Over a Decade of Adoption through Multiple Market Cycles Agenda ETFs are used by Institutions, Advisors and Individual Investors What are ETFs? History $1,500 1,600 Characteristics How they work ETF Essentials $1,200 1,200 Benefits of ETFs Tax efficiency Performance of index investing An Introduction to Exchange Traded Funds US ETP AUM ($bn) $900 $600 800 400 S&P 500 Inde ex Level Risk management Customizing exposures Three timely ETF strategies Fixed Income International $300 Tax management $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Others ETF AUM S&P 500 Index Level 0 Universe includes all exchange traded products. Sources: BlackRock, Bloomberg, as of 12/31/12. 2 3 1
Total Performance What is an ETF? Two Great Investment Ideas Brought Together Why do Financial Professionals use ETFs? Stock Like a Mutual Fund Return Risk What are Exchange Traded Funds? Tradable during the day ETFs Diversified Seek to outperform other investments Costs (and Taxes) taxes) Manage risk Diversification Spend less, save more Diversified funds that trade like stocks Performance vs. active funds Express a view Tradability and flexibility Transparency Cost effectiveness Tax efficiency Past performance does not guarantee future results. Diversification may not protect against market risk. Transactions in shares of funds may result in brokerage commissions. 5 6 2
ETFs can be Applied to Short- and Long-Term Strategies How Traditional Mutual Funds Work ETFs Work Differently than Traditional Mutual Funds Asset allocation or diversification Active manager complement or substitute Cash management Tactical or opportunistic views Buyers Sellers Mutual Fund Company Stock Exchange Buyers Sellers Stock Exchange Authorized participants In-kind transfer Fixed Income solutions Tax management Liquidity sleeve Investors Interact with the Fund to Purchase or Redeem Shares Investors are Insulated From Each Other, and In-Kind Transfer Helps Clear Low Cost Basis Positions, Improving Tax-Efficiency Image: digitalart / FreeDigitalPhotos.net. 7 8 9 3
ETFs and Mutual Funds: Key Differences Case Study: Liquidity During Volatile Markets Criteria ETFs Active Mutual Funds Performance goal Track a benchmark Outperform a benchmark Investors Have Turned to ETFs to Take Action Management Passive Active Performance may differ from benchmark. May not meet performance goal. Performance risks Holdings not altered during rising / May underperform due to manager s falling markets. holdings selection. Buying / selling shares Intraday on exchanges Once per day via fund company Price to buy / sell Current market price, which End-of-day NAV, less fees may differ from NAV Fees Expense ratio + transaction / brokerage costs Expense ratio + any sales loads / redemption fees Tax impact 1 of Shareholders may be impacted by all other Shareholders only impacted by their own action buyers / sellers shareholders actions Holdings disclosure Daily Typically quarterly The Benefits of ETFs Monthly ETF Share of US Stock Market Volume 70% 60% 50% 40% Last 5 years 1 of every 4 dollars traded is an ETF 30% 20% 10% Lehman bankruptcy ETFs become a source of liquidity in frozen Fixed Income markets 1,600 1,400 1,200 US debt downgrade 1,000 Investors use ETFs to express views 800 600 400 200 S&P 500 In ndex Level 0% 0 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 ETP Volume Market Share S&P 500 Index Level 1. Both vehicles are obliged to distribute capital gains to all shareholders. Sources: Bloomberg, NYSE Arcavision, S&P (June 2006 August 2011). 10 12 4
Lower Investing Costs Expense Ratio is only One Part of the Total Cost of Ownership Taxes are a Cost of Investing Morningstar Category Average Active Fund Fees (%) ETFs Mgmt Fees Corresponding ETFs (%) 1 Large Cap Blend 1.00 0.07 Core S&P 500 ETF Small Cap Blend 1.19 0.16 Core S&P Small-Cap ETF International Blend 1.06 0.16 Core MSCI Total International Stock ETF Diversified Emerging Markets 1.39 0.18 Core MSCI Emerging Markets ETF Intermediate Term Fixed Income 0.67 0.08 Core Total US Bond Market ETF Explicit Costs Expense ratio Brokerage commission Purchase price Implicit Costs Trading costs Performance vs. benchmark (tracking difference) Taxes on distributions Maintenance Fuel efficiency Insurance Total Costs When faced with a choice among ETFs in a category, consider all explicit and implicit costs Growth of $1,000,000, with and without Tax Costs (10 Years) $2,500,000 $2,250,000 $2,000,000 Investment t Growth (8% Return As ssumption) Annual Tax Cost: 0% $1,750,000 $1,500,000 Total tax impact $206,432 $1,250,000 Annual Tax Cost: 1% 1. Management Fees are fees paid to BlackRock Fund Advisors, the Funds investment advisor, an affiliate of BlackRock Investments, LLC. A Fund may also incur indirect expenses on its investments, if any, in other investment companies. Please see the Funds prospectuses for more information on such expenses. The annual management fees of Funds may be substantially less than those of most mutual funds. Buying and selling shares of Funds will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Sources: BlackRock, Morningstar, as of 12/31/12. 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. $1,000,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Source: BlackRock. For illustrative purposes only. Does not include commissions or sales charges or fees. 13 14 15 5
What s behind ETF Tax Efficiency? The Difference ETF Performance vs. Active Mutual Funds Index funds = lower portfolio turnover Protection from shareholder activity Percentage of funds that paid capital gains in 2012 Five-year track record: Percentage of actively managed mutual funds within each Morningstar category that outperformed the respective ETF Experienced portfolio management Funds from the 100 largest mutual fund companies 43% ETFs 2% Together, fees and taxes represent major contributors to the outperformance challenge faced by active fund managers. ETFs can produce capital gain distributions. For example, capital gains distributions are produced during an underlying index reconstitution or corporate actions (especially foreign). Trading shares of ETFs will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well. Source: BlackRock, Morningstar as of 12/31/12. Past distributions are not indicative of future distributions. Sources: BlackRock, Morningstar. 5-year period ending 2/13. Percentages are survivorship-adjusted and reflect the fund universe that existed at the start of the analysis period (i.e., the analysis includes finds that existed at the beginning of the analysis period but are no longer available due to fund mergers or liquidations over the analysis period). Analysis is based on the oldest share class of active open-end mutual funds to avoid double-counting of multiple share classes. Before-tax calculations include management fees. Per SEC guidelines, after-tax calculations include management fees in addition to loads and sales charges and assumes the prevailing rate of the highest tax bracket for investors. Actual after-tax performance depends on the investor s tax situation and may differ. Performance could have been positive or negative for both active funds and ETFs during the time period. Past performance does not guarantee future results. Other asset classes and time periods may have different results. 16 17 18 6
Customizing Your Exposure: What s Inside Your 40? Balance Yield with Client Risk Sensitivities Fixed income sectors cycle in and out of favor Two Tilts on Core Bond Exposure 10% Three Timely ETF Strategies Lowest Highest 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 9.8% 14.5% 29.0% 11.1% 2.9% 11.8% 10.2% 18.0% 58.2% 15.1% 15.6% 14.2% 8.2% 10.1% 6.9% 4.7% 2.7% 5.2% 6.9% 8.3% 15.9% 9.4% 6.2% 8.1% 6.8% 8.7% 3.1% 4.4% 2.6% 4.7% 5.6% 2.8% 5.9% 7.8% 5.9% 4.2% 5.3% 2.0% 1.9% 4.1% 2.4% 4.5% 5.3% -2.8% 0.4% 5.4% 5.4% 2.6% 4.9% -1.4% 1.2% 1.2% 1.4% 2.7% 1.9% -26.2% -6.0% 0.3% 0.2% 0.2% Short US Treasury Index US Corporate High Yield Index 7 10 Year US Treasury Index US Mortgage-Backed Securities Index Intermediate US Credit Index strategies Diversify issuer and interest rate risk Pinpoint exposures Improve transparency Yield 10% 5% Lower interest rate sensitivity 50% 40% Take on more credit risk AGG CSJ LQD HYG IEI Barclays 1 3 Year Credit Bond Fund iboxx $ Investment Grade Corporate Bond Fund iboxx $ High Yield Corporate Bond Fund Barclays 3 7 Year Treasury Bond Fund 85% All sector returns based on Barclays Capital Indexes. Index returns are for illustrative purposes only and do not represent actual 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. Part performance does not guarantee future results. For actual Fund performance, please visit www.ishares.com or request a prospectus by calling 1-800- (1-800-474-2737). Sensitivity to rising interest rates Tailor portfolios on.com Tools and Charts > Fixed Income Portfolio Builder Source: Barclays, as of 12/31/2012. For illustrative purposes only. 20 21 7
Playing Your View on Global Growth: Are Emerging Markets the New Defensive? Go Broad or be Selective in Emerging Markets Are Tax Rates Going to Rise? 2013 Consensus GDP Growth Expectations Capture the broad market Tax Rates are at Historic Lows 1.0% More than 3% 2 to 3% 1 to 2% 1.3% 0.8% 0.2% strategies Broad exposure, one trade Target a region or segment Overweight specific countries MSCI Emerging EEM Markets Index Fund MSCI Emerging Markets Minimum EEMV Volatility Index Fund Target local growth sectors MSCI Emerging g Markets Small Cap EEMS Index Fund Focus on potential bright spots Top Marg inal Tax Rate 100% 80% 60% 40% 20% strategies Emphasize low-cost, taxefficient investing in a lowreturn environment. Minimize this year s tax bill. Minimize future tax liabilities. 0 to 1% -1 to 0% -1.6% -2 to -1% -2.1% -3 to -2% Less than -3% -0.7% -3.8% MSCI Russia ERUS Capped Index Fund 0% 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 Source: Thomson Reuters, Consensus Economics, November 2012. Note: Average economist forecasts for real GDP growth in 2013. MSCI Brazil Index Fund EWZ Source: Tax Policy Center, as of 1/31/11. 22 23 24 8
Total Performance Harvest a Loss, Lower Tax Liabilities, Improve Diversification What Sets ETFs Apart? ETF essentials Example: Tax Loss Harvesting with ETFs Our Experience Largest ETF provider in the world. 600+ ETFs listed globally. ETFs are an established investment choice and have cycled through bear and bull markets. Liquidity, tax and cost efficiency, and total performance are key benefits of ETFs. Three timely opportunities in Fixed Income, international, and tax management to put ETFs to work. Over $757.7bn in assets 1. To realize a tax loss Sell Underperforming dividend stock Stock, mutual fund or ETF + Total Performance philosophy. Return Risk Our Focus Holdings published daily. Award-winning website. Buy High Dividend Equity Fund HDV ETF with similar objective + Our Scale Part of BlackRock, the world s largest asset manager. Over 40 years of indexing experience. Deep roots in every world region. Costs (and taxes) (and The Internal Revenue Service has not released a definitive opinion regarding the definition of substantially identical securities and its application to the wash sale rule and ETFs. The information provided is not intended to be tax advice. Tax consequences will vary by individual taxpayer. Investors should consult a tax professional before engaging in any tax strategy. This information should not be relied upon as research, investment advice or a recommendation regarding the Funds or any security in particular. This information is strictly for illustrative and educational purposes. 1. Source: Morningstar, as of 12/31/12. 25 26 27 9
Carefully consider the 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 1-800- (1-800-474-2737) or by visiting www..com. 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. Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. 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. Securities focusing on a single country may be subject to higher volatility. 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 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 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 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 Funds, it should be remembered that management fees associated with fund investments, like Funds, are not borne by investors in individual stocks or bonds. The annual management fees of Funds may be substantially less than those of most mutual funds. Buying and selling shares of 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 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 US 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. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, BlackRock ). The Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., 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., Russell Investment Group, S&P Dow Jones Indices LLC 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, 2013 BlackRock. All rights reserved. ishares and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. is-8390-0613 Not FDIC Insured No Bank Guarantee May Lose Value 28 29 30 10
For more information, visit ETFs and Mutual Funds: Key Differences Criteria ETFs Active Mutual Funds Performance goal Track a benchmark Outperform a benchmark www..com Management Passive Active Get Started Track-based learning May not meet performance goal. Performance may differ from benchmark. Performance risks May underperform due to manager s Holdings not altered during rising / falling markets. holdings selection. Buying / selling shares Intraday on exchanges Once per day via fund company Education Center Product Information Watch, listen, get credit Holdings, price and return information Appendix Price to buy / sell Current market price, which may differ from NAV End-of-day NAV, less fees Fees Expense ratio + transaction / brokerage costs Expense ratio + any sales loads / redemption fees Tax impact 1 of buyers / Shareholders may be impacted by all other Shareholders only impacted by their own action sellers shareholders actions Document Library Client presentations and materials Holdings disclosure Daily Typically quarterly Tools and Charts Portfolio modeling tools and reports 1-800- 1. Both vehicles are obliged to distribute capital gains to all shareholders. 31 33 11
BlackRock Viewpoint A Call for Greater ETF Transparency and Consistent Regulation Recommended Classification for Exchange Traded Products BlackRock and : 40 years of indexing Clear labeling of product structure and investment objectives. ETP Exchange Traded Product Catch-all term for any portfolio exposure product that trades on an Exchange. ETFs, ETCs, ETNs, and ETIs, are all subsets of ETP. Pioneering index investing Frequent and timely disclosure for all holdings and financial exposures. Clear standards for diversifying counterparties and quality of collateral. Disclosure of all fees and costs paid, including those to counterparties. Universal trade reporting for all equity trades, including ETFs. ETF ETN ETC ETI Exchange Traded Fund Exchange Traded Note Exchange Traded Commodity Exchange Traded Instrument The product is regulated as a publicly offered investment fund and can be appropriate for a long term retail investor. In our view, funds with daily leverage and inverse strategies should not use the ETF label. Funds whose exposure is achieved via a swap should use the best practices detailed below. Debt securities that may be structured as notes or trusts depending on their domicile. Backed by the credit of its issuer (often an investment bank) which may or may not be collateralized. The extent of regulatory oversight of these products currently varies by region. Limited to products that only hold physical commodities. In the US, these are highly regulated under the Securities Act of 1933. In our opinion, securities that provide exposure to physical commodities but are structured as debt instruments and not backed by the physical underlying commodity should not be considered an ETC. A type of ETP that describes any portfolio exposure product traded on an exchange that is not outlined above. The buyer should exercise increased due diligence. Leading the ETF industry Opening doors to new markets 2004 2001: 9/11 launches ETFs first China help investors ETF, the value 1991 reopened US FTSE 2006 1971 Emerging markets China Index market Large-Cap launches 2003 pioneer and equity index MSCI ETF (FXI) suite of innovator 1981 funds EAFE ETF Global MSCI EAFE (EFA) sectors & Emerging equity US Markets ETF index funds subsectors (EEM) 2008: Lehman bankruptcy ETFs are a source of liquidity in frozen fixed income markets 2010 China and Brazil Small- Cap ETFs launched 2012 emerging market regional ETFs fixed income sector ETFs Key questions to ask about ETPs Does the product use any derivatives to track its benchmark / index? What type of derivatives, if any, are used? How are they used (as a small part of the portfolio or as the primary way the products tracks its benchmark / index)? Does the product have any counterparty exposure? If so, who are the counterparties and what are the collateralization levels to address that counterparty exposure? Differences between swap structures Best Practices Worst Practices Over-collateralized vs. Limited collateral posted Multiple counterparties vs. Single counterparty Standards for collateral vs. No standards (type of securities) Independence between vs. Affiliated swap counterparty and swap counterparty and sponsor sponsor 1996 2000 WEBS WEBS (World become Equity Benchmark ETFs Shares) 2002 launches first fixed income ETFs 2005 Gold Trust (IAU) 2007 MSCI EAFE Small-Cap ETF (SCZ) High Yield Corporate Bond ETF (HYG) 2009 BlackRock joins forces with 2011: US downgrade Investors express views with ETFs Minimum Volatility suite High Dividend ETF (HDV) 34 35 36 12
Visit.com and Find Out Why 9 of 10 Large Professional Investors Choose for their ETFs 1 i Professional Quality i Every Individual investor is unique. That s Choice why there s. i Responsible Innovation delivers quality products that can help you navigate today s volatile markets. As your partner, helps you execute investment ideas with insights and support. is an industry leader in making investing clear, fair, and efficient for you. 1. 90% of all institutional investors (pensions, foundations and endowments; asset managers; insurance companies and investment advisors) surveyed in 2013 U.S. Exchange Traded Funds Study by Greenwich Associates used ETFs. Survey included 176 institutional investors already using ETFs, interviewed 2/2013-4/2013. 37 13