ComStage Complete guide to ETFs

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1 ComStage Complete guide to ETFs

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3 Contents ETFs - the best ideas are often the simplest 4 The ETF market 8 The world of ComStage ETFs 11 Replication methods 14 Choosing the right ETF 16 Investing in ETFs 22 Glossary 24 Opportunities / risks and important information 28

4 ETFs - the best ideas are often the simplest There seems to be virtually no limit to the ways in which investors can invest their money. From classic equity investments to bonds and currencies to commodities investors are spoilt for choice. And that is true not only when it comes to choosing the asset class, but also when choosing a particular financial product. Perhaps the most important principle - first laid down by the late stock market expert André Kostolany - is diversification. To put it simply: when investing don t put all your eggs in one basket. Since 1990 it has been easy to apply this principle in Germany by opting for an index investment. By investing in, say, a share index, the investor automatically acquires a large number of different shares, thereby spreading his risk. Exchange Traded Funds, or ETFs for short, are now an established asset class on the capital markets. High demand from institutional investors, and from private investors as well, for cost-effective, transparent and liquid exchange-traded index products is making the ETF sector the world s largest growth market for financial products.

5 ETFs the best ideas are often the simplest 5 What are Exchange Traded Funds (ETFs)? Put simply, ETFs are passive investment funds that have an unlimited term, are listed on the stock exchange and can be traded in a similar way to shares. The aim of an ETF is to replicate the performance of an underlying index (benchmark index) as accurately as possible. ETFs are noted for their low charges. No front-end load is payable when purchasing ETFs via the stock exchange, and the management fees are relatively low. But ETFs have even more going for them, as they can be traded at any time, plus they offer a high level of liquidity. This means investors can buy and sell ETFs at up-to-the-minute prices at any time during regular stock market trading hours. This enables ETF investors to react quickly and flexibly. What is more, the pricing of ETFs is transparent as the price of an ETF is linked to the performance of the underlying index. Because the indicative Net Asset Value (inav), which represents the estimated value of the ETF, is published continuously, investors can track the performance of the ETF and the benchmark index on a daily basis when stock markets are open. Special assets With a fund, the invested capital is designated as special assets. If an investment company files for insolvency, special assets are not affected. ETFs have the same protection: as the name suggests, Exchange Traded Funds count as funds and hence, in legal terms, as special assets, in the same way as classic investment funds. What this means for ETF investors is that their invested capital is protected in the event of the insolvency of the investment company, as neither the investment company nor its creditors can access the special assets.

6 6 ETFs the best ideas are often the simplest Classic investment funds compared with ETFs (active vs. passive) The management of capital investments falls into two main categories: active and passive management. Classic investment funds tend to be actively managed, with for example the fund manager deciding on the exact composition of the fund. The aim of active management is to outperform a particular index (the so-called benchmark) by deciding which securities to buy, hold or sell. ETFs, on the other hand, use the passive management approach, whereby an existing underlying instrument such as an index is replicated one to one. Passive management, unlike active management, does not involve laborious analysis for the purpose of selecting individual stocks, so the work involved is considerably reduced. As ETFs do not involve costly active fund management, their charges are much lower than those of classic investment funds. The management fees for a classic German equity fund are around 1.4 percent per year on average (not including any front-end load). By contrast, fees for an ETF on German stocks amount to about 0.15 percent a year. There has been no clear evidence to date to indicate which of the two management approaches is more advantageous. Practice shows, though, that only very few fund managers are capable of beating an existing index (after deduction of fees) on a permanent basis. Investment objectives and potential uses ETFs provide an ideal means of diversifying a portfolio, in other words spreading the risk. For example, an ETF on the German share index, the DAX, invests not in a single company, as would be the case when purchasing an individual share, but in the performance of all the largest and most important companies in Germany. This means investment risk is reduced compared with an investment in a single stock. Investors can achieve a high level of portfolio diversification with just a few transactions. Core / satellite strategy When using a core / satellite strategy as a long-term investment strategy with a portfolio diversified with ETFs, the portfolio is divided into core and satellite investments. The core investment forms the well-diversified basis of the portfolio, and comprises classic investment classes and regions. The core investment accounts for around 60 to 75 percent of the portfolio by volume, depending on the investor s propensity to risk. Meanwhile the satellite investments, which make up much a smaller part of the portfolio, invest in special areas or themes, such as commodities, sectors or emerging markets. With these, the investor deliberately assumes a higher risk in return for the opportunity to secure a higher return. Satellite investments are therefore seen as an addition to the portfolio and can increase the overall return if all goes well.

7 ETFs the best ideas are often the simplest 7 Short-term investment options If, for example, an investor has funds available but only for a short time, he can invest this cash in ETFs on a short-term basis. Continuous ETF trading ensures that ETFs can be bought and sold quickly and easily. As a result, investors can act on even short-term price movements and avoid having excessive cash holdings causing them to lose out on returns. Hedging strategy ETFs can be used to implement even shortterm hedging strategies using so-called short ETFs. Investors are able to protect themselves during periods when the stock market is losing ground by hedging against falling prices. Short ETFs allow investors to translate stock market price falls into profits on a daily basis, enabling them to benefit from these trends in the short term or hedge their portfolio. Implement special strategies The range of ETFs employing special strategies is also growing. Funds invest, for example, in stocks with a high dividend yield or profit from inflation-linked bonds issued by European countries. Stock market volatility is also replicated by ETFs and there are strategies with which investors can even participate disproportionately in rising prices. Minus can have a positive side too. Simply apply the right leverage.

8 8 The ETF market The ETF market Made in USA It was back in the Seventies that the first precursors to ETFs came into being in the USA. It was recognised, even back then, that passive index investments tended to perform better in the long term than actively managed funds. In 1971, the US financial service institution Wells Fargo launched the first-ever index fund for institutional investors, and five years later, private investors too were able to buy into index funds for the first time. In 1993 the first exchange traded index fund in other words the first ETF was born. The first proper ETF, billed Made in the USA, was launched on the American Stock Exchange in New York. In 1988, the Commerzbank subsidiary, CB German Index Fund Company, was the first to enable German investors to invest in an index. Despite initial scepticism, the funds proved a big success, and a wave of passive investment products followed in their wake. History of ETFs first index fund for institutional investors in the USA first index fund for institutional investors in Germany first ETF in Europe first index fund for private investors in the USA first ETF in the USA

9 The ETF market 9 Europe ETFs were first introduced in Europe in April At that time, Deutsche Börse launched a trading platform for ETFs on Xetra known as the XTF segment. From initially a modest six funds with combined assets of 723 million euros, the market soon took off. By the end of April 2013, 1,333 ETFs were listed with assets under management amounting to billion euros. As well as ETFs on German and European share indices, there is now a wide selection of ETFs on emerging economies, other asset classes such as bonds and commodities, and on various investment strategies, notably short and leverage strategies. Number of ETFs in Europe 1,400 1,200 1, to April 2013 Number of ETFs in Europe Source: Bloomberg; Commerzbank. As at: 30 April Assets under management in ETFs (fund volume) in Europe in bn Euros to April 2013 Assets under management (fund volume) in Europe Source: Bloomberg; Commerzbank. As at: 30 April 2013.

10 10 The ETF market A glimpse into the future ETFs are becoming increasingly popular, as seen not only in the growing number of ETFs available, but also in the rising volumes. A study by the respected Steinbeis-Hochschule Berlin is very positive on the development of the ETF market in Germany: Developments over the last few years have shown that transparency is becoming more and more important for private investors. ETFs do well in this respect: they offer a high degree of transparency in terms of their pricing and favourable cost structure. Since it is difficult to outperform the benchmark in the long term, actively managed investment classes will continue to see a marked decline in their assets under management. Meanwhile the proportion of passively managed investments including ETFs is set to increase accordingly. ETFs are steadily gaining in popularity, with the supply of products and demand for them both growing at a similar rate. This means there is an ever expanding range of ETFs available to investors. ETFs are suitable as a means of capitalbuilding, and are increasingly also being used for retirement provisions. Umbrella funds and standardised asset management firms will invest more heavily in ETFs.

11 The world of ComStage ETFs 11 The world of ComStage ETFs In 1988, the Commerzbank subsidiary CB German Index Fund Company enabled institutional investors in Germany to invest in an index for the first time. 20 years later, in September 2008, Commerzbank set up its ETF brand, ComStage, known for its low costs and high replication accuracy. With ComStage ETFs, investors also benefit from the inclusion of any dividends earned regardless of whether the ComStage ETF is linked to a performance index or a price index.

12 12 The world of ComStage ETFs Dividends there s more to be gained ETFs are generally based on performance indices or price indices. Performance indices include any dividends earned on the index stocks in the index calculation, thereby increasing the value of the index. As a result, investors making long-term investments benefit particularly from a performance index. Price indices, by contrast, do not take dividends into account in the index calculation. In the case of ComStage ETFs, investors benefit from the fact that dividend payments are taken into account regardless of whether the underlying index is a performance index or a price index. As a rule, this means that a ComStage ETF linked to a price index tends to outperform the underlying index itself. ComStage ETFs linked to a performance index contain the abbreviation TR, TRN, NR or GR in their name. These are explained in the glossary. The dividend can be paid out or immediately reinvested in the ETF. Information on this can be found on the internet at Indices whose stocks are not listed in Germany do not generally take dividends into account. If tax is payable in the country of the stock in question, part of the tax may be withheld by the relevant revenue authority (withholding tax). Capital market restrictions in individual countries can have the same effect in special situations. In both these cases the investor does not receive the entire dividend. DAX performance index vs. price index Standardised 9,000 8,000 7,000 6,000 5,000 4,000 3,000 The performance index clearly outperforms the price index, as reinvested dividends increase its value. Past performance is not a reliable guide to future performance. Source: Bloomberg. As at: 2 June ,000 1, DAX performance index DAX price index

13 The world of ComStage ETFs 13 Costs less is more ComStage ETFs are notable for their very low flat fees. They generally amount to between 0.10 and 0.70 percent p.a., and the flat fees on bond ETFs are usually even lower than for equity ETFs. What is more, unlike actively management funds where annual management fees also tend to be much higher, an investor buying ComStage ETFs via the stock exchange is not charged the front-end load that is usual for funds, nor any redemption fee. Investors investing in ComStage ETFs via the stock exchange only have to pay the usual transaction costs incurred with any equity investment. ComStage ETFs trade at bid/offer spreads of often only a few cents. This makes them very attractive for investors. The diversity of ComStage ETFs Cost-effective ComStage ETFs are now available covering virtually all index specialities. Investors can stake funds on a wide range of countries and regions, as well as on specific sectors. ETFs on STOXX Europe sector indices participate in the performance of all sectors of the European market. A broad spectrum of ComStage bond ETFs cover the bond market in Germany and the eurozone, with no restriction on duration. Apart from the classic bond markets, investors can profit, for example, from changes in the interest rate using ETFs on Bund Future strategies. ComStage ETFs on money market rates are available for investors wishing to invest in the money market, while the ComStage commodity ETF allows investors to participate in the price movements of precious metals, industrial metals and energy commodities. Leverage ComStage ETFs are a special instrument that allows investors to share disproportionately (on a leveraged basis) in the performance of the underlying security both on the positive and the negative side. In short: because they are so flexible, ComStage ETFs make ideal investment components and are an ideal instrument for implementing a wide range of investment strategies.

14 14 Replication methods Replication methods Accurately replicating the index ETFs use different replication methods to replicate an index as accurately as possible: the swap method and the full replication method. How a swap ETF works ETF Bank pays index performance Investment company pays performance of underlying portfolio swap partner (bank) The swap method With swap ETFs the fund s assets are invested in any securities, e.g. shares or bonds (underlying portfolio). In addition, a so-called swap is arranged with a swap partner (e.g. a bank). A swap is a contractual agreement to exchange predefined payment streams at a future point in time. What this means in the case of a swap ETF is that the performance of the underlying portfolio of the ETF is exchanged for the performance of the index being replicated. The combination of underlying portfolio and swap ensures that the ETF reproduces the performance of the index in question as precisely as possible. The swap method, which is used for the large majority of ComStage ETFs, offers the distinct advantage that it replicates the index more accurately than full replication ETFs. Index adjustments do not need to be reproduced directly at fund level, but are left to the swap partner, which is obliged under the swap contract to pay the exact index performance to the fund. Example of how a swap ETF works ETF swap partner (bank) Volume of underlying portfolio: 100m comprises 20 DAX stocks Performance: -1% Value of portfolio: 99m Performance swap Compensatory payment of 2m EURO STOXX 50 volume: 100m Performance: +1% Value of portfolio: 101m

15 Replication methods 15 The full replication method With full replication ETFs, the shares contained in the index being replicated are bought in line with their index weightings. So a full replication ETF on the DAX will hold exactly 30 stocks, while an ETF on the EURO STOXX 50 will hold exactly 50 stocks. Should the composition of an index alter, for instance as a result of a merger or because a company no longer satisfies the criteria for remaining in the index, the full replication ETF will reproduce this change by substituting the stocks concerned. The fund always needs to maintain a certain level of cash holdings for this purpose to enable it to react quickly to changes. Besides investing in the index components, a full replication ComStage ETF may also use derivative instruments and techniques to ensure the index is accurately replicated. ComStage ETFs of this kind are designated FR (Full Replication). Counterparty risk and collateralisation Counterparty risk Value differences can arise when using swaps, as the underlying portfolio and the index to which the ETF is linked perform differently. If, due to market performance, the underlying portfolio for the ETF has fallen in value, the swap partner has to make a corresponding compensatory payment. But if the swap partner becomes insolvent and is unable to meet its obligations towards the ETF, this may result in losses in the ETF. To protect investors, this so-called counterparty risk is limited by law to a maximum of ten percent of fund assets. Collateralisation of counterparty risk ComStage ETFs even go one step further: if, due to the market s performance, the ETF has a claim on the swap partner, this is collateralised by the depositing of securities. The value of the furnished collateral generally exceeds the fund s claims (over-collateralisation). Counterparty risk is therefore minimised in the case of ComStage ETFs.

16 16 Choosing the right ETF Choosing the right ETF The ETF market has grown exponentially in recent years. The number of ETFs available is increasing all the time, opening up ever more opportunities for investors. However, as the market grows, so does the complexity of the products. So it is all the more important to take care in choosing the right ETF. Before making an investment, investors need to consider certain key criteria such as the choice of underlying index, costs and fees, and the replication method used.

17 Choosing the right ETF 17 Choosing the underlying index Once an investor has decided to invest in an ETF, the first step is to choose the right index. Right in this case means selecting the index which best enables the investor to achieve his investment objectives. After all, an ETF is only ever as good as its index. For investors opting for passive investments, the choice of index is one of the most important active decisions they will have to make. As indices form the basis for all ETFs and determine their risk / reward profile, the choice of underlying index is the most important element of the selection process. The underlying index concept and methodology: Before making an investment, investors need to be aware of what market or market segment an index represents, and what approach it adopts. In other words, investors need to know in detail about the composition of the index and what weighting method is used, so that they are aware, for example, of the concentration risk attached to individual stocks or sectors. Names of ETFs: Every ETF is unique. So even if there are two ETFs linked to the same index with similar sounding names, they will differ in some respect such as their replication method or their use of income. Investors should find out in detail about the ETF prior to any investment decision to ensure they are spared any surprises in terms of the future performance. Foreign exchange effects: Currency effects are another important factor. Investors need to be aware that, if they invest in an ETF linked to a foreign index, they are exposed to a foreign exchange risk in addition to the equity risk. For example, this would be the case for an investor from the eurozone investing via an ETF in a US share index. The currency effect enables investors to benefit from the opportunities offered by an investment in a foreign currency. However, they also participate fully in any negative development. An appreciation of the foreign currency is beneficial for euro investors, whereas a depreciation of that currency can have negative consequences for investors. Investments in different national currencies can therefore hold both foreign exchange opportunities and foreign exchange risks for investors.

18 18 Choosing the right ETF Costs, charges and tracking error Although costs and charges are normally substantially lower for ETFs than for classic investment funds, it is worth taking a look at the detail. Charges: The Total Expense Ratio (TER) is a commonly used ratio in the fund and ETF industry, and represents the total cost ratio for an ETF. It includes administration charges such as fund management, auditor and operating costs along with the custodian bank fee that the ETF has to pay for the administration of its assets, and any performance-related charge. Charges at ComStage At ComStage, the flat fee is generally identical to the Total Expense Ratio. This means investors are not burdened with additional costs such as performancerelated charges or transaction costs incurred by the fund when buying or selling securities. Therefore running costs should always be the deciding factor for investors basing their choice of an ETF on cost considerations. This ratio transparently combines the cost elements, provides an efficient cost overview and above all facilitates cost comparisons. Investors should always be aware, though, that the charges quoted by ETF providers do not include securities account management costs or purchase costs such as transaction costs or any bank or stock exchange fees charged. Spread: In stock-exchange and over-the-counter trading, the spread refers to the difference between the purchase and sale price of an ETF. An investor buys an ETF at the higher offering price and sells at the lower bid price. The wider the spread, the smaller the price gain when trading in ETFs. Consequently the spread is very often used as an additional criterion when selecting exchange-traded index funds. Tracking error: ETFs aim to replicate the performance of a reference index (a benchmark) as accurately as possible. Active investment funds, on the other hand, try to beat the benchmark. While the success of an actively managed fund is shown by the amount to which it outperforms the benchmark, the success of a passively managed fund is indicated by its tracking error.

19 Choosing the right ETF 19 The tracking error indicates the level of fluctuation in the deviation of an ETF from its designated benchmark over a certain period. The smaller the deviation between the ETF and the benchmark, the better the ETF is replicating the reference index. However, the tracking error does not reveal whether this deviation from the index is positive or negative. In other words it serves as a measure of the quality of index replication, not of the quality of the ETF. A fund with a high tracking error may well achieve a positive performance. The tracking error plays more of a role for investors with a shorter investment horizon, as higher volatility than the benchmark can have a significant effect on income over short investment periods. In this respect, the tracking error is a measure of risk whereas the tracking difference is a measure of return. Tracking difference only income counts For investors with a long-term outlook, the tracking difference is more important than the tracking error. It represents the absolute difference in return between the ETF and its benchmark over a set period. It also states the percentage by which the ETF outperformed or underperformed its benchmark index. Investors need to look at both the tracking error and the tracking difference to obtain a complete picture of how well an ETF is replicating its benchmark. Why do deviations occur? Deviations between the performance of the ETF and that of the index being replicated occur, for example, as a result of the timing of dividend payouts and the tax treatment of dividend payments (withholding tax). Then there are the costs of the ETF, which only occur in the ETF and not in the index being replicated. With full replication ETFs, discrepancies can also occur as a result of the rebalancing of individual stocks in the index due to capital measures or regular index adjustments, which normally give rise to transaction costs when replicated in the ETF.

20 20 Choosing the right ETF Use of income The income of an ETF includes dividends and interest, among other things. For example, equity ETFs regularly receive dividend payments from companies whose shares they hold, and bond ETFs receive interest payments from the issuers of the bonds they hold. Like investment funds, ETFs also have different ways of dealing with this income. There are essentially two options - pay out the dividends or reinvest them: Distributing ETFs pass on any dividends and interest received directly to their investors usually once a year. The income is automatically credited to the investors accounts by the custodian. However, investors then have to decide what they want to do with the paid-out income. If, for example, they immediately reinvest it, they may incur additional costs in the form of stock exchange charges. Reinvestment ETFs do not pay out their income, but add it to the special assets. Interest and dividends are reflected in higher ETF unit prices. So the money stays in the fund, and investors do not have to concern themselves with how to reinvest it. The choice of variant depends primarily on the investor s personal investment strategy. If the investor is looking for a regular income, it would make sense to opt for ETFs that pay out. For long-term investments, a reinvestment ETF is generally advantageous.

21 Choosing the right ETF 21 Replication methods For many investors, the method used to replicate the index is a key criterion when it comes to deciding between different ETFs on the same benchmark index. Methods can vary from one ETF to another and from one ETF provider to another. As a rule, either full replication is used, or synthetic replication by means of swaps. Both variants have their pros and cons. Investors have to weigh up which criteria are key for them. A detailed explanation of the two replication methods can be found on pages 14 and 15. Information provision and service quality of ETF providers When choosing the right ETF, the selection process should ideally include an assessment of the quality of the ETF provider in question. Apart from the quality of the product itself, soft factors such as service, website quality, direct trading partners for investors and the availability of ETFs that can be incorporated into savings plans are very important. Good information provision in terms of high-quality, up-to-date, extensive information provided on websites and the facility to download brochures are a key consideration as well. And staff that are readily contactable, friendly and competent also contribute to product and market transparency from a private investor s point of view. Here too, investors need to weigh up the advantages and disadvantages and decide which criteria are critical for them and which not. Swap low tracking error lower flat fee reduced administration costs counterparty risk (if the swap is not collateralised) lack of transparency if the ETF s underlying portfolio is not published or contains illiquid securities Full replication no additional risk due to use of swaps (counterparty risk) high transparency as investors know exactly what is deposited as special assets higher tracking error higher flat fee cash position required

22 22 Investing in ETFs Investing in ETFs Order placement, trading hours and savings plans Having decided to invest in a ComStage ETF, an investor can purchase it either on the stock exchange or over-the-counter. The only prerequisite for the purchase and subsequent sale is that the investor holds a securities account with a bank or savings bank. Stock exchange trading ComStage ETFs can be traded on the Stuttgart stock exchange, the Frankfurt stock exchange, via Xetra, the electronic trading system, or via SIX on any trading day. Handelszeiten 20:00 hours hours Stuttgart Stock Exchange (ETF Bestx): from 8:00 to 22:00 hours Frankfurt Stock Exchange: from 09:00 to Xetra trading system: from 9:00 to 17:30 SIX Swiss Exchange Zürich: from 9:00 to 17:30 hours Over-the-counter trading (direct trading) ComStage ETFs can also be purchased and sold over-the-counter - also known as direct trading. The brokerage fees normally charged when trading on the stock exchange do not apply in this case. Under normal market conditions, over-the-counter buying and selling prices are provided continuously for ComStage ETFs between the hours of 8:00 and 22:00 hours. Whether an investor opts to trade on an exchange or over-the-counter, he normally has the facility to set a buying or selling limit when he places the order. In other words the investor specifies the maximum or minimum price at which he wishes to buy or sell. By setting individual limits, the investor can ensure that he buys or sells at a certain ETF price level without having to constantly monitor the market. At present, ComStage ETFs can be bought and sold over-the-counter through the following direct banks: Trading partner Webseite brokerjet comdirect bank Commerzbank Cortal Consors DAB bank direktanlage.at flatex ING-DiBa maxblue OnVista Bank S Broker Sino Swissquote TARGOBANK ViTrade direkt

23 Investing in ETFs 23 ETF savings plans Investors who want to invest in ComStage ETFs on an ongoing basis can do this by means of an ETF savings plan. This means that, even with a small investment sum, savers can access potential returns well above savings account or time deposit returns. Their low cost structure makes ETFs particularly suitable for medium or long-term capital building. One feature of the savings plan which sets it apart from a one-off investment is the so-called cost average effect. This is achieved when regularly investing an unchanging sum of money in one particular ETF. It means that when the stock market is in a weak phase, savers get more ETF units for their fixed investment sum (because the price of the ETF is lower) and fewer units when the stock market is strong (as prices are higher). The resulting average prices mean the ups and downs of the financial market are evened out over time. The ETF savings plan is available from various selected direct banks. Further information on ETF savings plans is available at www. comstage.de under the menu item Trading / Savings Plans.

24 24 Glossary Glossary Actively managed funds Investment funds whose composition is scrutinised and monitored by the fund management and adjusted according to the market situation. The fund management attempts, for example through stock selection, to achieve a higher risk-adjusted return for the actively managed portfolio than the equivalent risk-adjusted return for the benchmark index. Asset class An asset class represents a group of investment opportunities on the capital market that meet certain criteria. The most important asset classes are equities, money market, bonds, commodities and real estate. An investor can reduce the risk to the capital investment by splitting assets between different asset classes (diversification). Benchmark The benchmark is the key reference security against which one s own investments or the performance of an investment fund is compared. It is often a market index such as the DAX or the S&P 500 index. Actively managed funds always set out to beat this benchmark index, whereas passively managed funds such as ETFs aim to accurately replicate the performance of the benchmark. Core / satellite A core / satellite strategy is a combination of an active and passive investment strategy. The main portion of the invested capital (the core investment) is broadly diversified, while the smaller share of the portfolio (known as satellites) is actively invested to try to generate additional income from sources other than the core investment. Dividends A shareholder receives a payout of the specified amount, whereas a holder of fixed-income securities is not entitled to a fixed interest payment. He receives the proportion allocated to him when the part of the net income for the year earmarked for distribution is divided by the number of shares in the company. Diversification (spreading of risk) Risk diversification is the main reason for investing in investment funds. Risk can be reduced by splitting the investment sum between several individual securities, as the risk associated with a portfolio is lower than the weighted average of the risks of its individual positions. Market risks are reduced by spreading investments across different companies, sectors, countries and currencies. Equity funds Equity funds use investors money primarily to buy shares in listed companies. Investors also participate directly in a company s performance through the shares held in the fund. Equity funds buy shares from particular sectors and/or different countries.

25 Glossary 25 ETFs Exchange Traded Funds These are index funds that are traded on the stock exchange. Unlike in the case of actively managed funds, the fund manager does not attempt to beat the benchmark index by active portfolio management. Instead, Exchange Traded Funds aim to replicate the benchmark index as accurately as possible. As a result, the fund performs very similarly to the index. Front-end load The front-end load is a one-off charge that fund customers pay to the seller of the fund units for advisory services and marketing. The front-end load is not a standard amount but varies from one fund to another. For equity funds it may be around five percent of the value of the unit, and for bond funds around three percent. No front-end load is charged for ETFs traded on the stock exchange or over-the-counter. Fund taxation ETFs, like classic investment funds, count as special assets which are subject to the fund taxation regulations. This means that the principle of transparency applies to ETFs as well. For example, paid-out or retained dividends are taxable as so-called ordinary income of the ETF for private investors subject to unlimited tax liability in Germany at the time of the payout or of the reinvestment at the end of the ETF s financial year. GR Gross Return Index The suffix GR in the name of the ETF means that the underlying index is a Gross Return index, in other words the index calculation includes gross dividends and interest. Index adjustment At regular intervals or when certain events occur, the companies constituting the index are reviewed to check whether they still meet the criteria for membership of the index (e.g. market capitalisation, liquidity of their shares). If they do not, these companies are replaced with others. Liquidity A liquid market enables securities to be traded easily and enables investors to buy and sell flexibly at the latest market price. The large number of market participants willing to buy and sell, or the prices offered by market makers mean that investors are able to enter into and unwind positions quickly. Market Maker The market maker offers binding prices on request and is therefore always available as a market partner during stock exchange opening hours. He buys or sells either immediately from his own holdings or looks for a counterparty to the trade, which often takes only a matter of seconds.

26 26 Glossary NAV, Net Asset Value The market value of a fund unit is known as its asset value. For funds that do not charge buying fees, the asset value, market price and issue price are identical: they represent the price investors have to pay for one fund unit. Most funds calculate their asset value every day after market close. They do this by valuing all the securities in their portfolio at the closing price and adding them together with all the other assets such as cash funds etc., deducting all liabilities and dividing the total (total net assets) by the number of outstanding fund shares. inav (indicative Net Asset Value) The indicative Net Asset Value (inav) is calculated continuously and represents the estimated value of an ETF in real time. It is calculated on the basis of the portfolio published daily. NR Net Return / TRN Total Return Net The suffix NR or TRN in the name of the ETF means that the index underlying the ETF is a Net Return or a Total Return Net index: net dividends/interest are taken into account in the index calculation (after deduction of withholding tax where appropriate). Outperformance A fund is always compared with its benchmark. If it beats this benchmark, in other words the return on the fund is higher than the return on the benchmark, it is said to have outperformed the benchmark. Performance index see TR Total Return Index Price index A price index considers only the price performance of the index components. Unlike in the case of a performance index, the price discount associated with a dividend payment is treated as a price fall for the share. So a price index falls in value compared with a performance index at the time of dividend payouts. Reinvestment With reinvestment funds, income from securities (e.g. interest, dividends) is reinvested, thereby increasing the value of the fund. Special assets A fund is a special asset, meaning that the investors funds are managed separately from the operating assets of the investment company. Investors are not exposed to issuer risk. Spread In securities trading a distinction is drawn between the buying and selling price. For example, if investors want to buy ETFs directly from Commerzbank, they buy them at the so-called offering price (selling price). When they return them, Commerzbank buys the ETFs at the bid price (buying price). This is always lower than the offering price. The difference between the selling and buying price is known as the spread.

27 Glossary 27 Strategic asset allocation Investment decisions on which assets are admitted to the portfolio long-term, and what weighting they are given. Tactical asset allocation, by contrast, refers to decisions on the short to medium-term over- or underweighting of the selected asset classes. Total Expense Ratio (TER) Tracking error The Total Expense Ratio (TER) expresses the costs and fees payable annually as a percentage of the average fund volume. The tracking error is a measure of the level of fluctuation in the deviation of an ETF from its benchmark over a specified period. Tracking difference The tracking difference is a measure of the absolute performance difference between an ETF and its benchmark over a specified period. TR Total Return Index The suffix TR in the name of the ETF means that the underlying index is a performance index (Total Return Index, TR). A performance index measures the gain in the value of capital investments. Changes in capital and dividend payouts are included in the calculation of the performance index.

28 28 Opportunities / risks and important information Opportunities / risks and important information Opportunities ETFs are highly liquid and easy to trade. Therefore ETFs enable investors to react flexibly to market changes. Continuous trading means investors are able to buy and sell at any time. ETFs are highly transparent due to their passive fund management. They aim to reflect the underlying index virtually 1:1. ETFs are cost-effective and, as a rule, have lower regular charges than classic investment funds. There is no minimum investment sum with ETFs. Risks ETFs do not come with capital protection. They are linked to an index which may perform positively or negatively. As a result, the value of the fund units can rise or fall. Under extremely unfavourable circumstances (e.g. in the event of a market-related fall in the value of all index components), a total loss of the invested capital may occur. ComStage ETFs use derivative financial instruments such as Total Return Swaps for the purpose of efficient index replication, and these come with specific risks attached such as counterparty risk. The risk is that the counterparty will fail and therefore will no longer be able to meet its payment obligations. Although this risk is collateralised, there is still a possibility that ETF investors may suffer a loss if a business partner fails. The counterparty risk is limited by law to 10 percent of the fund s assets for each trading partner. Legal and regulatory provisions apply to collateral furnished by the trading partner in connection with securities lending and OTC transactions to minimise the counterparty default risk. There is always the possibility that some collateral may turn out to be worthless in the event of default, or that it has lost all its value by the time it comes to be used. The securities underlying the index may be traded in a currency other than that of the investor. In such cases, foreign exchange losses may impact negatively on the investment return from the investor s point of view. A detailed description of the opportunities and risks associated with investing in ETFs can be found in the offering prospectus.

29 Opportunities / risks and important informatione 29 Important information This publication is advertising as defined by the Securities Trading Act (WpHG). This publication provides certain information about the ETF referred to in it; however, on its own this is insufficient information on which to base an investment decision. An investment decision should therefore not be made solely on the basis of the sales prospectus and KIIDs and not based on the information provided in this overview. Investors are also advised to consult their tax, financial, legal or other advisors prior to acquiring ETFs to clarify any potential economic or tax consequences of acquiring such units individually. The funds themselves are not recommended, sold or advertised by the sponsors of the index (apart from the Commerzbank AG), nor do the sponsors provide any other assurances regarding the fund. In addition, the sponsors of the index referred to here (including Commerzbank AG) do not provide any assurances or guarantees whatsoever with regard to results achieved through use of its index and/or index level on a particular day, or in any other respect. Commerzbank AG disclaims all liability relating to this publication, the information contained in it or for any errors or omissions, or for losses of any kind arising from trust placed in the information in any way, subject to the laws and provisions in force. Commerzbank acts as market maker for the fund units referred to or trades in financial instruments economically associated with fund units or derivatives. Commerzbank AG s trading and/or hedging activities may influence price trends in relation to transactions conducted in fund units. ComStage ETF is an investment scheme (SICAV) which is registered in the Grand Duchy of Luxembourg and which, as an umbrella fund, is subject to the European regulation of collective investment schemes under UCITS IV. The sales prospectuses for the ComStage ETF contain a comprehensive description of the conditions governing the fund. The sales prospectus, the key investor information document (KIID), the articles of association and the current annual and mid-year reports are available free of charge from the following agents: information agent; paying agent and tax representative in Austria; Zürich, acts as paying agent and representative in Switzerland and Germany: Commerzbank AG, CM-EMC, ComStage, Frankfurt am Main, acts as the Austria: Erste Bank der österreichischen Sparkassen AG, Graben 21, A-1010 Vienna, acts as Switzerland: Commerzbank AG, Frankfurt am Main, Zurich Branch, Utoquai 55, CH-8034 Luxembourg: Managing Company Luxembourg: Commerz Funds Solutions S.A., 25, rue Edward Steichen, 2540 Luxembourg. Further information is available at Commerzbank AG is supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Copyright Commerzbank All rights reserved. 2 August 2013

30 Commerzbank AG Corporates & Markets Equity Markets & Commodities Mainzer Landstraße Frankfurt Germany Phone: Fax: Internet:

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