Smart beta deep dive Scott Boniferro CFP CIWM FCSI Product Manager, PowerShares October 20, 2015 This presentation was produced by Invesco Canada.
What is smart beta? 2
What is smart beta? For illustrative purposes only. 3
The Fundamental Index Company valuation: Market capitalization vs. Fundamental Index methodology Market capitalization Fundamental Index methodology 4
Why invest in low volatility? Lower risk doesn t always mean lower returns The Capital Asset Pricing Model (CAPM) states that in order to obtain a higher return, you must take on more risk. However, based on the historical U.S. equity market data shown below, the opposite seems true, as stocks with lower volatility have seen higher returns. This low-volatility anomaly presents an opportunity for investors to capture above-market returns with below-market risk. Volatility Returns 35% 30% 25% 20% 5.19% 4.27% 2.56% 0.28% -3.31% 6% 4% 2% 0% 15% -2% 10% -4% 5% -6% 0% -8% Least volatile Most volatile Source: FactSet, as at March 31, 2015. Data is for 1,000 largest U.S. stocks by marketcap from December 1988 to March 2015. Equal weighted and rebalanced monthly. Volatility data is divided by quintile. Excess return refers to annualized CAPM alpha, a measure of performance relative to the market. Positive alpha is the extra return awarded to the investor for taking additional risk rather than by accepting the market return. Volatility refers to 36-month price return standard deviation. 5
Our panelists Prashant Pandey RAFI Product Specialist Research Affiliates Kelly Tang Director, Global Research and Design S&P Dow Jones Indices 6
Low volatility indexing A history of strong risk-adjusted returns Canada 9.73 S&P/TSX Composite Low Volatility Index 7.73 13.88 S&P/TSX 4.83 Composite Index U.S. 11.09 S&P 500 Low Volatility Index (CAD Hedged) 8.20 15.18 S&P 500 Index (CAD Hedged) 5.89 International developed (US$) 18.40 13.42 S&P BMI International Developed Markets Low Volatility Index MSCI EAFE Index (Net) 2.97 6.66 Emerging markets (US$) 23.75 16.63 S&P BMI Emerging Markets Low Volatility Index MSCI Emerging Markets Index (Net) 4.27 8.96 24 18 12 6 0 4 8 12 16 Risk (%) Annualized return (%) Sources: Morningstar Research Inc. and S&P Dow Jones Indices, data from July 1, 2005 to September 30, 2015. Risk is measured by standard deviation. The S&P /TSX Composite Low Volatility Index was created on April 10, 2012. The S&P 500 Low Volatility Index was created on April 20, 2011. The S&P BMI Emerging Markets Low Volatility Index was created on December 5, 2011. The S&P BMI International Developed Low Volatility Index was created on December 5, 2011. Index data shown before these creation dates have been reconstructed and are calculated on a basis consistent with their current basis of calculation. The reconstructed performance is hypothetical and for illustrative purposes only. You cannot invest directly in an index. Index performance does not reflect fees and expenses that would be applicable to a fund. The hypothetical performance data for the index should not be taken as indicating that if the index had, in fact, existed during the shown time periods before its creation that the index would have achieved the hypothetical results shown as actual results might have differed. See the Hypothetical data assumptions and explanations slide for additional information. 7
Fundamental indexing A history of strong risk-adjusted returns Performance shown is hypothetical and is calculated using the methodology and assumptions described in detail on the next slide. Canada 12.99 FTSE RAFI Canada Index 7.13 13.83 S&P/TSX Composite Index 5.32 U.S. 16.45 FTSE RAFI US 1000 Index 7.35 14.98 S&P 500 Index 4.61 Global (US$) 17.42 FTSE RAFI All World 3000 Index 7.72 16.19 MSCI AC World Index 3.88 Emerging markets (US$) 23.92 22.90 FTSE RAFI Emerging Markets Index MSCI Emerging Markets Index 8.64 12.63 Canada Small/Mid* 16.23 17.02 FTSE RAFI Canada Small-Mid Index S&P/TSX Small Cap Index 8.27 13.57 Global Small/Mid (US$) 18.03 50% FTSE RAFI U.S. 1500 Small-Mid Index/ 11.20 50% FTSE RAFI Developed Markets Ex U.S. Mid-Small 1500 Index 18.16 MSCI World Small Cap Index 8.45 24 18 12 6 0 3 6 9 12 15 Standard deviation (%) Return (%) Source: Morningstar Research Inc. Data is from January 1, 2001 to September 30, 2015. Currency: Local unless otherwise stated. * Data from April 1, 2009 to September 30, 2015. Blended performance shown is hypothetical and is calculated using the methodology and assumptions described in detail on the next slide. 8
Hypothetical data assumptions and explanations Limitations on use of hypothetical data: Performance data for the period before the creation date for the relevant index has been reconstructed and is calculated on a basis consistent with each index s current basis of calculation. You cannot invest directly in an index. Performance for an index does not reflect fees and expenses that might be applicable to a fund. The hypothetical performance data for each index should not be taken as indicating that if the index had, in fact, existed during the shown time periods, that this index would have achieved the hypothetical results shown. Actual results might have differed from the shown results. FTSE RAFI Canada Index was created on November 28, 2005 and has been back-tested to December 1983 FTSE RAFI US 1000 Index was created on November 28, 2005 and has been back-tested to January1981 FTSE RAFI All-World 3000 Index was created on March 26, 2008 and has been back-tested to January 1984 FTSE RAFI Emerging Markets Index was created on November 28, 2005 and has been back-tested to January 1994 FTSE RAFI Canada Mid-Small Index was created on September 29, 2014 and has been back-tested to March 2009 FTSE RAFI US 1500 Mid-Small Index was created on March 20, 2006 and has been back-tested January 1980 FTSE RAFI Developed Mid-Small 1500 Index was created on March 19, 2007 and has been back-tested to January 1987 Index data shown before these creation dates have been reconstructed and are calculated on a basis consistent with their current basis of calculation. The reconstructed performance is hypothetical and for illustrative purposes only. The data shown for the 50% FTSE RAFI US 1500 Small- Mid Index/50% FTSE RAFI Developed Market Ex-US Mid- Small 1500 Index (Blended Index) are hypothetical and for illustrative purposes only. Actual results would have differed. 50% FTSE RAFI US 1500 Small-Mid Index/50% FTSE RAFI Developed Market Ex-US Small-Mid 1500 Index are calculated assuming only monthly rebalancing back to the strategic target allocations. 9
PowerShares ETFs listed on TSX Fixed income PTB PFL PSB USB PGL BKL PFH Equity income PPS PDC PSY USB.U PSY.U PowerShares Tactical Bond ETF PowerShares 1-3 Year Laddered Floating Rate Note Index ETF PowerShares 1-5 Year Laddered Investment Grade Corporate Bond Index ETF PowerShares LadderRite U.S. 0-5 Year Corporate Bond Index ETF 1 PowerShares Ultra Liquid Long Term Government Bond Index ETF PowerShares Senior Loan (CAD Hedged) Index ETF PowerShares Fundamental High Yield Corporate Bond (CAD Hedged) Index ETF PowerShares Canadian Preferred Share Index ETF PowerShares Canadian Dividend Index ETF PowerShares Global Shareholder Yield ETF 1 Fundamental Index equity PXC PXS PXG PXU PZC PZW Low-volatility equity TLV ULV ILV ELV PLV PXS.U PXG.U PZW.U PowerShares FTSE RAFI Canadian Fundamental Index ETF PowerShares FTSE RAFI U.S. Fundamental Index ETF 1 PowerShares FTSE RAFI Global+ Fundamental Index ETF 1 PowerShares FTSE RAFI U.S. Fundamental (CAD Hedged) Index ETF PowerShares FTSE RAFI Canadian Small-Mid Fundamental Index ETF PowerShares FTSE RAFI Global Small-Mid Fundamental ETF 1 PowerShares S&P/TSX Composite Low Volatility Index ETF PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF PowerShares S&P International Developed Low Volatility Index ETF PowerShares S&P Emerging Markets Low Volatility Index ETF PowerShares Low Volatility Portfolio ETF Source: Invesco Canada Ltd. 1 This strategy is also available in US-dollar-denominated units. U.S.-dollar-denominated units do not provide a currency hedge between the Canadian dollar and the U.S. dollar 10
Index methodology PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF and S&P 500 Low Volatility Index (CAD Hedged) PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the S&P 500 Low Volatility Index (CAD Hedged), or any successor thereto. Index methodology: The S&P 500 Low Volatility Index (CAD Hedged) is designed to replicate the returns of the S&P 500 Low Volatility Index (the Underlying Index ), with all or substantially all of the direct U.S.-dollar exposure of the Underlying Index hedged back to the Canadian dollar. The Underlying Index is designed to measure the performance of the 100 least-volatile stocks in the S&P 500 Index. Volatility is defined as the standard deviation of the security s daily price returns over the prior 252 trading days. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights. The Underlying Index is rebalanced quarterly after the close of trading on the third Friday of February, May, August and November of each year. The rebalancing reference dates are after the close of trading of the last business day of January, April, July and October, respectively. Additions are made to the Underlying Index only during the quarterly rebalancing. Constituents removed from the S&P 500 Index are removed from the Underlying Index simultaneously. PowerShares S&P/TSX Composite Low Volatility Index ETF and S&P/TSX Composite Low Volatility Index PowerShares S&P/TSX Composite Low Volatility Index ETF seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the S&P/TSX Composite Low Volatility Index, or any successor thereto. Index Methodology: The S&P/TSX Composite Low Volatility Index is designed to measure the performance of the 50 least volatile stocks in the S&P/TSX Composite Index. Volatility is defined as the standard deviation of the security s daily price returns over the prior 252 trading days. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weightings. The Index is rebalanced quarterly after the close of trading on the third Friday of March, June, September and December of each year. The rebalancing reference dates are after the close of trading of the last business day of February, May, August and November, respectively. Additions are made to the Index only during the quarterly rebalancing. Constituents removed from the S&P/TSX Composite Index are removed from the S&P/TSX Composite Low Volatility Index simultaneously. This index was created April 10, 2012. The S&P 500 Low Volatility Index (CAD Hedged) hedges its beginning-of-period balances of its U.S.-dollar exposure back to the Canadian dollar by using rolling one-month forward contracts. Daily hedge returns are computed by interpolating between the spot price and the forward price. This index was created January 22, 2012. 11
Index methodology PowerShares FTSE RAFI U.S. Fundamental (CAD Hedged) Index ETF and FTSE RAFI US 1000 Index (Canadian Hedged) PowerShares FTSE RAFI U.S. Fundamental (CAD Hedged) Index ETF seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the FTSE RAFI US 1000 Index (Canadian Hedged), or any successor thereto. Index methodology: The FTSE RAFI US 1000 Index (Canadian Hedged) is designed to replicate the returns of the FTSE RAFI US 1000 Index (the Underlying Index ), with all or substantially all of the direct U.S.-dollar exposure of the Underlying Index hedged back to the Canadian dollar. The Underlying Index is part of the FTSE RAFI Index Series, launched by FTSE in association with Research Affiliates ( RA ). As part of the FTSE s range of non-market capitalization weighted indices, the FTSE RAFI Index Series weights index constituents based on the following four fundamental measures of company size: dividends, cash flow, sales and book value. The Underlying Index is comprised of the 1,000 U.S. companies with the largest fundamental value that are included in the FTSE US All Cap Index. Stocks in the Underlying Index are free-float weighted to ensure that only the investable opportunity set is included within the index. The Underlying Index is transparent, independently governed and provides investors with freely available index rules, overseen by an independent committee of leading market professionals. The methodology for the Underlying Index includes using the audited dollar values of cash flow, book value, total sales and gross dividends to derive each constituent index weight. Prices, which can be prone to speculation, are not a component of the weights. As the fundamental weightings are regularly reviewed each March, the constituent weights are less affected by market bubbles that can overexpose an investor to individual companies, sectors or countries. For more information, please go to www.ftse.com/rafi. The index hedges its beginning-of-period balances of its U.S.-dollar exposure back to the Canadian dollar by using rolling one-month forward contracts. Daily hedge returns are computed by interpolating between the spot price and the forward price. This index was created November 28, 2005. 12
Hypothetical data assumptions and explanations Limitations on use of hypothetical data: Performance data for the period before the creation date for the relevant index has been reconstructed and is calculated on a basis consistent with each index s current basis of calculation. You cannot invest directly in an index. Performance for an index does not reflect fees and expenses that might be applicable to a fund. The hypothetical performance data for these indices should not be taken as indicating that if the index had, in fact, existed during the shown time periods, that this index would have achieved the hypothetical results shown. Actual results might have differed from the shown results. Index data shown before these creation dates have been reconstructed and are calculated on a basis consistent with their current basis of calculation. The reconstructed performance is hypothetical and for illustrative purposes only. The hypothetical performance data for the index should not be taken as indicating that if the index had, in fact, existed during the shown time periods before its creation that the index would have achieved the hypothetical results shown, as actual results might have differed. CAD hedged: PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF, PowerShares Senior Loan (CAD Hedged) Index ETF, PowerShares FTSE RAFI US Fundamental (CAD Hedged) Index ETF, PowerShares S&P 500 High Beta Index ETF, PowerShares QQQ (CAD Hedged) Index ETF, and PowerShares Fundamental High Yield Corporate Bond (CAD Hedged) Index ETF are each based on a CAD-hedged version of the respective Underlying Index. While each ETF will seek to hedge all or substantially all of the direct U.S.-dollar exposure back to the Canadian dollar, a perfect hedge may not be possible, and it may not be able to achieve the same level of hedging as the hedged index it seeks to replicate. For this reason, returns of an ETF that tracks an unhedged index and returns of an ETF that tracks a CAD-hedged version of that index will differ. 13
Important information Commissions, management fees and expenses may all be associated with investments in exchange-traded funds (ETFs). Unless otherwise indicated, rates of return for periods greater than one year are historical annual compound total returns including changes in unit value and reinvestment of all distributions, and do not take into account any brokerage commissions or income taxes payable by any unitholder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at www.powershares.ca. There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units. Most PowerShares ETFs seek to replicate, before fees and expenses, the performance of the applicable Index, and are not actively managed. This means that the Sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the Index regardless of whether the financial condition of one or more issuers of securities in the Index deteriorates. In contrast, if a PowerShares ETF is actively managed, then the Sub-advisor has discretion to adjust that PowerShares ETF s holdings in accordance with the ETF s investment objectives and strategies. Nasdaq, OMX, and Nasdaq OMX are registered trademarks of The Nasdaq OMX Group, Inc. ( Nasdaq OMX ) and LadderRite is a registered trademark of LadderRite Portfolios LLC ( LadderRite ). Nasdaq, OMX, Nasdaq OMX and LadderRite are collectively the Marks. The Marks are used under licence to PowerShares Capital Management LLC and Invesco Canada Ltd. The Product(s) have not been passed on by Nasdaq OMX or LadderRite as to their legality or suitability. The Product(s) are not issued, endorsed, sold, or promoted by Nasdaq OMX or LadderRite, and Nasdaq OMX AND LADDERRITE MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). 14
Important information FTSE is a trade mark owned by the London Stock Exchange Group companies and is used by FTSE International Limited ( FTSE ) under licence. The FTSE RAFI Index Series is calculated by FTSE in conjunction with Research Affiliates LLC ( RA ). Neither FTSE nor RA sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability in relation to its issue, operation and trading. Any intellectual property rights in the index values and constituent list vests in FTSE. Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third-party vendors, the construction of model portfolios, and in coding related to the index and portfolio construction process. While Research Affiliates ( RA ) takes steps to identify data and process errors so as to minimize the potential impact of such errors on index and portfolio performance, we cannot guarantee that such errors will not occur. Fundamental Index and/or Research Affiliates Fundamental Index and/or RAFI and/or all other RA trademarks, trade names, patented and patent-pending concepts are the exclusive property of Research Affiliates, LLC. S&P, S&P 500, S&P 500 Low Volatility Index, and S&P 500 High Beta Index are registered trademarks of Standard & Poor s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by Invesco Canada Ltd. LSTA is a registered trademark of Loan Syndications and Trading Association and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd. TSX is a trademark of TSX Inc. ( TSX ) and has been licensed for use by S&P Dow Jones Indices LLC and Invesco Canada Ltd. The S&P/TSX Composite Low Volatility Index, S&P/TSX Composite High Beta Index, S&P 500 Low Volatility Index (CAD Hedged), S&P 500 High Beta Index (CAD Hedged), S&P BMI International Developed Low Volatility Index, S&P BMI Emerging Markets Low Volatility Index and S&P/LSTA U.S. Leverage Loan 100 Index (CAD Hedged) (the Indices ) are products of S&P Dow Jones Indices LLC, and has been licensed for use by Invesco Canada Ltd. Invesco Canada Ltd.'s PowerShares Index ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, its affiliates, LSTA, or TSX and none of such parties make any representation regarding the advisability of investing in such product. 15
Important information Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. The indicated rates of return are the historical annual compounded total returns, including changes in security values and reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges, or income taxes payable by any securityholder, which would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from Invesco Canada Ltd. PowerShares, Leading the Intelligent ETF Revolution and all associated trademarks are trademarks of Invesco PowerShares Capital Management LLC (Invesco PowerShares), used under licence. Invesco Canada Ltd., 2015 Published October 20, 2015. This piece was produced by Invesco Canada Ltd. ETFs are not diversified investments. All MERs for ETFs are as at December 31, 2014. Invesco and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. 16
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