only reported bi-monthly with a lag. Data compares short interest from 1/15/13 vs. 12/31/12. 4

5 US-Listed ETFs: Most Successful Recent Launches by Assets $10.3 billion in total market cap of ETFs less than 1-year old - Newly launched Active ETFs account for 46% of the market cap of ETFs launched over the past year; PIMCO Total Return ETF (BOND) is the largest actively managed ETF with a market cap of $4.1 bln - Issuance off to a slow start in 2013; three new ETF listings and three closures YTD (13 announced closures) The top 10 most successful launches make up 69% of the market cap of ETFs launched over the past year - Six different ETF sponsors and two asset classes represented in top 10 most successful launches - Seven out of the 10 most successful launches over the past year have an income orientation - The ishares MSCI Global Select Metals & Mining Producers Fund (PICK) was the only recently launched ETF to exhibit net outflows last week (modest net outflows of $7 mln) Estimated Flows for ETF Launches Over Past Year Net Cash Flow ($ Mil) Mkt Cap Total ,373 3,205 10, Source: Bloomberg, Morgan Stanley Smith Barney Research. Data estimated as of 2/1/13 based on daily change in share counts and daily NAVs. Market Investment Objective Funds 1-Week 4-Week 13-Week ($ Mil) Share (%) US Broad-Market US Large-Cap US Mid-Cap US Small- & Micro-Cap US Sector & Industry US Custom US Dividend Income Leveraged/Inverse International - Developed International - Emerging Global Fixed Income , Commodity Currency Active ,021 4, Top 10 Successful Launches Over Past Year 1-Week Flows ($ Mil) 4-Week Flows ($ Mil) Mkt Cap Symbol Fund Name ($ Mil) BOND PIMCO Total Return ETF 4, SJNK SPDR Barclays Short Term High Yield Bond ETF IEMG ishares Core MSCI Emerging Markets ETF IEFA ishares Core MSCI EAFE ETF QLTA ishares AAA - A Rated Corporate Bond Fund PICK ishares MSCI Global Select Metals & Mining Producers Fund 258 (7) (7) IHY Market Vectors International High Yield Bond ETF EMHY ishares Emerging Markets High Yield Bond Fund VTIP Vanguard Short-Term Inflation-Protected Securities ETF EMLP First Trust North American Energy Infrastructure Fund Total 7,

6 US-Listed ETFs: New Listings For the Week Symbol Fund Name GLCB WisdomTree Global Corporate Bond Fund 1/31/ Actively managed ETF, sub-advised by Western Asset Management, focusing on global corporate bonds; non-usd exposure hedged via currency forwards. FLAG Forensic Accounting ETF 1/31/ Tracks an index that uses forensic accounting analysis to select and weight US large-cap stocks based on their earnings quality. Launch Date Expense Ratio (%) Source: Company Data, Morgan Stanley Smith Barney Research. 6

7 US-Listed ETFs: News Highlights Vanguard Transitions Indices on Four ETFs - On 1/31/13, Vanguard announced new benchmarks were in effect for four of its ETFs. - As previously announced, Vanguard is transitioning many of its domestic ETFs to University of Chicago CRSP Indices from MSCI Indices. - The Vanguard Mega Cap 300 ETF (MGC) will now track the CRSP US Mega Cap Index and simultaneously be renamed the Vanguard Mega Cap ETF. - The Vanguard Large-Cap ETF (VV) will now track the CRSP US Large Cap Index, the Vanguard Mid-Cap ETF (VO) will track the CRSP US Mid Cap Index, and the Vanguard Small-Cap ETF (VB) will track the CRSP US Small Cap Index. Source: Company Data, Morgan Stanley Smith Barney Research. 7

8 Recent Reports ETF US Sector Allocation Model Update - January 9, 2013 Fixed Income ETF Asset Allocation Model Update - January 8, Q12 Preliminary ETF Fund Flows-$51.8 Billion Net Inflows - January 2, 2013 US Dividend ETFs: More Than Just Yield - December 7, 2012 ETF Quarterly Report: $1.2 Trillion in 1,255 ETFs - December 4, Year-End ETF & CEF Tax Strategies - October 19, 2012 Vanguard Announces Index Changes - October 5, 2012 Morgan Stanley & Co., Citi Research and Morgan Stanley Smith Barney do not provide fundamental research ratings on exchange-traded funds (ETFs). 8

9 Leveraged, Inverse & Leveraged Inverse Conclusions and Risks 1) Leveraged, Inverse, and Leveraged Inverse (L&LI) ETFs generally capture a high percentage of their expected daily returns, particularly on a net asset value basis. 2) L&LI ETFs are not appropriate for all investors. However, we believe they can be appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period. In strong trending markets, being on the right side of the trade with L or LI ETFs can lead to very strong returns. 3) Investors should not expect these ETFs to deliver total returns linked to their benchmarks over any period other than daily. The effects of compounding and the daily re-leveraging or de-leveraging that occurs with L&LI ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error. Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in value by 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk. For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditional ETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. 9

10 Important Disclosures The information and opinions in Morgan Stanley Smith Barney Research were prepared by Morgan Stanley Smith Barney LLC and/or its affiliates Morgan Stanley Private Wealth Management Ltd, and Morgan Stanley Smith Barney Australia Pty Ltd (collectively, "Morgan Stanley Smith Barney"). For important disclosures (including copies of historical disclosures) regarding the securities and/or companies that are the subject of this Morgan Stanley Smith Barney Research product, please contact Morgan Stanley Smith Barney Research, 522 Fifth Ave., New York, N.Y , Attention: Research Management. In addition, the same important disclosures, with the exception of the historical disclosures, are contained on the Firm's disclosure website at Historical disclosures will be provided upon request back to June 1, Morgan Stanley Smith Barney Analyst Certification The Morgan Stanley Smith Barney research analysts principally responsible for the preparation and content of all or any identified portion of this research report, hereby certify that their views about the securities and/or companies discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. Unless otherwise stated, the individuals listed on the cover page of this report are Morgan Stanley Smith Barney research analysts. Global Research Conflict Management Policy Morgan Stanley Smith Barney has a Conflict Management policy available at: Important US Regulatory Disclosures on Subject Issuers The following analyst or strategist (or a household member) owns securities (or related derivatives), ETFs, or Closed-End funds that he or she covers or recommends in Morgan Stanley Smith Barney Research: David Perlman - Vanguard Total Stock Market ETF, Vanguard Total World Stock Index Fund, WisdomTree Emerging Markets Equity Income Fund. Morgan Stanley Smith Barney or an affiliate, including, but not limited to, Morgan Stanley, but excluding Citigroup Global Markets, Inc. and its affiliates other than Morgan Stanley Smith Barney, beneficially owned 1% or more of a class of common equity securities of: PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF. Within the last 12 months, Morgan Stanley Smith Barney or an affiliate, including, but not limited to, Morgan Stanley, and/or Citigroup Global Markets, Inc. or an affiliate, received compensation for investment banking services from the following issuers (if the security is an ETF or Closed-End Fund, the compensation is from the fund's investment manager or advisor): First Trust Dow Jones Internet Index, First Trust ISE-Revere Natural Gas Index, First Trust Large Cap Core AlphaDEX Fund, First Trust Morningstar Dividend Leaders Index Fund, PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF. In the next 3 months, Morgan Stanley Smith Barney or an affiliate, including, but not limited to, Morgan Stanley, and/or Citigroup Global Markets, Inc. or an affiliate, will seek compensation for investment banking services from the following issuers (if the security is an ETF or Closed-End Fund, the compensation is from the fund's investment manager or advisor): PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF, Vanguard Consumer Discretionary ETF, Vanguard Consumer Staples ETF, Vanguard Dividend Appreciation ETF, Vanguard Energy ETF, Vanguard ETF Emerging Markets, Vanguard ETF European, Vanguard ETF REIT, Vanguard Extended Market ETF, Vanguard Financials ETF, Vanguard FTSE All-World ex-us ETF, Vanguard FTSE ex-us SmallCap ETF, Vanguard Growth ETF, Vanguard Health Care ETF, Vanguard High Dividend Yield ETF, Vanguard Industrials ETF, Vanguard Information Technology ETF, Vanguard Intermediate-Term Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF, Vanguard Large-Cap ETF, Vanguard Materials ETF, Vanguard Mid-Cap ETF, Vanguard Mid-Cap Growth ETF, Vanguard Mid-Cap Value ETF, Vanguard MSCI EAFE ETF, Vanguard Pacific ETF, Vanguard Short- Term Bond ETF, Vanguard Short-Term Corporate Bond, Vanguard Small-Cap ETF, Vanguard Small-Cap Growth ETF, Vanguard Small-Cap Value ETF, Vanguard Telecom Services ETF, Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, Vanguard Total World Stock Index Fund, Vanguard Utilities ETF, Vanguard Value ETF. Within the last 12 months, Morgan Stanley Smith Barney or an affiliate, including, but not limited to, Morgan Stanley, and/or Citigroup Global Markets, Inc. or an affiliate, has provided or is providing investment banking services to, or has an investment banking client relationship with, the following issuers (if the security is an ETF or Closed-End Fund, the services were or are being provided to, or the relationship is with, the fund's investment manager or advisor): First Trust Dow Jones Internet Index, First Trust ISE-Revere Natural Gas Index, First Trust Large Cap Core AlphaDEX Fund, First Trust Morningstar Dividend Leaders Index Fund, PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF, Vanguard Consumer Discretionary ETF, Vanguard Consumer Staples ETF, Vanguard Dividend Appreciation ETF, Vanguard Energy ETF, Vanguard ETF Emerging Markets, Vanguard ETF European, Vanguard ETF REIT, Vanguard Extended Market ETF, Vanguard Financials ETF, Vanguard FTSE All-World ex-us ETF, Vanguard FTSE ex-us SmallCap ETF, Vanguard Growth ETF, Vanguard Health Care ETF, Vanguard High Dividend Yield ETF, Vanguard Industrials ETF, Vanguard Information Technology ETF, Vanguard Intermediate-Term Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF, Vanguard Large-Cap ETF, Vanguard Materials ETF, Vanguard Mid-Cap ETF, Vanguard Mid-Cap Growth ETF, Vanguard Mid-Cap Value ETF, Vanguard MSCI EAFE ETF, Vanguard Pacific ETF, Vanguard Short-Term Bond ETF, Vanguard Short-Term Corporate Bond, Vanguard Small-Cap ETF, Vanguard Small-Cap Growth ETF, Vanguard Small-Cap Value ETF, Vanguard Telecom Services ETF, Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, Vanguard Total World Stock Index Fund, Vanguard Utilities ETF, Vanguard Value ETF. Within the last 12 months, Morgan Stanley Smith Barney or an affiliate, including, but not limited to, Morgan Stanley, and/or Citigroup Global Markets, Inc. or an affiliate, has received compensation for products or services other than investment banking services from the following issuers (ifthe security is an ETF or Closed-End Fund, the compensation is from the fund's 10

11 Important Disclosures investment manager or advisor): Alerian MLP ETF, Consumer Discretionary Select Sector, Consumer Staples Select Sector SPDR, CurrencyShares Australian Dollar Trust, CurrencyShares Canadian Dollar Trust, CurrencyShares Swiss Franc Trust, Direxion Financial Bear 3X, Direxion Financial Bull 3X, Energy Select Sector SPDR, Financials Select Sector SPDR, Guggenheim BRIC ETF, Guggenheim China Small Cap ETF, Guggenheim Multi-Asset Income ETF, Guggenheim S&P Global Water Index ETF, Guggenheim Solar ETF, Health Care Select Sector SPDR, Industrials Select Sector SPDR, IQ Global Resources ETF, IQ Hedge Multi-Strategy Tracker ETF, ishares Barclays 1-3 Year Credit Bond, ishares Barclays 20+ Year Treasury Bond, ishares Barclays 3-7 Year Treasury, ishares Barclays 7-10 Year Treasury Bond, ishares Barclays Agency Bond Fund, ishares Barclays Aggregate Bond Fund, ishares Barclays Intermediate Credit, ishares Barclays Lehman 1-3 Yr Treasury, ishares Barclays MBS Bond Fund, ishares Barclays Short Treasury, ishares Barclays TIPS Bond Fund, ishares Cohen & Steers Realty Majors, ishares Core MSCI Emerging Markets ETF, ishares Core S&P 500 ETF, ishares Core S&P Mid-Cap ETF, ishares Core S&P Small-Cap ETF, ishares DJ US Basic Materials Sector Index Fund, ishares DJ US Cons. Services Sector Index Fund, ishares DJ US Consumer Goods Sector, ishares DJ US Technology Sector Index, ishares Dow Jones Broker-Dealers Index, ishares Dow Jones International Select D, ishares Dow Jones Select Dividend Index, ishares Dow Jones Transportation Index, ishares Dow Jones U.S. Index Fund, ishares Dow Jones U.S. Medical Devices, ishares Dow Jones U.S. Oil & Gas Exp., ishares Dow Jones U.S. Oil Equip. & Svcs, ishares Dow Jones US Aerospace & Defense, ishares Dow Jones US Energy Sector Index Fund, ishares Dow Jones US Financial Sector, ishares Dow Jones US Financial Services, ishares Dow Jones US Healthcare Sector, ishares Dow Jones US Home Construction, ishares Dow Jones US Industrial Sector, ishares Dow Jones US Real Estate Index, ishares Dow Jones US Telecom Sector, ishares Dow Jones US Utilities Sector, ishares FTSE China 25 Index Fund, ishares Gold Trust, ishares GSCI Commodity Indexed Trust, ishares High Dividend Equity Fund, ishares iboxx $ High Yield Corp Bond, ishares iboxx $ InvesTop Inv Grade Bond, ishares JPMorgan USD Emerging Mkt Bond, ishares Morningstar Large Growth Index, ishares Morningstar Large Value Index, ishares Morningstar Mid Growth Index, ishares Morningstar Mid Value Index Fund, ishares MSCI ACWI ex US Index Fund, ishares MSCI ACWI Index Fund, ishares MSCI All Country Asia ex- Japan Index Fund, ishares MSCI All Peru Capped Index Fund, ishares MSCI Australia Index Fund, ishares MSCI Brazil Index Fund, ishares MSCI BRIC Index Fund, ishares MSCI Canada Index Fund, ishares MSCI Chile Index Fund, ishares MSCI China Index Fund, ishares MSCI EAFE Growth Index Fund, ishares MSCI EAFE Index Fund, ishares MSCI EAFE Small Cap Index Fund, Ishares Msci Emerging Markets, ishares MSCI Emerging Mkts Min Volatilit, ishares MSCI EMU Index Fund, ishares MSCI France Index Fund, ishares MSCI Germany Index Fund, ishares MSCI Hong Kong Index Fund, ishares MSCI Israel Capped Index Fund, ishares MSCI Italy Index Fund, ishares MSCI Japan, ishares MSCI Malaysia Index Fund, ishares MSCI Mexico Index Fund, ishares MSCI Pacific ex-japan Index Fund, ishares MSCI Russia Capped Index Fund, ishares MSCI Singapore Index Fund, ishares MSCI South Africa Index Fund, ishares MSCI South Korea Index Fund, ishares MSCI Spain Index Fund, ishares MSCI Sweden Index Fund, ishares MSCI Switzerland Index Fund, ishares MSCI Taiwan Index Fund, ishares MSCI Thailand Index Fund, ishares MSCI Turkey Index Fund, ishares MSCI United Kingdom Index Fund, ishares MSCI USA Minimum Volatility Index Fund, Ishares Msci Value Index Fund, ishares Nasdaq Biotech, ishares PHLX SOX Semiconductors Sector Index Fund, ishares Russell 1000 Growth Index Fund, ishares Russell 1000 Index Fund, ishares Russell 1000 Value Index Fund, ishares Russell 2000 Growth Index Fund, ishares Russell 2000 Index Fund, ishares Russell 2000 Value Index Fund, ishares Russell 3000 Growth Index Fund, ishares Russell 3000 Index Fund, ishares Russell 3000 Value Index Fund, ishares Russell Microcap Index Fund, ishares Russell Mid Cap Growth Index, ishares Russell Midcap Index Fund, ishares Russell Midcap Value Index Fund, ishares S&P 100 Index Fund, ishares S&P 500 Growth Index Fund, ishares S&P 500 Value Index Fund, ishares S&P Europe 350 Index Fund, ishares S&P Global 100 Index Fund, ishares S&P Global Consumer Discretionary Sector Index Fund, ishares S&P Global Consumer Staples, ishares S&P Global Financial Sector Index Fund, ishares S&P Global Healthcare Sector Index Fund, ishares S&P Global Ind. Sector Index, ishares S&P Global Infrastructure Index, ishares S&P Global Materials Sector, ishares S&P Global Tech. Sector Index, ishares S&P Global Tele. Sector Index, ishares S&P Global Utilities Sector, ishares S&P Latin America 40 Index Fund, ishares S&P MidCap 400 Growth Index Fund, ishares S&P MidCap 400 Value Index Fund, ishares S&P N. Amer. Natural Res. Sector, ishares S&P N. Amer. Software Index Fund, ishares S&P Nat'l AMT-Free Municipal, ishares S&P North American Technology, ishares S&P Short Term Nat.Municipal, ishares S&P SmallCap 600 Growth, ishares S&P SmallCap 600 Value, ishares S&P U.S. Preferred Stock Index, ishares S&P/Citigroup International Treasury Bond Fund, ishares Silver Trust, Ishares Trust S & P Global, Market Vectors Agribusiness ETF, Market Vectors Brazil Small-Cap ETF, Market Vectors Coal ETF, Market Vectors Emerg. Markets Local, Market Vectors ETF Gold Miners, Market Vectors Global Alt.Energy ETF, Market Vectors Hard Assets Producers ETF, Market Vectors High Yield Municipal Inde, Market Vectors Indonesia Index ETF, Market Vectors Intermediate Municipal In, Market Vectors Junior Gold Miners ETF, Market Vectors Nuclear Energy ETF, Market Vectors Russia ETF, Market Vectors Steel Index ETF, Market Vectors Vietnam ETF, Materials Select Sector SPDR, Oil Services HOLDRS, Pharmaceutical HOLDRS, PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF, PowerShares Build America Bond Portfolio, PowerShares DB Agriculture Fund, PowerShares DB Base Metals Fund, PowerShares DB Energy Fund, PowerShares DB G10 Currency Harvest Fund, PowerShares DB Oil Fund, PowerShares DB USD Index Bearish Fund, PowerShares DB USD Index Bullish Fund, PowerShares Dynam. LargeCap Value, PowerShares Dynam.LargeCap Growth, PowerShares Dynamic Market Portfolio, PowerShares Emerging Markets Sovereign Debt Portfolio, PowerShares Financial Preferred Portf., PowerShares FTSE RAFI US 1000 Portfolio, PowerShares Global Clean Ergy. Portfol., PowerShares Global Water Portfolio, PowerShares Int.Div. Achievers Portfol., PowerShares Preferred Portfolio, PowerShares QQQ, PowerShares S&P 500 BuyWrite Portfolio, PowerShares S&P 500 Low Volatility Portfolio, PowerShares Senior Loan Portfolio, PowerShares VRDO Tax-Free Wkly Portfol., PowerShares Water Resources Portfolio, PowerShares WilderHill Clean Ergy., Rydex Russell Top 50 ETF, Rydex S&P 500 Pure Growth ETF, Rydex S&P Equal Weight ETF, Semiconductor HOLDRS, SPDR Barclays 1-3 Month T-Bill ETF, SPDR Barclays Capital Int. Treasury, SPDR Barclays Capital ST Muni. Bond ET, SPDR Barclays Convertible Bond ETF, SPDR Barclays High Yield Bond ETF, SPDR Barclays Municipal Bond ETF, SPDR Barclays Short Term High Yield Bond ETF, SPDR Biotech ETF, SPDR DB Int. Govt. Inflation-Protect, SPDR Dow Jones Int. Real Estate ETF, SPDR Dow Jones REIT ETF, SPDR KBW Bank ETF, SPDR KBW Regional Banking ETF, SPDR Oil & Gas Equipment & Services ETF, SPDR Oil & Gas Exploration & Prod. ETF, SPDR Retail ETF, SPDR S&P China ETF, SPDR S&P Dividend ETF, SPDR S&P Emerging Asia Pacific ETF, SPDR S&P Emerging Markets Small Cap ETF, SPDR S&P Homebuilders ETF, SPDR S&P International Dividend ETF, SPDR S&P International Small Cap ETF, SPDR S&P Metals & Mining ETF, Technology Select Sector SPDR, Utilities Select Sector SPDR, Vanguard Consumer Discretionary ETF, Vanguard Consumer Staples ETF, Vanguard Dividend Appreciation ETF, Vanguard Energy ETF, Vanguard ETF Emerging Markets, Vanguard ETF European, Vanguard ETF REIT, Vanguard Extended Market ETF, Vanguard Financials ETF, Vanguard FTSE All-World ex-us ETF, Vanguard FTSE ex-us SmallCap ETF, Vanguard Growth ETF, Vanguard Health Care ETF, Vanguard High Dividend Yield ETF, Vanguard Industrials ETF, Vanguard Information Technology ETF, Vanguard Intermediate-Term Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF, Vanguard Large-Cap ETF, Vanguard Materials ETF, Vanguard Mid-Cap ETF, Vanguard Mid-Cap Growth ETF, Vanguard Mid-Cap Value ETF, Vanguard MSCI EAFE ETF, Vanguard Pacific ETF, Vanguard Short-Term Bond ETF, Vanguard Short-Term Corporate Bond, Vanguard Small-Cap ETF, Vanguard Small-Cap Growth ETF, Vanguard Small-Cap Value ETF, Vanguard Telecom Services ETF, Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, Vanguard Total World Stock Index Fund, Vanguard Utilities ETF, Vanguard Value ETF, WisdomTree DEFA Equity Income Fund, WisdomTree Emerging Markets Equity Income Fund, WisdomTree Emerging Markets Local Debt Fund, WisdomTree International MidCap Dividend Fund, WisdomTree International SmallCap Dividend Fund, WisdomTree Japan Hedged Equity Fund. 11

12 Important Disclosures Sector, Consumer Staples Select Sector SPDR, CurrencyShares Australian Dollar Trust, CurrencyShares Canadian Dollar Trust, CurrencyShares Swiss Franc Trust, Direxion Financial Bear 3X, Direxion Financial Bull 3X, Energy Select Sector SPDR, Financials Select Sector SPDR, Guggenheim BRIC ETF, Guggenheim China Small Cap ETF, Guggenheim Multi-Asset Income ETF, Guggenheim S&P Global Water Index ETF, Guggenheim Solar ETF, Health Care Select Sector SPDR, Industrials Select Sector SPDR, IQ Global Resources ETF, IQ Hedge Multi-Strategy Tracker ETF, ishares Barclays 1-3 Year Credit Bond, ishares Barclays 20+ Year Treasury Bond, ishares Barclays 3-7 Year Treasury, ishares Barclays 7-10 Year Treasury Bond, ishares Barclays Agency Bond Fund, ishares Barclays Aggregate Bond Fund, ishares Barclays Intermediate Credit, ishares Barclays Lehman 1-3 Yr Treasury, ishares Barclays MBS Bond Fund, ishares Barclays Short Treasury, ishares Barclays TIPS Bond Fund, ishares Cohen & Steers Realty Majors, ishares Core MSCI Emerging Markets ETF, ishares Core S&P 500 ETF, ishares Core S&P Mid-Cap ETF, ishares Core S&P Small-Cap ETF, ishares DJ US Basic Materials Sector Index Fund, ishares DJ US Cons. Services Sector Index Fund, ishares DJ US Consumer Goods Sector, ishares DJ US Technology Sector Index, ishares Dow Jones Broker-Dealers Index, ishares Dow Jones International Select D, ishares Dow Jones Select Dividend Index, ishares Dow Jones Transportation Index, ishares Dow Jones U.S. Index Fund, ishares Dow Jones U.S. Medical Devices, ishares Dow Jones U.S. Oil & Gas Exp., ishares Dow Jones U.S. Oil Equip. & Svcs, ishares Dow Jones US Aerospace & Defense, ishares Dow Jones US Energy Sector Index Fund, ishares Dow Jones US Financial Sector, ishares Dow Jones US Financial Services, ishares Dow Jones US Healthcare Sector, ishares Dow Jones US Home Construction, ishares Dow Jones US Industrial Sector, ishares Dow Jones US Real Estate Index, ishares Dow Jones US Telecom Sector, ishares Dow Jones US Utilities Sector, ishares FTSE China 25 Index Fund, ishares Gold Trust, ishares GSCI Commodity Indexed Trust, ishares High Dividend Equity Fund, ishares iboxx $ High Yield Corp Bond, ishares iboxx $ InvesTop Inv Grade Bond, ishares JPMorgan USD Emerging Mkt Bond, ishares Morningstar Large Growth Index, ishares Morningstar Large Value Index, ishares Morningstar Mid Growth Index, ishares Morningstar Mid Value Index Fund, ishares MSCI ACWI ex US Index Fund, ishares MSCI ACWI Index Fund, ishares MSCI All Country Asia ex-japan Index Fund, ishares MSCI All Peru Capped Index Fund, ishares MSCI Australia Index Fund, ishares MSCI Brazil Index Fund, ishares MSCI BRIC Index Fund, ishares MSCI Canada Index Fund, ishares MSCI Chile Index Fund, ishares MSCI China Index Fund, ishares MSCI EAFE Growth Index Fund, ishares MSCI EAFE Index Fund, ishares MSCI EAFE Small Cap Index Fund, Ishares Msci Emerging Markets, ishares MSCI Emerging Mkts Min Volatilit, ishares MSCI EMU Index Fund, ishares MSCI France Index Fund, ishares MSCI Germany Index Fund, ishares MSCI Hong Kong Index Fund, ishares MSCI Israel Capped Index Fund, ishares MSCI Italy Index Fund, ishares MSCI Japan, ishares MSCI Malaysia Index Fund, ishares MSCI Mexico Index Fund, ishares MSCI Pacific ex-japan Index Fund, ishares MSCI Russia Capped Index Fund, ishares MSCI Singapore Index Fund, ishares MSCI South Africa Index Fund, ishares MSCI South Korea Index Fund, ishares MSCI Spain Index Fund, ishares MSCI Sweden Index Fund, ishares MSCI Switzerland Index Fund, ishares MSCI Taiwan Index Fund, ishares MSCI Thailand Index Fund, ishares MSCI Turkey Index Fund, ishares MSCI United Kingdom Index Fund, ishares MSCI USA Minimum Volatility Index Fund, Ishares Msci Value Index Fund, ishares Nasdaq Biotech, ishares PHLX SOX Semiconductors Sector Index Fund, ishares Russell 1000 Growth Index Fund, ishares Russell 1000 Index Fund, ishares Russell 1000 Value Index Fund, ishares Russell 2000 Growth Index Fund, ishares Russell 2000 Index Fund, ishares Russell 2000 Value Index Fund, ishares Russell 3000 Growth Index Fund, ishares Russell 3000 Index Fund, ishares Russell 3000 Value Index Fund, ishares Russell Microcap Index Fund, ishares Russell Mid Cap Growth Index, ishares Russell Midcap Index Fund, ishares Russell Midcap Value Index Fund, ishares S&P 100 Index Fund, ishares S&P 500 Growth Index Fund, ishares S&P 500 Value Index Fund, ishares S&P Europe 350 Index Fund, ishares S&P Global 100 Index Fund, ishares S&P Global Consumer Discretionary Sector Index Fund, ishares S&P Global Consumer Staples, ishares S&P Global Financial Sector Index Fund, ishares S&P Global Healthcare Sector Index Fund, ishares S&P Global Ind. Sector Index, ishares S&P Global Infrastructure Index, ishares S&P Global Materials Sector, ishares S&P Global Tech. Sector Index, ishares S&P Global Tele. Sector Index, ishares S&P Global Utilities Sector, ishares S&P Latin America 40 Index Fund, ishares S&P MidCap 400 Growth Index Fund, ishares S&P MidCap 400 Value Index Fund, ishares S&P N. Amer. Natural Res. Sector, ishares S&P N. Amer. Software Index Fund, ishares S&P Nat'l AMT-Free Municipal, ishares S&P North American Technology, ishares S&P Short Term Nat.Municipal, ishares S&P SmallCap 600 Growth, ishares S&P SmallCap 600 Value, ishares S&P U.S. Preferred Stock Index, ishares S&P/Citigroup International Treasury Bond Fund, ishares Silver Trust, Ishares Trust S & P Global, Market Vectors Agribusiness ETF, Market Vectors Brazil Small-Cap ETF, Market Vectors Coal ETF, Market Vectors Emerg. Markets Local, Market Vectors ETF Gold Miners, Market Vectors Global Alt.Energy ETF, Market Vectors Hard Assets Producers ETF, Market Vectors High Yield Municipal Inde, Market Vectors Indonesia Index ETF, Market Vectors Intermediate Municipal In, Market Vectors Junior Gold Miners ETF, Market Vectors Nuclear Energy ETF, Market Vectors Russia ETF, Market Vectors Steel Index ETF, Market Vectors Vietnam ETF, Materials Select Sector SPDR, Oil Services HOLDRS, Pharmaceutical HOLDRS, PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF, PowerShares Build America Bond Portfolio, PowerShares DB Agriculture Fund, PowerShares DB Base Metals Fund, PowerShares DB Energy Fund, PowerShares DB G10 Currency Harvest Fund, PowerShares DB Oil Fund, PowerShares DB USD Index Bearish Fund, PowerShares DB USD Index Bullish Fund, PowerShares Dynam. LargeCap Value, PowerShares Dynam.LargeCap Growth, PowerShares Dynamic Market Portfolio, PowerShares Emerging Markets Sovereign Debt Portfolio, PowerShares Financial Preferred Portf., PowerShares FTSE RAFI US 1000 Portfolio, PowerShares Global Clean Ergy. Portfol., PowerShares Global Water Portfolio, PowerShares Int.Div. Achievers Portfol., PowerShares Preferred Portfolio, PowerShares QQQ, PowerShares S&P 500 BuyWrite Portfolio, PowerShares S&P 500 Low Volatility Portfolio, PowerShares Senior Loan Portfolio, PowerShares VRDO Tax-Free Wkly Portfol., PowerShares Water Resources Portfolio, PowerShares WilderHill Clean Ergy., Rydex Russell Top 50 ETF, Rydex S&P 500 Pure Growth ETF, Rydex S&P Equal Weight ETF, Semiconductor HOLDRS, SPDR Barclays 1-3 Month T-Bill ETF, SPDR Barclays Capital Int. Treasury, SPDR Barclays Capital ST Muni. Bond ET, SPDR Barclays Convertible Bond ETF, SPDR Barclays High Yield Bond ETF, SPDR Barclays Municipal Bond ETF, SPDR Barclays Short Term High Yield Bond ETF, SPDR Biotech ETF, SPDR DB Int. Govt. Inflation-Protect, SPDR Dow Jones Int. Real Estate ETF, SPDR Dow Jones REIT ETF, SPDR KBW Bank ETF, SPDR KBW Regional Banking ETF, SPDR Oil & Gas Equipment & Services ETF, SPDR Oil & Gas Exploration & Prod. ETF, SPDR Retail ETF, SPDR S&P China ETF, SPDR S&P Dividend ETF, SPDR S&P Emerging Asia Pacific ETF, SPDR S&P Emerging Markets Small Cap ETF, SPDR S&P Homebuilders ETF, SPDR S&P International Dividend ETF, SPDR S&P International Small Cap ETF, SPDR S&P Metals & Mining ETF, Technology Select Sector SPDR, Utilities Select Sector SPDR, Vanguard Consumer Discretionary ETF, Vanguard Consumer Staples ETF, Vanguard Dividend Appreciation ETF, Vanguard Energy ETF, Vanguard ETF Emerging Markets, Vanguard ETF European, Vanguard ETF REIT, Vanguard Extended Market ETF, Vanguard Financials ETF, Vanguard FTSE All-World ex-us ETF, Vanguard FTSE ex-us SmallCap ETF, Vanguard Growth ETF, Vanguard Health Care ETF, Vanguard High Dividend Yield ETF, Vanguard Industrials ETF, Vanguard Information Technology ETF, Vanguard Intermediate-Term Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF, Vanguard Large-Cap ETF, Vanguard Materials ETF, Vanguard Mid-Cap ETF, Vanguard Mid-Cap Growth ETF, Vanguard Mid-Cap Value ETF, Vanguard MSCI EAFE ETF, Vanguard Pacific ETF, Vanguard Short- Term Bond ETF, Vanguard Short-Term Corporate Bond, Vanguard Small-Cap ETF, Vanguard Small-Cap Growth ETF, Vanguard Small-Cap Value ETF, Vanguard Telecom Services ETF, Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, Vanguard Total World Stock Index Fund, Vanguard Utilities ETF, Vanguard Value ETF, WisdomTree DEFA Equity Income Fund, WisdomTree Emerging Markets Equity Income Fund, WisdomTree Emerging Markets Local Debt Fund, WisdomTree International MidCap Dividend Fund, WisdomTree International SmallCap Dividend Fund, WisdomTree Japan Hedged Equity Fund. 12

13 Important Disclosures An affiliate of Morgan Stanley Smith Barney, including but not limited to, Morgan Stanley & Co. LLC, and/or Citigroup Global Markets Inc., has a significant financial interest in relation to the following issuers (if the security is an ETF or Closed-End Fund, the significant financial is in relation to the fund's investment manager or advisor): ishares Barclays 1-3 Year Credit Bond, ishares Barclays 20+ Year Treasury Bond, ishares Barclays 3-7 Year Treasury, ishares Barclays 7-10 Year Treasury Bond, ishares Barclays Agency Bond Fund, ishares Barclays Aggregate Bond Fund, ishares Barclays Intermediate Credit, ishares Barclays Lehman 1-3 Yr Treasury, ishares Barclays MBS Bond Fund, ishares Barclays Short Treasury, ishares Barclays TIPS Bond Fund, ishares Cohen & Steers Realty Majors, ishares Core S&P 500 ETF, ishares Core S&P Mid-Cap ETF, ishares Core S&P Small-Cap ETF, ishares DJ US Basic Materials Sector Index Fund, ishares DJ US Cons. Services Sector Index Fund, ishares DJ US Consumer Goods Sector, ishares DJ US Technology Sector Index, ishares Dow Jones Broker-Dealers Index, ishares Dow Jones International Select D, ishares Dow Jones Select Dividend Index, ishares Dow Jones Transportation Index, ishares Dow Jones U.S. Index Fund, ishares Dow Jones U.S. Medical Devices, ishares Dow Jones U.S. Oil & Gas Exp., ishares Dow Jones U.S. Oil Equip. & Svcs, ishares Dow Jones US Aerospace & Defense, ishares Dow Jones US Energy Sector Index Fund, ishares Dow Jones US Financial Sector, ishares Dow Jones US Financial Services, ishares Dow Jones US Healthcare Sector, ishares Dow Jones US Home Construction, ishares Dow Jones US Industrial Sector, ishares Dow Jones US Real Estate Index, ishares Dow Jones US Telecom Sector, ishares Dow Jones US Utilities Sector, ishares FTSE China 25 Index Fund, ishares Gold Trust, ishares GSCI Commodity Indexed Trust, ishares High Dividend Equity Fund, ishares iboxx $ High Yield Corp Bond, ishares iboxx $ InvesTop Inv Grade Bond, ishares JPMorgan USD Emerging Mkt Bond, ishares Morningstar Large Growth Index, ishares Morningstar Large Value Index, ishares Morningstar Mid Growth Index, ishares Morningstar Mid Value Index Fund, ishares MSCI ACWI ex US Index Fund, ishares MSCI ACWI Index Fund, ishares MSCI All Country Asia ex-japan Index Fund, ishares MSCI All Peru Capped Index Fund, ishares MSCI China Index Fund, ishares MSCI EAFE Growth Index Fund, ishares MSCI EAFE Index Fund, ishares MSCI EAFE Small Cap Index Fund, ishares MSCI Emerging Mkts Min Volatilit, ishares MSCI Russia Capped Index Fund, ishares MSCI USA Minimum Volatility Index Fund, Ishares Msci Value Index Fund, ishares Nasdaq Biotech, ishares PHLX SOX Semiconductors Sector Index Fund, ishares Russell 1000 Growth Index Fund, ishares Russell 1000 Index Fund, ishares Russell 1000 Value Index Fund, ishares Russell 2000 Index Fund, ishares Russell 2000 Value Index Fund, ishares Russell 3000 Index Fund, ishares Russell 3000 Value Index Fund, ishares Russell Microcap Index Fund, ishares Russell Mid Cap Growth Index, ishares Russell Midcap Index Fund, ishares Russell Midcap Value Index Fund, ishares S&P 100 Index Fund, ishares S&P 500 Growth Index Fund, ishares S&P 500 Value Index Fund, ishares S&P Europe 350 Index Fund, ishares S&P Global 100 Index Fund, ishares S&P Global Consumer Discretionary Sector Index Fund, ishares S&P Global Consumer Staples, ishares S&P Global Financial Sector Index Fund, ishares S&P Global Healthcare Sector Index Fund, ishares S&P Global Ind. Sector Index, ishares S&P Global Infrastructure Index, ishares S&P Global Materials Sector, ishares S&P Global Tech. Sector Index, ishares S&P Global Tele. Sector Index, ishares S&P Global Utilities Sector, ishares S&P Latin America 40 Index Fund, ishares S&P N. Amer. Natural Res. Sector, ishares S&P N. Amer. Software Index Fund, ishares S&P Nat'l AMT-Free Municipal, ishares S&P North American Technology, ishares S&P Short Term Nat.Municipal, ishares S&P U.S. Preferred Stock Index, ishares S&P/Citigroup International Treasury Bond Fund, ishares Silver Trust, Ishares Trust S & P Global, PIMCO 1-5 Year U.S. TIPS Index Fund, PIMCO Enhanced Short Maturity Strat.Fund, PIMCO Intermediate Muni. Bond Strat.Fund, PIMCO ST Municipal Bond Strat. Fund, PIMCO Total Return ETF, SPDR S&P 500 ETF. For an explanation of the determination of significant financial interest, please refer to the applicable policies for managing conflicts of interest, which can be found at The research analysts or strategists principally responsible for the preparation of Morgan Stanley Smith Barney Research have received compensation based upon various factors, including quality of research, investor client feedback, competitive factors, and firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues). Research analysts' or strategists' compensation is not linked to the profitability or revenues of particular capital markets transactions performed by Morgan Stanley Smith Barney or the profitability or revenues of particular fixed income trading desks. Morgan Stanley Smith Barney and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Smith Barney Research. Morgan Stanley Smith Barney and/or its affiliates sells to and buys from customers the securities/instruments of issuers covered in this Morgan Stanley Smith Barney Research report on a principal basis. Morgan Stanley Smith Barney and others associated with it may have positions in and effect transactions in securities of ETFs mentioned and may also perform or seek to perform brokerage and other services for those ETFs and may enter into transactions with them. Affiliates of Morgan Stanley Smith Barney may participate in the creation and redemption of the securities covered in this report and as an authorized participant or otherwise, and may acquire such securities from the issuers for the purpose of resale. 13

14 Important Disclosures Investors should consider the investment objectives, risks, charges and expenses of each investment company carefully before investing. The prospectuses and product descriptions contain this and other information about the investment company and should be read carefully before investing. Investors may obtain product descriptions and prospectuses for the ETFs mentioned in this report from the ETF distributor, their brokers or the exchange upon which the particular ETF is listed. Morgan Stanley is an authorized participant for one or more ETFs of the following fund families: BlackRock Fund Advisors, ; DirexionShares, ; ETF Securities, ; Guggenheim Funds, ; Merrill Lynch & Co., ; PIMCO ETFs, ; PowerShares Capital, ; StateStreet Global Advisors, ; United States Commodity Funds, ; The Vanguard Group, ; VanEck Associates, ; WisdomTree, ETFs are redeemable only in Creation Unit size through an Authorized Participant. Certain disclosures listed above are also for compliance with applicable regulations in non-us jurisdictions. Closed-End Fund Rating System Morgan Stanley Smith Barney only rates Closed-End Funds ("CEF"). For CEFs, Morgan Stanley Smith Barney uses a relative rating system using the terms Overweight, Equal-weight, Underweight, and Not Covered (see definitions below). Morgan Stanley Smith Barney does not assign ratings of Buy, Hold or Sell to the CEFs we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Smith Barney Research. In addition, since Morgan Stanley Smith Barney Research contains more complete information concerning the analyst's view, investors should carefully read Morgan Stanley Smith Barney Research, in its entirety, and not infer the contents from the ratings alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a security or fund should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Closed-End Fund Ratings Definitions Overweight (O): The closed-end fund's total return is expected to exceed the average total return of the analyst's industry coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E): The closed-end fund's total return is expected to be in line with the average total return of the analyst's industry coverage universe, on a risk-adjusted basis, over the next months. Underweight (U): The closed end fund's total return is expected to be below the average total return of the analyst's industry coverage universe, on a risk-adjusted basis, over the next months. Not Covered (NC): Indicates that the analyst does not cover the fund. Closed-End Fund Ratings Distribution (as of date January 31, 2013 ) Morgan Stanley Smith Barney only rates CEFs. Thus, this Ratings Distribution table only displays the distribution data for the rated CEFs. For disclosure purposes only (in accordance with FINRA requirements), we include the category of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, and Underweight. Morgan Stanley Smith Barney does not assign ratings of Buy, Hold or Sell to the CEFs we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definition below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively. CEF Coverage Universe Investment Banking Clients (IBC) Closed-End Fund (CEF) Rating Category Count % of Total Count % of Total IBC % of Rating Category Overweight/Buy % % 10.7% Equal-weight/Hold % % 12.8% Underweight/Sell % % 11.5% Total % % 14

15 Important Disclosures Data includes CEFs currently assigned ratings. An investor's decision to buy or sell a fund should depend on individual circumstances (such as an investor's existing holdings) and other considerations. The Investment Banking Clients data above applies only to Morgan Stanley Smith Barney's CEF coverage universe. The data indicates those CEF investment managers for whom Morgan Stanley Smith Barney, provided investment banking services within the previous 12 months. Other Important Disclosures This Morgan Stanley Smith Barney Research does not provide individually tailored investment advice. Morgan Stanley Smith Barney Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Smith Barney Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Smith Barney and its affiliates do not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implications that may result from acting on a particular recommendation. Morgan Stanley Smith Barney Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Issuers" section in Morgan Stanley Smith Barney Research reports or the "Listing of Important U.S. Regulatory Disclosures by security" section of the firm's disclosure website at lists all issuers mentioned where Morgan Stanley Smith Barney or Morgan Stanley & Co. LLC, or their affiliates (excluding Citigroup Global Markets, Inc.) owns 1% or more of a class of common equity securities of the issuers. For all other issuers mentioned in Morgan Stanley Smith Barney Research, Morgan Stanley Smith Barney or its affiliates may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Smith Barney Research. Employees of Morgan Stanley Smith Barney not involved in the preparation of Morgan Stanley Smith Barney Research may have investments in securities/instruments or derivatives of securities/instruments of issuers mentioned and may trade them in ways different from those discussed in Morgan Stanley Smith Barney Research. Morgan Stanley Smith Barney Research is based on public information. Morgan Stanley Smith Barney makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Smith Barney Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Smith Barney Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley Smith Barney business areas, including investment banking personnel. Morgan Stanley Smith Barney Research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. Morgan Stanley Smith Barney may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Investing in closed-end funds involves risks. These include the general risks associated with investing in securities, possible changes in market prices relative to net asset values and manager performance. Besides the general risk of holding securities that may decline in value, closed-end funds have risks related to leverage and the potential for discounts to widen. Morgan Stanley Smith Barney's Global Research Department produces and distributes research products for clients of Morgan Stanley Smith Barney. The legal entity that takes responsibility for the production of this document is the legal entity which the first named author is employed by. This research is disseminated in Australia to "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N , holder of Australian financial services license No ). 15

16 Important Disclosures Morgan Stanley Smith Barney is not incorporated under the People's Republic of China ("PRC") law and the research in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities. Morgan Stanley Private Wealth Management Ltd, which is authorized and regulated by the Financial Services Authority, approves for the purpose of section 21 of the Financial Services and Markets Act 2000, research for distribution in the United Kingdom. Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC. If an analyst named on the front of this report is based in the UK, then this report is produced by Morgan Stanley Private Wealth Management UK Ltd, authorized and regulated by the FSA, for Morgan Stanley Smith Barney LLC. The trademarks and service marks contained in Morgan Stanley Smith Barney Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Morgan Stanley Smith Barney Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney. Morgan Stanley Smith Barney Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request Morgan Stanley Smith Barney LLC. Member SIPC. 16