Seek Opportunity in Lower Starting Valuations While Avoiding Crowded Trades Developed Market (DM) Valuations Remain Attractive Developed Market (ex US) valuations remain attractive relative to history and versus other global equity regions Strong flow trends validate the opportunity in DM but choose wisely for your core exposure Certain DM Trades May be Getting Crowded Currency-hedged strategies have faltered, given recent dollar uncertainty Low volatility factor strategies another popular approach may be growing less attractive as valuations within those stocks have risen, potentially reducing future returns Take Action: RODM (exchange-traded fund) An ETF that offers growth potential with lower volatility and a built-in valuation discipline Allocates capital to companies exhibiting strong and balanced exposures across well-established risk factors (valuation, quality and momentum) Targets 20% volatility reduction over a market cycle through the index construction process Seeks to avoid valuation and concentration risks inherent to many lower volatility strategies 1
Developed Markets Remain Attractively Valued Relative to Other Equity Regions Developed Market valuations have increased somewhat, but remain low relative to historical averages Relative Value Attractiveness (higher score = lower valuation relative to historical average) 0.60 0.50 0.40 Developed market equities appear attractively valued relative to US, emerging markets and global small cap Composite Score 0.30 0.20 0.10 - (0.10) (0.20) (0.30) 12/31/2015 1/31/2016 2/29/2016 3/31/2016 4/30/2016 5/31/2016 Russell 1000 Index MSCI World Excluding United States Index MSCI Emerging Markets Index MSCI World Small Cap Index 2 The chart above compares the Relative Value Attractiveness of each equity region over six recent time periods. Recent valuation measures are based on the historical average of each index and its standard deviations between January 31, 1998 and April 30, 2016. The composite scores (z-scores) were calculated using two common valuation measures: book yield and earnings yield. A higher score indicates a lower valuation relative to the historical average for each index. Source: Bloomberg. Analysis by Lattice Strategies. The Russell 1000 index is a market capitalization index of approximately 1,000 of the largest companies in the U.S. equity markets, a subset of the Russell 3000 Index. The MSCI World Excluding United States Index is a free float-adjusted market capitalization index that is designed to measure global equity performance. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure emerging markets equity performance. The MSCI World Small Cap Index is a free float-adjusted market capitalization index that captures small cap representation across developed markets countries.
Buyer Beware: Within Developed Markets, Low Volatility Stocks May Be Expensive 0.70 0.65 0.60 0.55 0.50 Value Scores of Developed Markets Companies (higher score = more favorable value factor) Low Volatility Stocks High Volatility Stocks Universe Average More Attractive Valuation Low vol stocks appear expensive relative to DM Universe average Ratio 0.45 0.40 0.35 0.30 Less Attractive Valuation 0.25 0.20 1/31/2000 1/31/2004 1/31/2008 1/31/2012 1/31/2016 3 The chart above depicts the valuation score of three sets of equities: 1) Lattice universe of developed market equities 2) The 20% of stocks within the universe with the lowest volatility over the time period and 3) The 20% of stocks with the highest volatility over the same period. The ratio measures the value factor score of each universe of stocks based on Lattice s Value Factor Score, which is a composite measure of relative valuation based on several value measures. Source: Lattice Strategies and as of May 31, 2016
An Alternative Approach to Volatility Reduction with Valuation Discipline RODM seeks to reduce volatility (over a market cycle versus the capitalization-weighted benchmark) Volatility while offering attractive exposure to value (and other factors) Lattice Value Factor Score RODM MSCI World Ex-US Index Low Volatility Stocks High Volatility Stocks RODM 15.9% 13.5% 0.50 0.44 0.66 1- Year Standard Deviation through 3/31/16 A higher score indicates a more attractive valuation as measured by the Lattice Value Factor Score An important point of distinction: RODM s index methodology seeks to reduce volatility by selecting securities with lower correlations instead of limiting stock selection to a single factor (volatility) used in other popular approaches. Lattice s approach seeks to achieve volatility targets while avoiding unintended risks and gaining exposure to potentially return-enhancing value, momentum and quality factors. 4 Volatility Chart at Left: Data reflects standard deviation of RODM and the MSCI World ex-us Index over the 1-year period through March 31, 2016. Source: Bloomberg and Lattice Strategies. Valuation Chart at Right: Compares the Lattice Value Factor Score, a composite measure of relative valuation based on five measures of value, of the stocks within the Lattice Developed Markets (ex-us) Universe with the lowest volatility (top quintile) and highest volatility (bottom quintile) with the stocks that comprise RODM. Source: S&P Capital IQ/Compustat. Calculations by Lattice Strategies. Data as of May 31, 2016. Past performance is no guarantee of future results.
Take Action: RODM RODM: Take Better Risk in International Equities * Deliberate Risk Allocation Seeks the growth potential of international companies while explicitly seeking to reduce volatility and drawdown risk Improved Diversification Provides deep and diverse exposure across international economies, beyond megacap multinational companies Enhanced Return Potential Seeks enhanced returns by selecting companies with a favorable combination of risk/return factors, including valuation, momentum and quality Portfolio allocation (%) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 % of RODM holdings with positive combined factor score 0.0-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Combined Factor Score By contrast, slightly more than half (50.3%) of companies in the capitalizationweighted MSCI World Ex-US Index exhibited positive aggregate factors 89.7 Objective: RODM is an ETF that, before fees and expenses, seeks to track the performance of Lattice Risk-Optimized Developed Markets (ex-us) Strategy Index. *The Index seeks to improve risk and return potential relative to capitalization-weighted benchmarks such as the MSCI All Country World (ex-us) Index through deliberate risk allocation, improved diversification, and by selecting companies based on favorable risk/return factors such as valuation, momentum, and quality. 5 Stocks in the above chart are plotted according to their combined factor score (x) and assigned weight (y) in the index. Combined factor scores reflect the degree to which each stock exhibits a favorable combination of value, momentum, and quality factors. Stocks to the right of the axis are deemed to have positive factor attributes while stocks on the left exhibit negative factors. Value is a measure of each company s stock price relative to earnings and other measures. Momentum is determined by analyzing the recent trading direction of each stock and Quality is measured by the company s profitability. Source: Lattice Strategies as of March 31, 2016. Holdings subject to change.
About Lattice Strategies Lattice Strategies LLC is an investment management firm committed to risk-focused research and investment strategy design. Since 2007, Lattice has operated on the fundamental belief that the disciplined and intentional allocation of risk is the most influential contributor to long-term growth of capital. Lattice s full spectrum of risk-first investment strategies enables investors to assert more control over portfolio risks in pursuit of financial goals. ETF Trading Execution Support Lattice Strategies provides capital markets support to help ensure efficient trading in its ETFs. Please contact Ben Quah at 415-689-1888 or bquah@latticestrategies.com for further information. Important Disclosure An investor should consider the fund s objectives, risks, charges and expenses carefully before investing. A prospectus with this and other information about the fund may be obtained by visiting www.latticestrategies.com or by calling 415-315-6600. Read the prospectus carefully before you invest. Important note about risk: There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund's prospectus for specific details regarding the Fund's risk profile. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss. Lattice ETF Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. An investor cannot invest directly in an index. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a fund or portfolio, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. Index performance does not reflect the performance of the Fund. Investors may acquire ETF Shares and tender them for redemption through the Fund in Creation Unit Aggregations only. Please see the prospectus for more details. Total returns are calculated using the daily 4:00pm net asset value (NAV). Market price returns reflect the midpoint of the bid/ask spread as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Capitalization-weighted Index refers to the Morgan Stanley Capital International World ex-us Index (MSCI World Ex-US Index). The index is composed of companies representative of the market structure of 22 Developed Market countries in North America, Europe and the Asia/Pacific Region, excluding the US. The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties ) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www. msci.com) Book Yield compares a stock s book value to its market value and is calculated by dividing a company s book value per share to the company s stock price. Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio. Price/Earnings Ratio is a valuation metric defined as market price per share divided by annual earnings per share. The ratio represents equity securities within the Fund s portfolio, and is not intended to demonstrate Fund growth, income earned by the Fund, or distributions made by the Fund. Correlation is a statistical measure of how an index or portfolio moves in relation to another index or portfolio. A correlation ranges from -1 to 1. A correlation of 1 means the two indexes have moved in lockstep with each other. A correlation of -1 means the two indexes have moved in exactly the opposite direction. Beta is a measure of the volatility, or systematic risk, of a portfolio in comparison to the market as a whole. Beta of 1 indicates that the share price will typically move with the market; Beta more than 1 indicates the share price will typically be more volatile than the market; Beta less than 1 share price will typically be less volatile than the market. Standard Deviation is a statistical measure of the extent to which returns of an asset vary from its average. Z-scoreis a statistical measurement of a score's relationship to the mean in a 6 group of scores. Lattice Funds are distributed by ALPS Distributors, Inc. Ben Quah is a registered representative of ALPS Distributors, Inc. LAT000313 Exp: 3/1/17