4/26/2012. Navigating the ETF Landscape. The ETF revolution. ETF assets expected to approach $2 trillion by 2014 $2,500 1,200 AUM ($B) # of ETFs

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1 Navigating the ETF Landscape FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION The ETF revolution ETF assets expected to approach $2 trillion by 2014 $2,500 $2,000 AUM ($B) # of ETFs 1099 $2,093 1,200 1, AUM ($B) $1,500 $1,000 $1, # of ETFs 400 $500 $0 219 $ $ Sources: FactSet, Bloomberg, Strategic Insight, BlackRock, as of 12/31/10. Note: Projected AUM based on trailing 3YR CAGR of 20%. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 2 1

2 Key criteria for selecting the right ETF Manager How well do you know your ETF manager? Exposure What s inside your ETF? Structure What are the implications of structure? Liquidity Can you trade when you need to? Costs What does it really cost? FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 3 1. Manager How well do you know your ETF manager? Expertise in the ETF market Track record, experience, commitment It takes size, skill and expertise to realize ETFs benefits for investors A business model aligned with advisors and their clients What advisor-focused support is available to help investment professionals and their clients navigate ETFs, build portfolios and execute strategies? FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 4 2

3 The diverse ETF landscape: No longer a handful of products and providers to evaluate AUM market share AUM by asset class 2% 2% 5% 8% 14% 11% 45% 47% 23% 28% 15% ishares Vanguard State Street ProFunds PowerShares Van Eck Others Domestic Equity Fixed Income International Equity Commodity/Other 82% of the ETF share held by the three largest providers, with ishares holding 44% of ETF assets ETFs have enabled many asset classes to become instantly relevant to a broader investor base Sources: Bloomberg, FactSet, BlackRock, as of 12/31/10. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 5 2. Exposure What s inside your ETF? Targeted exposure Broad or narrow? Depth of coverage? Overlap or gaps with other index products or active managers? Index name recognition Trackable, complete and representative of the investment opportunity? Institutional-grade indexes you want as benchmarks? Frequency of disclosure and level of transparency Infrequent disclosure of holdings exposes investors to risk Index methodology impacts underlying economic exposure. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 6 3

4 Index methodology impacts economic exposure Technology and telecom example Dow Jones U.S. Technology Index Dow Jones U.S. Select Telecommunications Index Technology Select Sector Index 14% 100% 100% 86% Three-Year Return 1.9% -3.93% -0.42% Three-Year Standard Deviation 26.6% 25.7% 24.5% Technology Companies Telecom Companies Standard deviation is a measure of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Sources: BlackRock, Bloomberg, as of 12/31/10. Index constituents are subject to change. Index returns are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual ishares Fund performance, please visit or request a prospectus by calling iShares ( ). FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 7 Managing index exposure Putting indexes together MSCI Broad Market Index MSCI Large Cap 300 MSCI Prime Cap 750 Midcap Midcap 400 MSCI Mid Cap Microcap Small Cap 600 MSCI Small Cap 1750 For illustrative purposes only market cap spectrum not to scale. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 8 4

5 Institutional investor use of indexes Institutional use of US equity benchmarks ,412 Assets in US$ Billions Wilshire Growth 1000 Growth Source: Investments, FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 9 3. Structure What are the implications of ETF structure? Complete and transparent benefits to shareholders Balancing exposure with cost and tax efficiency and liquidity Stand-alone, dedicated ETF structure Insulation from the activities of other shareholders only happens with this structure Past performance does not guarantee future results. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 10 5

6 Structure impacts risks, taxes and tracking error 1940 Act 1933 Act Open-End Fund Unit Investment Trust Grantor Trust Exchange Traded Notes Closed-End Fund Other Listed Vehicles Limited Partnership FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 11 What makes an ETF an ETF? Buyers Financial Intermediaries Stock Exchange Financial Intermediaries Sellers Market Makers Fund Company The creation/redemption process insulates shareholders from transaction costs and investment activities of other shareholders. 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. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 12 6

7 Multi-class structure: Multiple interests Mutual fund shareholders interact with the same investment pool underlying the ETF share class Direct investor share Institutional share Mutual fund investment pool Advisorsold share ETF share Actions of mutual fund shareholders may create capital gains distributions for ETF shareholders. Additionally, ETF shareholders may pay for potential costs incurred by other share classes. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 13 ETF structure facts: Dedicated vs. multi-class Dedicated share class structure Multi-class structure Investment interest Portfolio of securities (stocks, bonds, swaps). Share of an investment pool invested in a portfolio of securities. Costs Tax efficiency and insulation from activities of other shareholders Liquidity Tracking error ETF expense ratio. Fund expenses, including transaction costs, are distributed pro rata across all shareholders. ETF shareholders pay only for potential costs incurred within the ETF. Creation/redemption mechanism helps insulate shareholders from transaction costs and capital gains created by other shareholders. One shareholder s actions do not create capital gains distributions for other shareholders. Each share class has a unique expense ratio. Fund expenses, including transaction costs, are distributed pro rata across all shareholders, including potential costs incurred by other share classes. Scale may reduce these costs. ETF shareholders may pay for potential costs incurred by other share classes. ETF creation/redemption mechanism helps insulate ETF shareholders from activities of other ETF shareholders. Transactions of mutual fund shareholders may create tax efficiencies by creating additional tax lots; however, redemptions may also create capital gains distributions that are distributable to ETF shareholders. Determined by ETF trading volume and liquidity of underlying securities Low to moderate Investment comparisons are for illustrative purposes only and are not meant to be all-inclusive. Transactions in shares of ETFs will generate tax consequences. ETFs are obliged to distribute portfolio gains to shareholders. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 14 7

8 4. Liquidity Can you trade when you need to? Liquidity is like oxygen: You don t notice it until it s gone Credit crisis of 2008 placed a premium on liquid investments and liquid investment vehicles Provider support for liquidity Tight bid/ask spreads in conjunction with deep, liquid markets are ideal for all investors. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 15 Liquidity and access during stressful times ishares Barclays Aggregate Bond Fund (AGG) vs. Vanguard Total Bond Market ETF (BND) Average Daily Volume ($M) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $ /07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 Spread (bps) AGG Spread BND Spread AGG avg daily volume BND avg daily volume Sources: ArcaVision of NYSEArca, FactSet, Bloomberg, BlackRock. Information on BND is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any funds, other than the ishares Funds, that are described in this material. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 16 8

9 5. Costs What does it really cost? Explicit costs Expense ratio An important fee, however only one part of the total cost equation Brokerage commission May be charged for the purchase or sale of an ETF, increasing the cost to enter or exit a position Implicit costs Trading spread A wide bid/ask spread 1 may result in a transaction further from the price an investor expected to pay, impacting the return over the holding period Market impact The extent to which the actual transaction price differs from the displayed market quote may affect the return over the holding period Tracking error The cost of under-/overperformance versus the benchmark can have an unexpected impact on returns Capital gains The cost of paying taxes on capital gains distributions can have a negative impact on returns Total cost When faced with a choice among ETFs in a category, consider all explicit and implicit costs 1. Trading spread, also referred to as bid/ask spread, is the difference between bid/ask prices, which reflect the most current value at which an investor can buy or sell shares of an ETF during market trading hours. Explicit costs are predetermined based on the ETF s fees and brokerage firm s commission schedule. Implicit costs may vary based on market events and trading volume. Implicit costs may change continuously based on current market conditions FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 17 Expense ratio is just one factor in total cost of ownership Example: Two international developed markets ETFs Explicit cost Implicit costs Expense ratio Trading spread Market impact Tracking error Total implicit costs (excluding capital gains costs) ETF1 0.35% 0.01% 0.01% 0.13% 0.15% ETF2 0.15% 0.01% 0.03% 0.87% 0.91% Explicit and implicit costs may differ significantly between ETFs. Source: Arcavision, BlackRock, as of 12/31/10. This example shows the total cost decomposition without capital gains costs for the universe of international developed markets ETFs tracking the MSCI EAFE Index (there were two such ETFs as of 12/31/10). The assumption is that an investor purchased each ETF and held it for a year. Trading spread and market impact are defined as one-way costs. Trading spread is the average spread as of 12/31/10. Market impact is calculated as follows: (execution price bid or offer price)/(bid or offer price). Tracking error is measured over the one-year period (annualized) ending 12/31/10. Tracking error refers to the absolute under-/overperformance differential of an ETF versus its benchmark over a one-year period after accounting for expense ratio. This should not be considered representative of the differences in such costs between all ETFs. Actual costs vary and historical outcomes are not indicative of future outcomes. While ETF costs reduce total returns, an ETF with higher total costs could have higher total returns over a given time period. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 18 9

10 ETF portfolio management strategy drives tracking error Replication versus optimization Full replication No asset-specific tracking error Required for unit investment trusts (UITs) Optimization Often employed to meet 1940 Act or other regulatory requirements Fund holds a representative sample Designed to maintain similar industry and risk characteristics to the benchmark index Balance exposure with liquidity and tax management FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 19 ishares focuses on ETF tax efficiency Percentage of ETFs that paid capital gains distributions in 2010 ishares ETFs Vanguard ETFs State Street ETFs 2.3% 20.6% 12.3% 97 7 Source: Bloomberg, as of 12/31/10. Percentages account for ETFs available prior to 10/31/10. Past distributions are not indicative of future distributions. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 20 10

11 The ishares advantage Total Performance Management The ishares total performance investment philosophy strikes a deliberate balance between return, risk, costs and taxes + Return Risk Expertise ishares is the leading ETF provider in the world, with 400+ ETFs listed globally representing over $570 billion in assets 1 Total Performance Management + True Partnership ishares provides premium solutions from high-quality products to dedicated teams and services to support financial professionals and institutional investors Costs (and Taxes) 1. Source: Global ETF Research and Implementation Strategy, BlackRock, as of 12/31/10. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 21 Selecting the right ETF: Key takeaways Manager How well do you know your ETF manager? Exposure What s inside your ETF? Structure What are the implications of structure? Liquidity Can you trade when you need to? Costs What does it really cost? FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 22 11

12 Know the differences Transparency Costs Accessibility Strategy Strategy Trading Redemption process Fees Tax implications ishares ETFs Active Mutual Funds ishares index ETFs are passively managed; they Most mutual funds are actively managed, seeking to seek to track a market index, before fees and outperform market indexes expenses, and do not attempt to outperform during rising or declining markets. Performance may diverge from the ETF s underlying index. Trade on exchanges intraday at market price, which may be greater or less than its NAV Shares not individually redeemed through the fund Expense ratio plus transaction costs Transactions generate tax consequences for the transacting shareholder only; obliged to distribute gains to all shareholders Accessed directly through the fund company or through a select broker. Pricing generally occurs once a day. Redeemed through fund company at end-of-day NAV, less applicable fees Expense ratios (typically higher than index-linked products 1 ); may charge sales loads or redemption fees Shareholder transactions may generate tax consequences for all shareholders; obliged to distribute gains to shareholders Transparency Daily holdings disclosure 2 Generally quarterly holdings disclosure 1. Active funds typically charge higher fees than index-linked products due to increased trading and research expenses that may be incurred. 2. In accordance with MSCI licensing, holdings for MSCI-indexed funds are updated monthly. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 23 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. Investing involves risk, including possible loss of principal. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Investment comparisons are for illustrative purposes only and are not meant to be all-inclusive. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products prospectuses. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and investments in smaller companies typically exhibit higher volatility. Technology and telecommunications companies may be subject to severe competition and product obsolescence

13 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. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Shares of ishares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. 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. Index returns are for illustrative purposes only and do not represent actual ishares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. BlackRock does not 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. 25 FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION The ishares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, BlackRock ). The ishares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones Trademark Holdings, LLC, European Public Real Estate Association ( EPRA ), FTSE International Limited ( FTSE ), JPMorgan Chase & Co., MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts ( NAREIT ), New York Stock Exchange, Inc., Investment Group or Standard & Poor s, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50/Residential/ Retail/Mortgage or Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed 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 trademark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under license. 2011, 2012 BlackRock. All rights reserved. ishares and BlackRock are registered trademarks of BlackRock. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. is R1_v02EK_3/12 Not FDIC Insured No Bank Guarantee May Lose Value 26 FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 13