ETF Basics: An Introduction to ishares Exchange Traded Funds

Transcription

1 ETF Basics: An Introduction to ishares Exchange Traded Funds

2 Terms of use Before using ishares Funds presentation materials with your clients, please check to ensure that the materials comply with your firm's guidelines. 2

3 Agenda Growth of ETFs and Barclays Global Investors The engine of ETFs Unique benefits of ETFs and ishares Low cost Tax efficiency Transparency Risk management Liquidity Modularity and strategies 3

4 Consistent Growth of Exchange Traded Funds (ETFs) ETFs experienced rapid growth during bear and bull markets There are 672 U.S. ETFs covering global equity and fixed income with AUM of over U.S. $619 billion. 700 U.S. ETF AUM 1, , ,200 1, S&P 500 ishares Others Sources: FRC and Yahoo Finance as of 12/31/07. Universe includes exchange traded grantor trusts. 4

5 ishares Family of Funds and Mutual Fund Markets In Net New Asset Flows Fund Family 2006 Net Flows ($M) 2007 Net Flows ($M) American Funds Vanguard ishares Dodge & Cox State Street Global Advisors T. Rowe Price Dimensional Investment Group Franklin Templeton Investments Thornburg ProFunds Fund families serve different market segments Source: Strategic Insights as of 11/30/07. Excludes funds of funds and money market funds. Information on American Funds, Vanguard Group, Dodge & Cox, State Street Global Advisors, T. Rowe Price, Dimensional Investment Group, Franklin Templeton Investments, Thronburg and ProFunds is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of securities, other than the ishares Funds, that are described in this presentation.

6 ishares Funds are Brought to you by Barclays Global Investors Total assets managed: $2 trillion Total active assets managed: $491.5 billion 3,002 employees worldwide* serving approximately 3,000 clients in 51 countries Largest ETF manager with more than $388 billion in assets MONTREAL TORONTO LONDON TOKYO SAN FRANCISCO BOSTON AMSTERDAM ATLANTA LATIN AMERICA HK/SINGAPORE Full service office Client service/business development SYDNEY *Excluding contractors. Source: BGI. As of 9/30/07. ishares Funds are distributed by SEI Investments Distribution Co. Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. BGFA is a subsidiary of Barclays Global Investors, N.A., a majority-owned subsidiary of Barclays Bank PLC. 6

7 WHAT IS AN ETF?

8 Familiar Ground Best of Both Worlds Like a stock Trading flexibility intraday on the exchange Long or short* Options Like an index fund Constructed to track benchmark indexes Low expense ratios Low turnover * With short sales, you risk paying more for a security than you received from its sale. Short sales subject to availability. 8

9 What Sets an ETF Apart? The creation/redemption process distinguishes ETFs from mutual funds and closed-end funds The creation/redemption process enables the unique benefits of ETFs 9

10 How Traditional Mutual Funds Work Buyers Fund Company Stock Exchange Sellers 10

11 The Innovative Mechanism of ishares ETFs Buyers Financial Intermediaries Stock Exchange Financial Intermediaries Sellers Market Makers Fund Company Mutual funds and ishares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the ishares Funds will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. 11

12 The Benefits of ishares ETFs Low cost Tax efficiency Transparency Risk management Liquidity Modularity and strategies 12

13 COSTS OF INVESTING Internal Fees and Taxes

14 Internal Expenses Matter $100,000 investment for 10 years 8% annualized return 25 bps 50 bps 100 bps $215,892 gross value Internal fees $3,862 Foregone earnings Net value Does not include commissions or sales charges. $1,475 $210,556 $7,625 $14,866 $2930 $5,778 $205,338 $195,249 14

15 ishares Funds Low Expense Ratios Fund Category bps ishares ETF Large-cap 9 15 ishares S&P 500 ishares Russell 1000 Small-cap Fixed income International Sector ishares S&P SmallCap 600 ishares Russell 2000 ishares Lehman Treasury Series ishares iboxx $ Investment Grade Corporate Bond ishares Lehman Aggregate & TIPS ishares MSCI International Series 1, 2 ishares MSCI EAFE ishares MSCI Emerging Markets ishares Dow Jones Sectors ishares S&P Global Sectors 1. Brazil, South Africa, South Korea, Taiwan: 68 bps. 2. MSCI Pacific ex-japan, 50bps Transactions in shares of the ishares Funds will result in brokerage commissions. 15

16 Tax Efficiency of ishares ETFs Index Funds Low turnover Baskets of securities for shares Creation/redemption process Cap gain control Shareholders interact via exchange Taxed as an equity transaction ETFs can produce capital gain distributions. For example, during an underlying index reconstitution or corporate actions (especially foreign). 16

17 RISK MANAGEMENT

18 ishares ETFs are Transparent Manage the unknown know what you own ishares holdings are published daily on ishares.com Pricing of underlying holdings is refreshed continually No style drift Each benchmark represents a defined market segment Benchmark providers publish methodology Manage risk ishares ETFs are designed to closely track a benchmark 18

19 ishares Funds Track ishares Funds 3-Year Average Annual Tracking (as of 12/31/07) Expense Ratio (as of 1/1/08) S&P % 0.09% Russell % 0.20% Dow Jones U.S. Total Market -0.21% 0.20% Dow Jones U.S. Technology -0.60% 0.48% MSCI Japan -0.53% 0.52% MSCI EAFE -0.22% 0.34% Source: BGI. Past tracking performance does not guarantee future performance. 19

20 LIQUIDITY

21 ishares ETFs Provide Enhanced Liquidity Liquidity of underlying securities provides foundation for ETF liquidity Exchange-traded attribute provides additional layers of liquidity Market participants compete for client orders leading to tighter spreads Investors receive price improvement by transacting in the ETF whenever they buy/sell the ETF inside the spread cost of the underlying portfolio basket of securities Trading volume is not indicative of total liquidity in an ETF 21

22 ishares ETF Liquidity Offers Price Improvement ishares MSCI Emerging Markets (EEM) ishares Russell 2000 (IWM) 1,400 $ $0.05 Annual Shares Traded (mlns) 1,200 1, $0.25 $0.20 $0.15 $0.10 $0.05 Spread ($) Annual Shares Traded (mlns) $0.04 $0.03 $0.02 $0.01 Spread ($) EEM Trading Volume EEM ETF Spread ($) $ IWM Trading Volume IWM ETF Spread ($) $0.00 EEM Underlying Portfolio Spread ($) IWM Underlying Portfolio Spread ($) 22 Sources: NYSEArca, Stock Facts Pro, 12/06.

23 ishares MODULAR FAMILY OF FUNDS A Solutions-Driven Approach

24 The Benefits of Modularity Building block format Enables implementation of strategies Indexing pre-2000 and post-2000 Source: FRC as of 2/28/07. Universe includes exchange traded grantor trusts. 24

25 Modularity and Portfolio Completion S&P 1500 U.S. Equity Portfolio S&P 500 S&P 500 Growth S&P 500 Value Large-cap stocks S&P MidCap 400 S&P MidCap 400 Growth S&P MidCap 400 Value S&P SmallCap 600 S&P SmallCap 600 Growth S&P SmallCap 600 Value 25

26 Modularity and Core/Satellite Russell 3000 Portfolio of Active Funds or Managers Russell 1000 Russell 1000 Growth Russell 1000 Value Large-cap growth Large-cap value Russell Midcap Russell Midcap Growth Russell Midcap Value Russell 2000 Russell 2000 Growth Russell 2000 Value Small-cap growth Small-cap value 26

27 Modularity and Tactical Investing Utilities Consumer Services Dow Jones U.S. Total Market Basic Materials Consumer Services Consumer Goods Energy Financial Healthcare Industrial Technology Energy Technology Telecom Utilities 27

28 Modularity and Duration Management Yield Duration Lehman 1 3 Year Treasury Lehman 7 10 Year Treasury Lehman 20+ Year Treasury iboxx $ Investment Grade Corporate Bond Lehman 1-3 Year Credit Lehman Intermediate Credit iboxx $ High Yield Corporate 28

29 Good for Clients. Good for Business. Manage costs Manage risks Manage taxes Complementary to your business Portfolio managers and asset managers Wealth managers Consultants and advisors 29

30 Carefully consider the ishares Funds investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds prospectuses, which may be obtained by calling iShares or by visiting Read the prospectus carefully before investing. There are risks involved with investing, including possible loss of principal. 30

31 The ishares Funds are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. Barclays Global Investors Services (BGIS) assists in the marketing of the Funds. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., which is a majority-owned subsidiary of Barclays Bank PLC, none of which is affiliated with SEI. Shares of ishares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Mutual funds and ishares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the ishares Funds will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. When comparing stocks or bonds and ishares Funds, it should be remembered that management fees associated with fund investments, like ishares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of ishares Funds may be substantially less than those of most mutual funds. Buying and selling shares of ishares funds will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Neither Barclays Global Investors, N.A. and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. 31

32 The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. The ishares Funds are not sponsored, endorsed, or issued by Lehman Brothers, nor are they sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., European Public Real Estate Association (EPRA ), FTSE International Limited ( FTSE ), FTSE/Xinhua Index Limited ( FXI ), iboxx, KLD Research & Analytics, Inc., MSCI Inc., Morningstar Inc., The NASDAQ Stock Market, Inc., National Association of Real Estate Investment Trusts ( NAREIT ), New York Stock Exchange, Inc., Frank Russell Company, or Standard and Poor s. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI nor BGI, nor any of their affiliates, are affiliated with the companies listed above. FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in the FTSE/Xinhua Index vest in FXI. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50 Index, FTSE NAREIT Residential Index, FTSE NAREIT Retail Index, FTSE NAREIT Mortgage REITs Index or FTSE NAREIT Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Global Real Estate ex-us/north America/Europe/Asia, Index; all rights vest in FTSE, NAREIT, and EPRA. All rights in the FTSE Developed Small Cap ex-north America Index vest in FTSE. "FTSE" is a trade- and servicemark of London Stock Exchange and The Financial Times Limited; "Xinhua" is a trade- and servicemark of Xinhua Financial Network Limited. NAREIT is a trademark of NAREIT; EPRA is a trademark of EPRA Barclays Global Investors. All rights reserved. ishares is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. 32 Not FDIC Insured No Bank Guarantee May Lose Value

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