ETF Radar Magazine (JulAug2009) by ETF Radar

News • Market Intelligence • Rankings

July-August 2009

etfRADAR M

Issue No. 1

Coverstory

READY FOR TAKE OFF? Insights & Strategy

GEARED EXCHANGE TRADED PRODUCTS Marketplace

NORTH AMERICA, EUROPE AND ASIA-PACIFIC AT A GLANCE Interview

HECTOR MCNEIL

Contents 3 EDITORIAL 4 MARKET SUMMARY Selected statistics and news from all over the world.

6 COVERSTORY Ready for take off ? Will Europe’s ETF market see the same explosive growth and depth of liquidity like the U.S. market?

9 INSIGHTS & STRATEGY Geared Exchange Traded Products: What investors using geared - or leveraged - exchange traded products should know about the impact of volatility on their returns.

13 MARKETPLACE Global ETF news and selected market indices at a glance.

14 NORTH AMERICA

15 EUROPE 16 MIDDLE EAST & ASIA-PACIFIC

A review of the current job market and an overview about upcoming events within the ETF industry.

21 GLOBAL PLAYERS 17 INTERVIEW Comprehensive details about the

Hector McNeil from ETF Securities about oil, gold and other hot commodities and the market reactions after the AIG disaster.

world’s largest ETF providers.

18 LEARNING CURVE A subtle distinction: Compared to traditional mutual funds the settlement process when buying or selling ETFs work differently. A view behind the scenes.

CONTACTS

INFORMATION PUBLISHER Martin Raab, CAIA

NORTH AMERICA eMail: americas@etf-radar.com Phone: +1 239 384 6090 Mailing address: 2316 Pine Ridge Road #402 Naples, FL 34109

RESEARCH DIRECTOR Sebastian Stahn EDITORIAL DIRECTOR Florian Kurz

EUROPE, MIDDLE EAST and ASIA-PACIFIC eMail: europe.asiapacific@etf-radar.com Phone: +49 89 28744906 Mailing address: Postfach 101214 80086 Munich

DESIGN DIRECTOR Cathrine Corbeau TECHNICAL DIRECTOR Tobias Stoeger

WEBSITE www.etf-radar.com

ETF Radar Magazine • J u l y - A u g u s t

19 CAREER & EVENTS

2009

SUBSCRIPTION The ETF Radar Magazine is published bi-monthly. Subscriptions to the magazine are complimentary for qualified readers. For all subscription enquiries please contact us at magazine@etf-radar.com COPYRIGHT No part of this publication may be copied, photocopied or duplicated in any form or by any means without publisher’s prior written consent. No statement in this issue is to be construed as a recommendation to buy or sell securities or to provide investment advice.

Editorial

Brandnew, international, comprehensive - and open-minded.

NEWCOMER

o doubt that the Exchange Traded Funds market faces a massive opportunity through the combination of increasing investor demand and recent structural innovation. From now on we will be vital part of this exciting market as we aim to be an inspiring information resource for sophisticated institutional and private investors, advisors, portfolio managers, banks and other financial corporations worldwide. The ETF Radar Magazine will inform you about the latest developments in the global ETF markets in a comprehensive way. In our first issue we cover the latest trends in the European ETF market as well as the much cited risks of geared (or leveraged) exchange traded products. I won’t say more about the content of our first edition - I just recommend you to explore this highend magazine by yourself. Your feedback is greatly appreciated. All the Best,

a rti n

Publisher

NEW ETF ISSUER WILL START SOON

Ra a b

UP & DOWN

Laurence Fink CEO and founder of Blackrock Inc. agreed to acquire Barclays Global Investors - including the global iShares business - for USD 13.5 billion. With this acquisition Blackrock will become the world’s largest asset manager. He told Fox Business he has no plans to raise expense ratios at Barclays Global Investors' lineup of exchange-traded funds. “I could say with total clarity they're not going higher. We're going to keep them where they are or bring them down." The BlackRock CEO expects ETFs to continue their fast rate of growth and that the firm could introduce actively managed ETFs. The seller, London-based Barclays Bank plc, will have a net gain of USD 8.8 billion from the sale. The inital (but finally not successful) bidder CVC will receive a USD 175 million breakup fee as compensation from Barclays.

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Farley Thomas, Head of Worldwide Wholesale Distribution at HSBC Global Asset Management in London recently confirmed the intention of HSBC to start an own Exchange Traded Funds business. HSBC is ready to increase its footprint in the passive sector. “We are going to embrace these trends, not fight against them,” affirms Mr Thomas. HSBC’s passive and quants arm, Sinopia, already runs index-tracking products, so ETFs would be a natural progression. “On a three-year view, I would be amazed if our bank is not a major player,” he predicts. The ETF Radar Magazine will observe the upcoming developments and report about it accordingly. Good luck, HSBC!

Bernard L. Madoff The disgraced financier (Bernard L. Madoff Investment Securities LLC) has been sentenced to the maximum 150 years in prison for masterminding a USD 65bn ponzi scheme. He wrecked the lives of thousands of credulously investors worldwide. The sentence means that the 71-year old fraudster will end his days in prison. His release is officially scheduled for the year 2159.

Market Summary

THE GLOBAL MARKETS AT A GLANCE

May

June

GLOBAL EXCHANGE TRADED FUND FLOWS (by region in USD bn.)

April

MAJOR EQUITY INDICES (performace in percent)

140%

+7,6% +10.8% 130%

+5.0% -2.1%

120%

YTD-APR 2009

-1.8% 110%

100%

DOW JONES INDUSTRIAL AVERAGE (US) EUROSTOXX 50 (EUROPE) DAX 30 (GERMANY) NIKKEI 225 (JAPAN) HANG SENG (HONG KONG)

COMMODITIES

2008 June

May

April

(performace in percent)

140%

130%

120%

110%

2007

100%

-20 -10

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200

90%

WTI OIL FUTURE AUG 09 (IPE) GOLD (SPOT) NATURAL GAS INDEX (AMEX)

Source: Interactive Data Solutions | Data as of 30 June 2009.

UNITED STATES OFFSHORE EUROPE JAPAN ASIA PACIFIC

Source: Barclays Global Investors | Data as of April 2009.

NUMBER CRUNCHER

3.110 35

Number of ETFs listed in Europe with no turnover within the last 30 days.

Number of exchanges providing ETF trading.

Estimated Number of institutional ETF investors worldwide.

Source: ETF Radar, Selected Exchanges, BGI. Data as of June 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

Market Summary

FOCUS: EUROPEAN ETFS FLOW-TRENDS FLOWS OF EUROPEAN ETFS BY ASSET CLASS

AUM FOR EUROPEAN ETFS BY ASSET CLASS

(in Euro million)

Commodity - ETF

Commodity - ETC

Credit

Equity

Equity Debt

Debt Money Market

Money Market Other ETFs

Other ETFs -4.000

-2.000

0 1M Flow

2.000

4.000

3M Flow

20.000

40.000

60.000

80.000

100.000

FLOWS OF EUROPEAN ETFS BY SECTOR

FLOWS OF EUROPEAN ETFS BY GEO FOCUS

(in Euro million)

Automobiles & Parts

Americas

Banks

Emerging Markets

Basic Resources

Euroland

Chemicals

European Union

Construction & Materials Food & Beverage

France

Health Care

Germany

Industrial Goods & Services

Global

Insurance

Italy

Media

Japan

Oil & Gas Personal & Household

Spain

Retail

Sweden

Technology

Switzerland

Telecom

Travel & Leisure

Others

Utilities -150

-100

-50

0 1M Flow

-1.500

100

-1.000

-500

0 1M Flow

3M Flow

500

1.000

1.500

2.000

3M Flow

All Data as of 30 June 2009.

TOP 5 BEST PERFORMING ETFS (Last 3 months; db xtrackers only) EXCHANGE TRADED FUND Dow Jones STOXX 600 Banks Return Index db x-trackersMSCI Brazil Index db x-trackersMSCI EM Latin America db x-trackersDow Jones STOXX 600 Basic Res. Return Index db x-trackersS&P Select Frontiers Index

ETF Radar Magazine â&#x20AC;˘ J u l y - A u g u s t

PERFORMANCE FEE (P.A.) 41.93% 0.30% 37.19% 0.65% 35.11% 0.65% 32.96% 0.30% 32.94% 0.95%

2009

www.dbxtrackers.com Serivceline +44 20 7547 1747

Coverstory

European ETF market:

Ready for TAKE OFF? In North America, the birthplace of Exchange Traded Funds (ETFs), these popular financial instruments have grown into a USD 500 billion market. In Europe currently more and more investors flock to ETFs - but will we there really see the same explosive growth and depth of liquidity ?

BY SASCHA SPECKETER, SOURCE UK SERVICES LTD., LONDON

ince the origins of the US ETF market sixteen years ago, it has grown into a USD 500 billion market with enormous liquidity and transparency. Nine years ago, the first European listed ETFs appeared. Will Europe see the same explosive growth and depth of liquidity? It is an opportunity but not an inevitability. Europe suffers from fragmentation and limited on exchange trading volumes. With thirty issuers and 672 ETFs spread across 25 exchanges but seeing less than 2% daily turnover, diversity is causing fragmentation when investors need concentrated liquidity and tight bid/offer spreads. The US ETF market In 1993, State Street launched its first ETF called S&P Depositary Receipts, today known as SPDRs (”Spiders”). The first SPDR tracked the S&P 500 index and traded in real time on exchange. Shortly thereafter, Morgan Stanley and Barclays launched a series of ETFs called WEBS (World Equity Benchmark Shares, later to be renamed iShares) tracking the MSCI foreign stock market indices. Since the launch of the first set of ETFs, the US market in Exchange Traded Products (ETPs) has developed rapidly. The first ETFs in the US were created in specie (physical replication), where the ETF provider buys all index constituents, or an optimised basket, in order to replicate the performance of a specific index. This method can incur meaningful transaction costs as the underlying basket has to be actively managed both in reaction to index rebalancing as well as corporate actions such as dividends, rights issues and splits. The transaction costs of managing that basket are passed on to the ETF and lead to tracking error over time. Stock lending can supply revenue to offset running cost but introduces non-trivial counterparty risk. Today, daily ETF trading volume accounts for

ETF Radar Magazine • J u l y - A u g u s t

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approximately one-third of the total trading volume on the New York Stock Exchange and assets under management (AuM) in US ETFs have reached USD 500 billion. There are 18 issuers and outstanding AuM represents 4.6% of the total US asset management pool. However, it took ten years for the US market to gain full critical mass and for ETFs to develop as a truly liquid investment and trading vehicle. Liquidity and breadth of investor base were interlinked. As more investors entered the market, liquidity grew and as liquidity grew, it drew in further investors. When hedge funds began trading ETFs in significant volumes, they brought enormous liquidity to the market. Because hedge funds often follow a long-short strategy, they require a trading vehicle that is deeply liquid and which can be borrowed from a lending institution. Stock-lending desks can then either source the required ETF from their own balance sheet, from a client or can create new ETFs and lend them out. The development of an efficient lending market for US ETFs was a key stage in the development of the market. The European ETF market The ETF market in Europe began in the year 2000 with iShares listing ETFs on European exchanges and Indexchange offering its first products. Indexchange developed into one of the biggest ETF providers in Europe before being purchased and absorbed by iShares. Today, Europe has 30 ETF providers offering a total of over 672 ETFs but with a relatively limited AuM of approximately USD 150 billion (representing less than 1.5% of total assets in European fund management, compared to 4.6% in the US). In Europe, there are multiple ETFs tracking each major index and they are listed on 25 different exchanges. Europe is suffering from fragmentation and lack of critical mass. As a result, on exchange trading volumes in Europe are USD 2 billion versus USD 90 billion in the US. In contrast,

Coverstory

in the US, index providers generally license the same index to only one or two ETF providers, concentrating liquidity in that product. In addition, the US market has only a limited number of exchanges for ETF trading focusing liquidity on those venues. The advantage of a highly liquid market is twofold. For a market maker or broker, it means taking on less risk when trying to find the other side of the trade. For the investor, trading becomes more efficient and cost effective as bid/offers narrow and transparency grows. There are two main gaps that stand out as holding back the European ETF market: Liquidity Gap - Europe is lacking significant on-exchange liquidity. Trading volumes are low in relation to current European AuM. Of the tra d i n g th a t i s ta ki n g p l a ce, approximately 80% is done over-thecounter (OTC). With products listed on multiple exchanges, market makers have to divide the trading capital that they have to dedicate to any one product across different exchanges. Also, an investor looking to trade has to monitor prices across multiple venues in order to determine the best available market price. As a result, ETF trading in Europe is less transparent and bid/offer spreads tend to be wider. As mentioned earlier, onexchange liquidity is important for market participants to evaluate the depth of a market and also to draw in new participants. Penetration Gap - The European investor base for ETFs is not as broad and deep as the US. The US market benefits from a highly developed retail market, which accounts for about 50% of assets under management in ETFs. There are structural factors that have aided this growth. Private investors are self directed in the US but less so in Europe. In Europe, private investors traditionally consult their local bank branch or independent financial advisor, where they usually buy investment products over-the-counter. Also missing from the European ETF

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MILESTONES IN THE ETF HISTORY 1971 Samsonite Pension Fund – William Sharpe und Bill Fouse, both employed at Wells Fargo, set up the first indexfund for institutional investors. 1976 Vanguard 500 – First indexfund for retail investors launched by Vanguard's John Bogle und Burton Malkiel. 1987 IPS – Creation of Index Participation Shares (IPS) which became listed on the AMEX. During that time Nathan Most and Steven Bloom who were responsible for new product development at the AMEX started to design Exchange Traded Funds. 1989 Toronto Index Participation Shares – So called „TIPS“ (not to confuse with Treasury Inflation Protected Securities) which were linked to the TSE-35 Index got listed on the Toronto Stock Exchange. 1993 SPDR S&P-500 – After years of effort, the AMEX launched the first ETF, Standard and Poor’s Depositary Receipt (Ticker SPDR), called the "Spider," in January 1993. 1992 Optimized Portfolios As Listed Securities (OPALS) – Morgan Stanley introduced its first ETF-similar financial instruments on the Luxemburg Stock Exchange. 1996 World Equity Benchmark Shares (WEBS) – Morgan Stanley developed the first U.S. based funds holding stocks linked to foregin indices. Today WEBS is trading as „iShares MSCI indices“. Country Baskets – The NYSE offers „Country Baskets“ in eight offshore markets assembled by Deutsche Morgan Grenfell. Unfortunately these products did not survive. 1998 Diamonds – State Street Global Advisors launched the Diamonds (Ticker DIA) based on the Dow Jones Industrial Average as well 10 SPDRs linked to industry sectors. 1999 Cubes – On year after introducing the Diamonds, State Street Global Advisors launched the so called cubes (Ticker QQQ) which tracks the NASDAQ 100 Index.

market are hedge funds. They account for approximately 30% of ETF trading in the US but are almost totally absent from the European ETF market. Closing the liquidity and penetration gaps could be the key to the next stage in the development of the European ETF market. Source is addressing those issues with its multi-bank Exchange Traded Product offering. Setting a new common standard for Exchange Traded Products Source is a specialist provider of Exchange Traded Products (ETPs) with a unique approach and deep roots in the trading community. Our founders are some of the largest participants in the ETP market: Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley. Other key partners include Nomura, Banca IMI, Flow Traders, IMC and Nyenburgh. Together, we recognise the value in creating a new, common standard for ETPs.

“Closing the liquidity and penetration gaps could be the key to the next stage in the development of the European ETF market.” Source is an open architecture platform designed to deliver enhanced liquidity, increased transparency, reduced fragmentation, diminished counterparty risk and improved market performance. At Source, we realise the importance of taking into account multiple perspectives while harnessing cooperation and competition in order to build compelling products. As we gain momentum, we are focused on both enhancing existing markets and entering new markets. We are actively seeking additional partners for our venture. We are confident that our unique approach to ETPs will deliver a superior investor experience and a rapid growth in assets.

Coverstory

To overcome the inefficiencies in the European ETF market, Source is concentrating on enhancing liquidity and reducing counterparty risk. Source lists each product on only one exchange and is working with its partners' stock lending desks to create an active lending market in its ETFs. Source also diversifies and manages its counterparty risk by using multiple derivative providers and an independent asset manager. What are Source ETFs? Source ETFs are UCITS III compliant funds that seek to provide the performance of a specific index. They achieve their target performance by investing in liquid equities and using total return swaps to minimise any tracking error. As a result, the swap counterparties (Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley) bear the risk and cost of tracking the index while the fund itself achieves its target performance. Exposure to the swap counterparts in aggregate is capped at 4.5% and is further mitigated by spreading that exposure across multiple swap counterparties and regularly resetting the swaps to zero. Source ETFs also benefit from an independent asset manager (Assenagon Asset Management) and fund administrator (Bank of Ireland). T-ETCs: Commodities exposure backed by superior collaterals. Exchange traded commodities (ETCs) are open ended securities that are listed on stock exchanges and generally aim to provide the performance of a given commodity index or sub-index. ETCs enable investors to gain exposure to commodities without trading futures or taking physical delivery. “T-ETC” is the trademark name for Source's exchange traded commodities. These products offer the market access to a range of S&P GSCI indices and have the added security of being fully secured by liquid, high-quality assets in the form of US Treasury Bills and cash. These assets are held in a segregated account with Wells Fargo acting as collateral administrator and Deutsche Bank as trustee. The return is achieved ETF Radar Magazine • J u l y - A u g u s t

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by exchanging payments linked to the MILESTONES IN THE ETF HISTORY ... 2001 Nuveen – Four Fixed Income Trust Receipts and equity funds proposed for launch in Hong Kong. Indexchange – Listing of the first Indexchange ETFs based on the DAX, DJ EuroSTOXX 50 and DJ STOXX 50. 2002 VIPER – After a lawsuit with Standard&Poor’s (S&P) Vanguard launched its VIPER (Vanguard Index Participation Equity Receipts) ETF. VIPER Shares are the first investment vehicle structured as an exchange-traded share class of existing Vanguard index funds. 2005 FX ETF – Rydex Investments introduced the first currency exchange-traded fund, based on the euro, on the NYSE. 2006 Acquistion of Indexchange – Barclays announced that it has entered into an agreement with HVB (now Unicredit) to acquire Indexchange, one of Europe’s leading ETF issuers. The HVB unit will be integrated into BGI’s iShares division. 2009 Alternative ETF – Deutsche Bank (db xtrackers) lists the world's first ETF on hedge funds. Source – The joint-venture of BoA/Merrill Lynch, Goldman Sachs and Morgan Stanley called Source has been launched. “Black rocks” – BlackRock agreed to buy Barclays’ investment unit, including iShares, for US$13.5 billion to become the world’s largest money manager.

interest earned on the US Treasury Bills for the total return of the relevant commodity index. The derivative exposure is diversified among the authorised swap counterpar ts, collateralised daily with G7 government bonds and cash and reset weekly. The issuer of the certificates is an Irish-domiciled entity called Source Commodity Markets PLC which is administered by Deutsche Bank Ireland. The Source T-ETCs are exchange traded certificates not funds or exchange traded funds. P-ETCs: The direct way Source offers a physically backed ETC (P-ETC). Instead of holding US

Treasury bills, they invest directly in the physical commodity that they are tracking. Source's gold P-ETC owns gold held in JP Morgan's London vaults. Gold P-ETCs can be redeemed for cash or physical gold and are traded on the London Stock Exchange in US dollars. Future Market Development The European ETF market faces a massive opportunity through the combination of burgeoning investor demand and recent str uctural innovation. European pension funds, portfolio managers and particularly active managers are increasingly using ETFs to implement their asset allocation strategies. The low costs are compelling but increased on exchange liquidity and reduced counterparty risk are key to continuing this trend. As institutional investment accelerates off the back of structural enhancements, private investors are likely to increase their investment both directly and through fund of fund vehicles. Cost savings, liquidity and transparency are compelling and position ETFs to compete aggressively with traditional certificates and warrants offering delta one beta exposure.

“The development of the US ETF market provides an indication but not a blueprint for Europe's future.” From a structuring perspective, the use of swaps allows Source's new generation of ETFs to offer a wide and flexible range of market exposures across all asset classes. Through Source's multi-bank platfor m, investors gain both efficient index replication with minimal tracking error and tight counterparty risk control. The future looks bright for European ETFs as long as we succeed in reversing the current trend toward fragmentation and diminished liquidity. The development of the US ETF market provides an indication but not a blueprint for Europe's future.

Insights & Strategy

A SUBTLE DISTINGTION

Geared

EXCHANGE-TRADED PRODUCTS Recently FINRA warned on geared ETPs. Too many investors using geared - or leveraged - ETPs do not fully appreciate the effect that excessive volatility has on their return. A trending market could produce satisfactory returns, while a trendless index with excessive volatility is likely to produce substantial losses. A real example illustrates the impact of volatility on the return of geared exchange-traded-products. BY MARIANA F. BUSH (CFA), WELLS FARGO ADVISORS, WASHINGTION, D.C.

n the last few years, geared ETPs have expanded the arsenal of tools that allow market players to confront the markets. The market has certainly embraced these relatively new tools quickly and broadly as evidenced by the rate of growth in assets in those types of products. Since the first geared ETP was launched in the summer of 2006, there are currently USD 30 billion in more than 120 geared ETPs. The assets in geared ETPs have risen as the markets declined last year. The first mover's advantage is usually quite strong in the ETP universe. Thus, it is not too surprising that ProShares, the first to launch geared ETPs, currently holds over 80% of the assets in geared ETPs. It is surprising though, that Direxion, the newest entrant in this universe after launching its first geared ETP as recently as early November, has quickly ramped up to be the number two player as measured by assets. Direxion holds over 10% of the assets in geared ETPs. One may argue that one of the reasons why Direxion gathered so many assets in such a short period, is because Direxion also had a first mover's advantage Direxion gears its ETPs three times, as opposed to only two times. At this point, no other geared ETP provider does that. Some of the other players that offer geared ETPs are PowerShares/Deutsche Bank (5% of assets), Rydex (1%) as well as Morgan Stanley and UBS. It appears that when ETF Radar Magazine • J u l y - A u g u s t

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market players employ geared ETPs, particularly when they have a view against the market, they are quite confident about their “bet”. That would explain why many more assets are held in geared ETPs that provide -2x exposure (46% of total geared ETP assets) compared to those with 1x exposure (only 6%), as shown in the pie chart on the right. The Impact of Volatility: The Ignored Variable While some blame the geared ETPs the tools for not producing the results that they expect, we argue that the problem lies with the users, many of which are not familiar with the variables volatility of the underlying index in particular that define the performance of a geared ETP. The other principal variable that defines the return of a geared ETP the return of the underlying index is quite obvious to users. Following, we will attempt to explain the difference between a “Simplistic Return Expectation” and the actual return of a geared ETP with a couple of real examples. Since exaggeration 3x gearing as opposed to 2x gearing often helps to clarify the relationship between a cause and its effect, we will use two Direxion ETPs the Direxion Energy Bull 3X Shares (ERX) and the Direxion Energy Bear 3X Shares (ERY) for our illustration. The underlying index for both is the Russell Energy 1000 Index1. The ideal Period The optimum outcome for a geared ETP is a period of high

Insights & Strategy

absolute return and low volatility for the underlying index, which is what some may refer to as a trending market the underlying index goes far and it does so with few zigzags. Such was the case for the Russell Energy 1000 Index from 12/23/08 to 1/6/09 (the green dots in the chart above), during which it returned 14.8%. There was no “zigzagging;” the index went straight up. The simplistic expectation for the return of ERX (+3x) would have been 44.3%, or three times the 14.8% return of the underlying index during the period. In fact, ERX returned more than that 50.5% during the same period. The reason the actual return was higher than the simplistic return expectation is because the return was tripled every day, and every day the starting point was higher without exception. Bottom line, the return of the underlying index was high relative to ist volatility during our Ideal Period, as shown in the Table below. If market players are able to successfully identify and anticipate such periods of trending markets, it is likely that users will be rewarded for their use of geared ETPs.

dots in the Chart on the previous page). Its return was almost zero 0.1% to be p r e c i s e. H owe ve r, t h e i n d e x experienced tremendous volatility sharp zigzags. Some would describe this period as trendless with high volatility. An uninformed investor may have initially presumed that ERX (+3X) and ERY (-3X) had similar returns as that of the underlying index, i.e. a return close to zero during the same period. Yet, that was not the case. ERX returned -15.6% and ERY returned -27.2%! Users of geared ETPs must be extremely cautious during periods of high volatility. In summary, high volatility relative to the absolute of the return of a geared ETP's underlying index is crucial for positive returns among geared ETPs. Too many users incorrectly assume that accurately guessing the direction of a geared ETP's underling index is sufficient. It is not! Correctly guessing a low enough volatility is necessary as well. The Table on the left summarizes the return and volatility for the holding period and annualized of our Ideal and Nightmarish Periods and the consequences on the returns of the corresponding geared ETPs.

The Nightmarish Period Investors should avoid periods when a market experiences a volatility that is too high relative to its absolute return. Such a period took place only a few days before our Ideal Period mentioned above. From 11/17/08 to 12/2/2008, the Russell Energy 1000 Index did “basically nothing” (the red

Understanding the Underlying Index: Really! Individuals should fully understand the underlying index of a geared ETP. Initially, this may appear to be an obvious, and unnecessary, statement. Yet, we would like to underscore ist importance, especially with certain geared ETPs whose underlying indices

track commodities. The underlying indices of most geared ETPs are fairly straightforward, but a few may not be. An example of a straightforward index would be the underlying index of the UltraShort Financials ProShares (SKF) the Dow Jones U.S. Financials Index. Even without viewing the top holdings of the Dow Jones U.S. Financials Index, one could easily imagine which they are, and how the index would likely behave as financial stocks trade. However, some of the underlying indices of geared ETPs are not as straightforward as most investors may suspect. The underlying index of the ProShares Ultra DJ-AIG Crude Oil (UCO) is a good example. UCO tracks +2x the daily return of the DJ-AIG Crude Oil Index. If the term structure of oil futures is in heavy contango, as was particularly the case in December, the DJ-AIG Crude Oil Index will likely produce negative returns (assuming minimal changes in spot.) In other words, rolling futures positions during contango will burden the return of a commodity index, if all else remains equal. If an individual is unaware of the burden that contango may have on the return of an index2, and accurately anticipated an increase in the spot price of oil, he may still be disappointed at the return of UCO. Buying Between Reset Periods: What Did I Buy?! Most of the geared ETPs reset their desired exposure on a daily basis all

Gearing Magnitude Premium/Discount Tracking Error

Price of Geared ETP

4:00 PM

3:00 PM

2:00 PM

1:00 PM

12:00 PM

2.0 5.0 10.0 2.0 0.0 -2.5 -1.4 0.0

Price of Geared ETP

11:00 AM

20% 50% 100% 20% 0% -25% -14% 0%

$17 $16 $15 $14 $13 $12 $11 $10 $9 $8 $7 $6 $5

Underlying Index

10:00 AM

Price of Geared ETP $10.00 $10.00 $8.00 $6.00 $10.00 $12.00 $16.00 $14.00 $12.00 20%

If shares are bought at this time, and sold at the close Return Effective of Gearing Geared for Holding ETP Period

17 16 15 14 13 12 11 10 9 8 7 6 5

9:30 AM

Eastern Time Previous Close 9:30 AM 10:00 AM 11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM Day's Return

2 0% throughout the day 0 basis points Return of Underlying Index (Current vs Underlying Previous Index Day's Close) 10 10 0% 9 -10% 8 -20% 10 0% 11 10% 13 30% 12 20% 11 10% 10%

Underlying Index

Assumptions:

Past performance is not indicative of future results. An index is not managed and is unavailable for direct investment.

ETF Radar Magazine • J u l y - A u g u s t

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Insights & Strategy

ProShares and Direxion at this point in order to maintain a constant gearing ratio. Yet a few do so on a monthly basis all geared PowerShares reset their exposure on a montly basis. One reset frequency is not necessarily better than the other; however, individuals must understand that if they purchase or sell the shares of a geared ETP between resets, the geared ETP may end up experiencing a different gearing magnitude during the holding period. In other words, an ETP with a daily constant gearing ratio of +2x may effectively end up experiencing a +10x or -2.5x gearing magnitude depending on the entry point, as we illustrate in the example on the previous page. In our hypothetical example above, if one had bought the shares of the geared ETP, which happens to have a +2x constant gearing ratio, at 11 AM when the underlying index reached 8 or its bottom for the day , the effective gearing ratio for the holding period, i.e. from 11 AM until the end of the day, would have been an amazing +10x. On the other hand, if one had bought the shares when the index peaked between resets at 2 PM , the effective gearing ratio would have been a -2.5x. In other words, the bullish geared ETP behaved like a bearish geared ETP from 2 PM to the close! Our hypothetical example could just as easily be applied to a geared ETP that resets on a monthly basis. Simply, convert the hours of the trading day into days of the month. Do Not Call it Tracking Error: It's Not That! Many individuals talk about geared ETPs having significant “tracking error” when they really refer to the divergence between the “simplistic return expectation” and the actual return on the geared ETP. This divergence is not tracking error! In fact, most of the geared ETPs, especially if they use total return swaps as opposed to futures, experience minimal tracking error. Tracking error is defined differently it is the difference between the NAV return of an ETP and the return of its underlying index. The returns may be calculated on a daily,

ETF Radar Magazine • J u l y - A u g u s t

2009

weekly, monthly, quarterly or yearly basis. The time frame evaluated may vary as well last year, first quarter, etc. Potential Tax Inefficiency During certain market environments, some geared ETPs may not be as taxefficient as most of their peers. One of the most significant advantages of exchange-traded funds is their taxefficiency they historically have rarely distributed capital gains at year-end. However, not all ETPs always enjoy such an advantage. Especially during a period when markets move significantly in one direction, as was the case last year, some geared ETPs may end up paying a taxable distribution, which could be a substantial amount of its assets and is likely not able to be offset with capital losses. For example, after most markets declined significantly last year, several inverse ETPs paid out distributions that ranged from 1% to almost 80% of their net asset value. The creation and redemption process of a geared ETP does not allow it to minimize or avoid distributing capital gains as. Unlike most exchange-traded funds, the creation and redemption process of geared ETPs takes place with cash, not in-kind, because total return swaps not underlying stocks or bonds are used to provide the desired geared exposure. Thus, a geared ETP cannot displace any gains during the redemption process. Furthermore, a geared ETP's relatively high portfolio turnover ratio requires it to realize gains, and as a registered investment company, it is required to distribute at least 90% of realized gains. Not only were the 2008 distributions a taxable event, but it later turned out that they were not capital gains that may have been able to be offset by capital losses. Counterparty Risk Most geared ETPs achieve their desired exposure through total return swaps, which add an additional layer of risk: counterparty risk. In simple terms, a total return swap is an agreement in which one party makes payments based on a set rate, either fixed or

variable, while the other party makes payments based on the total return of a reference asset or index. If one of the counterparties suddenly (or not so suddenly) becomes unable to deliver its share of the contract, it will default on the swap. There are several ways in which geared ETPs have attempted to mitigate counterparty risk. First, geared ETPs use swap providers with only the highest of credit qualities. Second, a geared ETP that enters into swap ag reements may diversify its counterparties. In other words, an ETP may enter into swap agreements with various counterparties instead of using only one counterparty. Unfortunately, an ETP with few assets is probably not able to afford more than one counterparty at a time. Third, a geared ETP may decide to enter into shortterm swap agreements such as a 1-day or 30-day swaps instead of a 1-year swap agreement in order to minimize its exposure to the counterparty. Fourth, a geared ETP may use futures instead of swaps to minimize counterparty risk. However, futures may exacerbate an ETP's tracking error. Instead, swaps allow a geared ETP to control more precisely the targeted return. Finally, ETP providers may enter into tri-party agreements: (1) ETP, (2) swap provider, and (3) custodian. In a triparty agreement, the collateral that must be posted for the swap agreement is segregated into an account with the custodian. Without a tri-party agreement, the swap provider would hold the collateral, thus only two parties would be involved. With a triparty agreement, in case the swap provider defaults all of a sudden, only the overnight mark-to-market would be at risk, not the collateral. As one would expect, a tri-party agreement carries a slightly higher cost, but it is another measure that helps reduce counterparty risk. It should be noted that some of the geared ETPs are Exchange-traded Notes. In particular, all the PowerShares that gear their exposure are exchange-traded notes. In general, an ETN carries the credit

Insights & Strategy

COMPACT quality risk of its issuer. In the case of the geared PowerShares currently in existence that would be Deutsche Bank.

“Geared ETPs are most appropriate for only speculative investors and shortterm traders” Suitability to Investors Given all the complexities of geared ETPs we think they are most appropriate for only speculative investors and shortterm3 traders who truly understand all the moving parts that affect the total return of geared ETPs. Such users should monitor positions carefully and frequently, and should be ready to rebalance positions as a geared ETP's underlying index changes. The higher the gearing ratio of an ETP, the nimbler and more cautious the user needs to be. This report has attempted to clarify most of the major moving parts that affect the total return of a geared ETP, yet note that a few additional moving parts such as a changing premium/discount to net asset value and tracking error are universal to all ETPs – geared and nongeared.

GEARED / LEVERAGED EXCHANGE-TRADED FUNDS

eared - or so-called leveraged - Exchange Traded Funds seek to deliver multiples of the performance of the index or benchmark they track. Some leveraged ETFs are “inverse” or “short” funds, meaning that they seek to deliver the opposite of the performance of the index or benchmark they track. Like traditional ETFs, some inverse ETFs track broad indices, some are sector-specific, and still others are linked to commodities or currencies. Inverse ETFs are often marketed as a way for investors to profit from, or at least hedge their exposure to, downward-moving markets. Some funds are both short and leveraged, meaning that they seek to achieve a return that is amultiple of the inverse performance of the

underlying index. An inverse ETF that tracks the S&P 500, for example, seeks to deliver the inverse of the performance of the S&P 500, while a 2x leveraged inverse S&P 500 ETF seeks to deliver twice the opposite of that i n d e x ’s p e r f o r m a n c e . To accomplish their objectives, leveraged and inverse ETFs pursue a range of investment strategies through the use of swaps, futures contracts and other derivative instruments. Most leveraged and inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.

_______ 1 - This index, as well as others tracked by Direxion ETPs, were created for the ETPs. 2 - Some users may believe that SKF's underlying index is the S&P 500 Financials Index, which has a high correlation to the Dow Jones U.S. Financials Index, but may not experience exactly the same return over a specific period. 3 -By short-term, we are referring to hours and days, maybe weeks.

ETF Radar Magazine • J u l y - A u g u s t

2009

Marketplace

Global

TOP 10 GLOBAL EXCHANGES BY TURNOVER

TOP 25 ETF PROVIDER WORLDWIDE

(in USD mn.)

(sorted descending by Assets-under-Management, in USD bn.) 6.501,91 4.512,94

9.296,53 9.141,03 16.027,95

15.588,39

4.096,93

3.437,67

95.587,00

374.892,62

TOP 10 ETFS WORLDWIDE (TOTAL AUM) (sorted descending by Assets-under-Management, in USD mn.) ETF NAME

TICKER

SSGA SPDR S&P 500 ISHARES MSCI EMERGING MARKETS INDEX FUND ISHARES MSCI EAFE INDEX FUND ISHARES S&P 500 INDEX FUND ISHARES BARCLAYS TIPS BOND FUND POWERSHARES QQQ TRUST ISHARES IBOXX USD INVSTM. GRD. CORP. BND FD VANGUARD TOTAL STOCK MARKET ETF ISHARES BARCLAYS AGGREGATE BOND FUND ISHARES RUSSELL 1000 GROWTH INDEX FUND

SPY US EEM US EFA US IVV US TIP US QQQQ US LQD US VTI US AGG US IWF US

AUM

ADV

62,756 30,600 29,782 17,497 13,105 12,911 11,526 9,998 9,631 9,295

23,548 2,138 924 465 126 4,685 123 144 66 149

NR. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

                        

PROVIDER iShares State Street Global Advisors Vanguard Lyxor Asset Management db x-trackers ProShares PowerShares Nomura Asset Mgmt. Van Eck Associates Corp Bank of New York Credit Suisse Asset Mgmt. Nikko Asset Management Zurich Cantonal Bank Direxion Shares ETFlab Investment Daiwa Asset Management Easy ETF Hang Seng Inv. Mgmt. WisdomTree Investment Commerzbank China Asset Management Claymore Securities Credit Agricole AM UBS Global Asset Mgmt. XACT Fonder

# of ETFs 386 104 40 104 107 74 124 29 20 1 8 9 4 20 30 23 57 3 51 51 2 57 53 8 10

AUM (US BN) 380.23 119.68 59.52 35.98 28.26 26.67 26.44 14.32 8.06 6.38 6.14 5.87 5.37 5.15 4.68 4.58 4.25 4.21 4.07 3.27 3.20 3.10 2.81 2.48 2.10

% TOTAL 48.2% 15.2% 7.5% 4.6% 3.6% 3.4% 3.4% 1.8% 1.0% 0.8% 0.8% 0.7% 0.7% 0.7% 0.6% 0.7% 0.5% 0.5% 0.5% 0.4% 0.3% 0.4% 0.4% 0.3% 0.3%

Source: Barclays Global Investors| Data as of June 2009.

Source: Barclays Global Investors| Data as of May 2009.

TOP 10 ETFS WORLDWIDE (CHANGE IN AUM) (sorted descending by largest change in Assets-under-Management, in USD mn.) ETF NAME

TICKER

SPY US EEM US EFA US IVV US TIP US QQQQ US LQD US VTI US AGG US IWF US

AUM 62,756 30,600 29,782 17,497 13,105 12,911 11,526 9,998 9,631 9,295

CHNGE. 31,149 11,128 924 465 126 4,685 123 144 66 149

Source: Barclays Global Investors| Data as of May 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

Marketplace

North America NORTH AMERICAN EXCHANGES AT A GLANCE (sorted descending by total turnover, in EUR mn.) Total

Exchange NYSE EURONEXT (US) NASDAQ OM X TSX G ROUP

ETFs Listed at End of Month

Turnover (USD m)

Trades

% Change MoM in USD

Ma rket-s ha re (%)

1,025

30,187

374,893

24.5

4,410

95,587

28.2

107

1,364

15,588

OTHER SE'S (BATS, CBO E, ETC.)

19.0

FINRA-ADF

28.3

1,829

825,287

34,971.6

TOTAL

100.0

Source: World Federation of Exchanges| Data as of May 2009.

ON THE RADAR +++ SELECTED ETF NEWS

TOP 10 ETFS IN THE U.S. (TOTAL AUM) (sorted descending by Assets-under-Management, in USD mn.) ETF NAME

TICKER

SPY US EEM US EFA US IVV US TIP US QQQQ US LQD US VTI US AGG US IWF US

AUM

ADV

62,756 30,600 29,782 17,497 13,105 12,911 11,526 9,998 9,631 9,295

23,548 2,138 924 465 126 4,685 123 144 66 149

Source: Barclays Global Investors| Data as of May 2009.

TOP 10 ETFS IN THE U.S. (CHANGE IN AUM) (sorted descending by largest change in Assets-under-Management, in USD mn.) ETF NAME

TICKER

AUM

SSGA SPDR S&P 500 POWERSHARES QQQ TRUST ISHARES RUSSELL 2000 INDEX FUND PROSHARES ULTRASHORT S&P500 DIREXION DAILY FINANCIAL BULL 3X SHARES PROSHARES ULTRASHORT FINANCIALS PROSHARES ULTRASHORT FINANCIALS ISHARES MSCI EMERGING MARKETS INDEX FUND DIREXION DAILY FINANCIAL BEAR 3X SHARES ISHARES DOW JONES U.S. R.ESTATE INDEX FUND

SPY US 62,756 QQQQ US 12,911 IWM US 8,950 SDS US 3,979 FAS US 1,630 XLF US 5,140 SKF US 1,247 EEM US 30,600 FAZ US 1,628 IYR US 1,367

CHNGE. 31,149 4,685 2,841 2,654 2,426 2,300 2,213 2,138 1,853 1,369

Source: Barclays Global Investors| Data as of May 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

NORTH AMERICA: WHILE IN CANADA THE FIRST ETF ON THE S&P/TSX 60 SHARIAH INDEX WILL BE LAUNCHED SOON, THE NYSE RECENTLY STARTED TRADING IN AMERICA’S FIRST ISLAMIC ETF. (ETFR) In recent years, sharia-compliant ETFs have popped up in various countries including the United Kingdom, India, Singapore, Dubai, Malaysia and South Africa. In April 2009 Absa Capital launched South Africa’s first shariah-comliant ETF linked to the FTSE/JSE Shari’ah Top 40 Index. Recently the trend has arrived North America: Islamic financial services company UM Financial Inc. has teamed up with Jovian Capital Corp. in a bid to list Canada’s first sharia-compliant exchange-traded fund. The ETF will be linked to the performance of Standard & Poor’s new “S&P/TSX 60 Shariah Index”. In compliance with Islamic law, the index avoids firms involved in financial services, alcohol, gambling and pork products. The new index represents approximately 73% of the Canadian equity market capitalization and is highly correlated to the classic S&P/TSX 60 index. The sharia ETF would target Canada’s Muslim population which numbers about one million, as well as foreign investors. The NYSE was a little bit faster and started trading of America’s first ETF on July, 1. The so called JETS Dow Jones Islamic Market International Index Fund (JVS) will seek to match the performance of the Dow Jones Islamic Market Titans 100 Index. The index is composed of 100 companies located outside the United States, comprising some twenty-three countries and exposure to eighteen different trading currencies. The fund anticipates a gross expense ratio of 0.68%. Administrator and Custodian of this first ETF of Javelin Investment Management is Brown Brothers Harriman.

Marketplace

Europe EUROPEAN EXCHANGES AT A GLANCE (sorted descending by total turnover, in EUR mn.) Tota l ETFs Listed a t Exchange

Turnover (EUR m)

Trades

End of M onth

% Change MoM Ma rket-s ha re in EUR

( %)

DEUTSCHE BÖ RSE

452

147,904

11,323.8

5.9

31.2

NYSE EURONEXT

444

152,977

6,568.0

5.4

19.5

LO NDO N SE

319

74,687

6,493.7

10.4

11.4

BO RSA ITALIANA

368

213,455

4,593.6

7.5

12.6

SIX SW ISS EXCHANGE

158

33,060

2,428.0

-10.6

4.8

NASDAQ OM X NORDIC

106,072

1,758.0

-24.5

5.1

OSLO BO RS

96,505

1,618.9

38.0

4.7

BO LSA DE MADRID

N/A

171.1

-32.8

0.4

WIENER BÖ RSE

182

8.2

67.3

0.0

253

5.6

91.7

0.0

111

2.5

-31.4

0.0

0.2

3.3

ATHENS EXCHANGE IRISH STOCK EXCHANGE OTHER SE'S OVER-THE-COUNTER TOTAL

1,829

825,287

34,971.6

7.0 100.0

Source: World Federation of Exchanges| Data as of May 2009.

TOP 10 ETFS IN EUROPE (TOTAL AUM)

ON THE RADAR +++ SELECTED ETF NEWS

(sorted descending by Assets-under-Management, in USD mn.) ETF NAME

TICKER

AUM

LYXOR DJ EURO STOXX 50 DB X-TRACKERS II EONIA TR INDEX ISHARES DJ EURO STOXX 50 (DE) ISHARES DJ EURO STOXX 50 ISHARES FTSE 100 ISHARES S&P 500 LYXOR CAC40 ZKB GOLD ETF XMTCH ON SMI ISHARES CORP. BOND FUND

MSE FP XEON GY SX5EEX GY EUN2 GY ISF LN IUSA LN CAC FP ZGLD SW XMSMI SW IBCS GY

6,702 5,437 5,180 5,157 4,869 4,824 4,461 3,804 3,470 3,300

ADV 81 46 84 94 100 61 81 17 22 19

Source: Barclays Global Investors| Data as of May 2009.

TOP 10 ETFS IN EUROPE (CHANGE IN AUM) (sorted descending by largest change in Assets-under-Management, in USD mn.) ETF NAME

TICKER

AUM

CHNGE.

DB X-TRACKERS II EONIA TR INDEX ISHARES CORP. BOND. ZKB GOLD ETF ETFLAB DAFLPLUS MAXIMUM DIVIDEND ISHARES FTSE 100 ISHARES DIVDAX ISHARES MSCI EMERGING MARKETS DB X-TRACKERS MSCI EMGNG. MKTS. TR INDEX LYXOR DJ EURO STOXX 50 LYXOR MSCI INDIA

XEON GY IBCS GY ZGLD SW ETFDXMD ISF LN DDAXKEX IEEM LN XMEM GY MSE FP INR FP

5,437 3,300 3,804 956 4,869 1,081 1,830 2,206 6,702 1,009

-1,503 1,089 1,068 956 948 885 860 729 -668 627

GERMANY: FIRST RETAIL-CONVERTIBLES LINKED TO AN ETF UNDERLYING LAUNCHED. (ETFR) WestLB, still one of Germany’s largest Landesbanks, started the offering period for the first retail-derivatives directly linked to an Exchange Traded Fund. The product has been set up as Reverse-Convertible (”ETF Anleihe iShares DAX”) with a 5% p.a. coupon (WLB2SP / 70% barrier of inital pricing) or 6,5% p.a. coupon (WLB2TX / 80% barrier of inital pricing). The performance of the reverse convertible is directly linked to the performance of iShares’ DAX ETF. If the price of the iShares DAX ETF - compared to the inital level at issuance - will decline 20% (WLB2TX), 30% (WLB2SP) or more at the calaculation day (June 18, 2010), the investor will receive a pre-defined repayment in iShares DAX ETFs via physical settlement. If the price is above the trigger line investors will receive 100% of its nominal amount back (cash settlement). The interest amount will be paid in cash to the investor in any case. “We want to fill the gap between convertibles and ETFs by offering this new, innovative structure. The underlying is popular and well-known which should enhance the demand from the buy side” said Frank Haak, Product Manager Equity Markets at WestLB in Düsseldorf.

Source: Barclays Global Investors| Data as of May 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

Marketplace

Middle East & Asia-Pacific MIDDLE AND FAR EAST EXCHANGES AT A GLANCE (sorted descending by total turnover, in EUR mn.) Total Exchange SHANGHAI SE

Trades (in thous ands)

ETFs Listed a t End of Month

Turnover ( USD m)

% Change MoM M arket -share in USD (%)

458

4,513

HO NG KO NG SE

152

4,097

KOREA EXCHANGE

341

2,333

1,692

TOKYO SE

1,530

OSAKA SE

1,440

ISTANBUL SE

1,037

TAIWAN SE

586

SING APO RE SE

578

AUSTRALIAN SE

319

IND IA NATIONAL SE

SHENZHEN SE

THAIL AND SE

NEW ZEALAND SE

OTHER SE'S

0.5

1,829

825,287

34,971.6

TOTAL

Source: World Federation of Exchanges| Data as of May 2009.

TOP 10 ETFS IN ASIA-PACIFIC (TOTAL AUM)

ON THE RADAR +++ SELECTED ETF NEWS

(sorted descending by Assets-under-Management, in USD mn.) ETF NAME

TICKER

AUM

TSE TOPIFL ETF OSE NIKKEI 225 ETF TRACKER FUND OF HONG KONG ISHARES FTSE/XINHUA A50 CHINA TRACKER LISTED INDEX FUND 225 HANG SENG INDEX ETF HONG KONG DAIWA ETF- NIKKEI 225 DAIWA ETF-TOPIFL HANG SENG H-SHARE INDEX ETF HONG KONG CHINA 50 ETF

1306 JP 1321 JP 2800 HK 2823 HK 1330 JP 2833 HK 1320 JP 1305 JP 2828 HK 510050

6,912 6,109 4,743 4,396 3,089 2,484 2,383 2,259 1,604 1,584

ADV 28 57 58 104 32 1 16 2 36 204

Source: Barclays Global Investors| Data as of May 2009.

TOP 10 ETFS IN ASIA-PACIFIC (CHANGE IN AUM) (sorted descending by largest change in Assets-under-Management, in USD mn.) ETF NAME CHINA 50 ETF ISHARES FTSE/XINHUA A50 CHINA TRACKER HANG SENG INDEX ETF BANKING INDEX BENCHMARK BEES INDIA WOORI CREDIT SUISSE KOSPI 200 HANG SENG H-SHARE INDEX ETF TRACKER FUND OF HONG KONG POLARIS TAIWAN TOP 50 TRACKER SPDR S&P/ASX 200 FUND CHINA sme etF

TICKER 510050 2823 HK 2833 HK BBEES IN 069660 KS 2828 HK 2800 HK 0050 TT STFI AU 159902 CH

AUM 1,584 4,396 2,484 23 63 1,604 4,743 1,545 1,066 408

CHNGE. 1,016 776 732 -713 -628 556 504 492 461 -316

MALAYSIA: FIRST CALL WARRANTS ON ETFS LAUNCHED. (ETFR) CIMB Bank, the second largest commercial bank in Malaysia, launched on July 5 the first cash-settled call warrants on the Tracker Fund of Hong Kong and iShares FTSE/Xinhua A50 China Tracker in Malaysia. CIMB Bank said the Tracker Fund of Hong Kong was the first ETF in Asia and tracked the performance of Hang Seng Index, while iShares FTSE/Xinhua A50 China Tracker tracked the performance of the FTSE/Xinhua China A50 Index. As the liquidity provider for the new call warrants, CIMB Bank would facilitate competitive bids and quotes for investors during the trading hours, according to a press statement. Head of Equity Derivative Group, Lim Jong Hau, said the call warrants offered were European-style cash-settled, meaning the call warrants would be settled based on the positive difference between the closing price at expiry and the strike price. Hence the warrants cannot be converted into units of the respective ETFs unlike the latest product launch of “ETF convertibles” with physical settlement (page 15).

Source: Barclays Global Investors| Data as of May 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

Interview

ETF SECURITIESâ&#x20AC;&#x2122;

Hector McNeil

about oil, gold and other hot commodities and the market reactions after the AIG disaster.

hat are the expectations of ETF Securities, as t h e p i o n e e r i n E xc h a n g e Tr a d e d Commodities, for the gold price within the next 6 months and by which factors will the price be influenced in the near term? We believe the medium term fundamentals for gold are very good. Supply is constrained and getting more costly, but we believe the main source of demand will be inflation. With the expansion of most paper currencies, supply gold by definition, should prosper as its supply is relatively constant. The demand we are seeing for our two gold products ETFS Gold Bullion Securities and ETFS Physical Gold back up this theory. Investors are still going long gold and we now have just under a record Assets Under Management figure of 8m ozs. Which of your ETCs/ETFs are currently most demanded by investors? The most active ETCs are ETFS Gold Bullion Securities and ETFS Physical Gold for gold exposure. ETFS Leveraged What challenges did you face last year with the trouble Crude Oil, ETFS Brent Oil, ETFS Brent 1 year , ETFS of AIG and how have the investors reacted? Agriculture , ETFS Copper and The whole market was affected by ETFS Physical Platinum, also September's events and clearly AIG continue to be in demand. The most was at the centre of this. One of our popular ETFs of our company are Issuers uses AIG to manage exposure Russell Global Gold Miners, Russell Hector is responsible for sales and marketing for to our DJ-AIG index products. As a Global Shipping, Global Nuclear and the ETF Securities group of companies. He started result of the issue we have greatly DAXGlobal Alt Energy. his career at the London Stock Exchange after enhanced this offering by adding a completing his studies at the University of Hull. layer of collateral that ensures that W hich exchange is most Hector left the LSE to study full time for an MBA over 100% of the value of the ETCs at Warwick Business School. He then had a short f r e q u e n t e d f o r t h o s e stint at BZW before moving to Morgan Stanley for are collateralised. Therefore, this takes ETCs/ETFs? five years. From Morgan Stanley, he moved to away Issuer and counterparty risk and The most active exchanges for us are: become Chief Operating Officer at Jiway, the leaves a very credit robust product for The London Stock Exchange, Borsa Exchange joint venture between Morgan Stanley the investor - a first of its kind. Italiana and Xetra. Euronext also has and OM Gruppen. After Jiway, Hector spent time Investors have voted with their feet at Nomura, and then was Head of Business growing volumes. Development at Susquehanna International and these products have trebled in Securities, setting up a highly successful market AUM since November. It should also What are your expecations making and liquidity provision business which be said that 4/5ths of our assets are in regarding the oil price? Will it stay included ETF, stock future and equity market physically backed bullion products that well above 60 USD/barrel within making. He lives in London. are the most robust of any ETF or the next time and maybe retest ETC in the market, and these picked the 100USD/barrel level? up huge assets during the AIG crisis. Oil is interesting, we see investors shorting using our ETFS Short Oil as well as going long into our ETFS Brent Oil and Which new products from ETF Securities should ETFS Leveraged Crude, so it's a two way flow. There is no real investors expect for the next time? consensus. We have seen strong demand for ETFS Natural We will continue to expand our offering and continue to Gas and ETFS Leveraged Natural Gas. Investors seem to innovate - for example by launching our new ETFs tracking think that Natural Gas is seen as lagging the oil price so adding double leveraged and double short versions of Europe's main value. equity indices. - Thank you for the interview!

VITA

ETF Radar Magazine â&#x20AC;˘ J u l y - A u g u s t

2009

Learning Curve

A SUBTLE DISTINCTION Compared to traditional mutual funds the settlement process when buying or selling ETFs work differently. A view behind the scenes.

BY MARTIN RAAB, ETF RADAR MAGAZINE, NAPLES (FL)/MUNICH.

hat happens exactly when an investor buys or sells units of an Exchange Traded Fund? At a first look nothing special - but what happend behind the scenes is unique. Unlike in the mutual funds business retail investors who buy or sell ETF units have no direct contact with the specific ETF issuer. Instead, ETF units bought or sold by retail investors are first created or redeemed only by so-called “authorized participants” or market makers - in many cases large institutional investors or specialized market makers who contract with the Exchange Traded Fund sponsor to serve that role.

as the ETF or cash to a specially designated custodial bank for safekeeping. After a check that the basket represents the requested ETF by the custodian, the ETF shares are forwarded on to the authorized participant/market marker. This is a so-called in-kind trade of essentially equivalent items that does not trigger capital gains for investors. The market makter receives ETF units (usually created in blocks of 50,000 units) in the same value as the basket of securities or the cash that it has delivered. This exchange of a basket of securities for ETF units is called the creation process (issuance of Exchange Traded Fund units). These “creation units” are then sold to retail investors (”ETF THE TRADING FLOWS (SUBSCRIPTIONS AND REDEMPTIONS) sellers”) in smaller share lots. ETF SELLER Basket of securities/cash

i.e. EXECUTION/ORDERROUTING VIA BROKER/BANK

CASH A/C PORTFOLIO

Redemption Process ETF units

Cash

ETF units

Cash

ETF units

I N T R A DAY TRADING

CUSTODIAN ETF(ETF fund FUND manager

MARKET MARKER

MANAGER)

Liquidity transfer, Providing real-time Bid/Ask-Quotes

ETF units

Creation Process

CASH A/C PORTFOLIO

Basket of securities/cash

The way back: Redemption In the secondary market the market maker can then offer its ETF units for sale on the exchange. Alternatively, it can hold them in its own portfolio. Conversely, the market maker can buy back a large block of ETFs on the open market and sends it to the custodial bank and in return receives back an equivalent basket of individual stocks which are then sold on the open market (or typically returned to their loanees). This process is called the redemption process.

EXECUTION/ORDERROUTING VIA BROKER/BANK

The final question is: What motivates each player within this process? Of course to ETFBUYER buyer ETF generate profits. The market maker is P R I M A R Y M A R K E T S E C O N D A R Y M A R K E T primarily driven by profits from the difference in price between the basket of stocks and the ETF and on part of the bidThe creation process ask spread of the ETF itself. Whenever there is an The procedure for the issuance and return of Exchange opportunity to earn a little by buying one and selling the Traded Fund units in the primary market is known as the other, the authorized participant will jump in. All other creation/redemption process. This process entails the involved parties takes a small portion of the fund's annual exchange of cash or baskets of securities for ETF units, or assets as their fee, which is clearly stated in the prospectus vice versa. In the primary market the market maker delivers available to all investors. a basket of securities with the same weighting of securities ETF Radar Magazine • J u l y - A u g u s t

i.e.

2009

Career&Events

CAREER

Outlook JOB OFFERS

ACTIVE EMPLOYERS

Total amount and global allocation of job offers within the ETF Industry

Top 10 Hiring Companies Worldwide

REGION North America United States Europe United Kingdom Switzerland Germany Middle East/Asia Pacific Japan Singapore

OFFERS 145 145 62 52 6 4 4 3 1

TREND

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Barclays Global Investors/iShares (US) Selby Jennings Recruitment (UK) JPMorgan (US) State Street (US) Charles Schwab (US) Aston Carter (UK) Credit Suisse/Xmtch (CH) Profund Advisors/proshares (US) UBS (US) ETF Securities (UK)

Source: ETF Radar | Data as of 30 June 2009.

Job Offers sorted by Country:

1. Japan (80%) 2. Singapore (20%) Middle East Asia-Pacific

North America

69% Europe

29%

Job Offers sorted by State:

1. New York City (27%) 2. California (20%) 3. Massachusetts (12%) 4. North Carolina (10%) 5. Connecticut (8%) 6. New Jersey (8%) 7. Virginia (5%) 8. Pennsylvania (4%) 9. Texas (4%) 10. Illinois (2%)

Job Offers sorted by Country:

1. United Kingdom (84%) 2. Switzerland (9,6%) 3. Germany (6,4%)

(%) - Marketshare of state or country vs. total number of ETF jobs in the specific region available. Source: ETF Radar | Data as of 30 June 2009.

ETF Radar Magazine â&#x20AC;˘ J u l y - A u g u s t

2009

Career&Events

EVENT

Calendar SELECTED EVENTS

OCTOBER

SEPTEMBER

NOVEMBER

8th Annual Euro ETF Forum

2nd Swiss Pensions Forum

portfolio ETF-Forum

14 September 2009

1 October 2009

November 30 - Dec 1

Location

London (UK), Hilton Metropole

Zurich (CH), Marriott Hotel

Frankfurt (GER), Radisson SAS Hotel

Organizer information

imn.org

ftglobalevents.com/schweizerpension09

etfforum.de

Registration Fee

starting at 250 GBP

starting at 199 EUR

TBD

ETF & Indexing Investments Europe

ETF Insights Series

21-23 September 2009

6 October 2009

Location

London (UK), Park Plaza Victoria

Zurich (CH), Hotel Widder

Organizer information

8 October 2009

terrapinn.com

Location

Registration Fee

Paris (FR), Hotel de Crillon

starting at 1,795 GBP

20 October 2009

Exchange Traded Product Days

London (UK), One Great George Street

Location Organizer information

17 September 2009

DECEMBER Super Bowl of Indexing 6-9 December 2009 Location Phoenix (USA), Biltmore Resort Organizer information imn.org Registration Fee TBD

ftglobalevents.com

Location

Registration Fee

Lugano (CH)

Complimentary for qualified professionals

24 September 2009 Location Geneva (CH)

Fund Forum Middle East Event

Organizer information

19 - 22 October 2009

etpd.ch

Location

Registration Fee

Bahrain, The Diplomat Radisson SAS Organizer information

Free of charge

icbi-events.com/fundsmiddleeast Registration Fee

ETF Insights Series

Various packages available

24 September 2009 Location Madrid (ES), The Westin Palace

Inside ETFs Europe Conference

29 September 2009

22-23 October 2009

Location

Frankfurt (GER), Steigenberger Hotel

San Sebastiรกn (ES), Miramar Palace

Organizer information

ftglobalevents.com

insideetfseurope.com

Registration Fee

Complimentary for qualified professionals

starting at 199 EUR

Is your upcoming event not listed? Just let us know. magazine@etf-radar.com

ETF Radar Magazine โ ข J u l y - A u g u s t

2009

Global Players (Selection) ET F Pr ov ide r (tra ding a s)

C onta ct de tails (websi te/Hea do ffi ce)

Blac kr ock /BGI

www.isha res.co m

i Share s

L ondo n EC 3N 4HH (UK)

S SgA Inc.

www.ssg afunds.co m

Str eetTr ack s

B os ton, MA, 02111 (USA)

Va ngua rd

www.vang uard.co m

Va ngua rd ET Fs

Wa yne, PA 19087 (USA)

S ocié té Géné ra le S A

www.lyxo re tf.c om

L yxo r ETF s

92987 Pa ri s-L a Défe nse (F R)

De utsche Bank A G

www.dbxtra cke rs.com

db x-tr ack ers

60311 F rank furt (GER )

Inves co

www.invesc opo we rshar es.c om

P ower Share s ETF s

Whea ton, IL 60187 (USA)

P ro Sha re s

www.proshare s.c om

P roS ha re s

B ethesda , MD 2081 4 (USA)

N omur a AM

www.nom ura -a m.co.jp

No m ur a ETFs

To kyo 103 -8260 (Japa n)

Va n Ec k Se c. C or p.

www.vane ck.com

m ar ketvec tor

Ne w York , NY 10017 (US A)

N ik ko A M

www.nikk oa m.co m

nik ko ETF s

To kyo , 107-62 42, (Ja pa n)

C re dit Suisse A M

www.xm tch-e tf.c om

xm tch ETFs

8070 Züric h (CH)

BNP P a ribas

www.ea syetf.co m

Ea syETF s

75009 Pa ri s (F R)

ET FL ab Invm t.

www.etflab.de

e tflab

80807 München (GER )

Wisdo mTr ee Invmt.

www.wisdo mtr ee.com

Wi sdom Tree ETF s

Ne w York , NY 10017 (US A)

C om me rzbank A G

www.co ms tag e.de

c om stag e ETFs

60311 F rank furt (GER )

Ra ting s (S&P /MDYS/ FTC H)

Mar ke t R eg ulato rs (Sel ection)

Liste d ETFs (gl oba l)

-/A1/-

SEC, F SA (UK), AMF

381

-/A1/-

S EC

104

Fla gs hip pr oducts (Tick er)

Exc hange Listing s

IWM, DAXEX, US, UK , GE R, IT , C H, FR , AT, HK, SG, AU SP DR

As se ts-unde r- Re plica tion m etho d Ma nag em ent

M ar ke tshar e (US/ EU/MEAP)

US $336 B n

full re pl ica tion

53%/39% /10%

US, F R, NL , SG, HK, AU

US $110 B n

full re pl ica tion

21% /0.7%/14 %

sam pling (SP DR )

-/ -/-

S EC

US$51 Bn

full re pl ica tion / sam pling

11%/0% /0%

AA-/ Aa2/-

AMF , F SA (UK )

116

L VC, C AC, MSE

GER, UK, IT, ES, CH, FR , AT, SG

US$33 Bn

synthe tic repl ica tion

0%/22% /0%

A+/Aa 1/AA-

Ba FIN, AMF , F SA (UK )

404

XDAX, XEOD

GER, UK, IT, CH, F R, AT, SG

US$26 Bn

synthe tic repl ica tion

0% /17% /15%

B B B+ /A3/B B B+

S EC

143

QQQQ

US$24.2 B n

full re pl ica tion

5% /0.5%/0%

-/ -/-

S EC

PSQ, QL M, DDM

US$24 Bn

-/Ba a 2/BB B

F SA (JP )

US$13.5 B n

-/ -/-

S EC

GDX, RSX

-/ -/-

S EC

A+/Aa 1/AA-

FINMA

AA/ Aa1/AA

AMF

A/-/ Aa2

full re pl ica tion / sam pling / synthetic

5% /0% /0%

full re pl ica tion

0%/0% /27%

US$6.3 B n

full re pl ica tion / sam pling

1% /0% /0%

US$5.6 B n

full re pl ica tion

0%/0% /11%

XMS MI

US$5.6 B n

full re pl ica tion / sam pling

0% /4% /0%

CPETDX5

GER, F R, IT, CH

US$4.6 B n

full re pl ica tion

0% /3% /0%

B AF IN

ETFL 01, ETFL 02

GER

US$3.5 B n

full re pl ica tion

0% /2% /0%

-/ -/-

S EC

WTIND, WTDFA

US$3.2 B n

full re pl ica tion / sam pling

1% /0% /0%

A/Aa3 /A+

B AF IN

CBDAX

GER

US$2.7 B n

synthe tic repl ica tion

0% /2% /0%

Table sorted by Assets-under-Management. Please notice: SSgA rating equals STT Corp. rating. iShares ratings equals Blackrock's rating. Nomura AM equals Nomura Hlds' rating. ETFLab Invmt. equals Dekabank's rating. Source: ETF Radar Research, June 2009.

ETF Radar Magazine • J u l y - A u g u s t

2009

Disclaimer EXCHANGE TRADED FUNDS ARE SOLD BY PROSPECTUS. PLEASE CONSIDER THE INVESTMENT OBJECTIVES, RISK, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION, CAN BE OBTAINED FROM THE ETF SPONSOR OR YOUR FINANCIAL ADVISOR. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. Important Disclosures Wachovia Securities has no applicable relationships with the companies mentioned within the report “Geared Exchange Traded Products”. For important disclosure information, please contact: Wachovia Securities, Attn: Advisory Services (Disclosure Information), One North Jefferson, St. Louis, MO 63103, or call by phone: (888)-410-9203, or refer to: www.wachoviasec.com/gotoresearchdisclosures. Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. Additional Information and Disclaimers All figures are subject to market fluctuation and change. Investments that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than investments that are more diversified. An index is not managed and is unavailable for direct investment. Total returns assume reinvestment of all distributions, including dividends and capital gains. Reinvestment does not assure a profit or protect against a loss in declining markets. Total returns do not include commissions, fees, other transaction variables or the effects of taxation. Past performance does not guarantee or predict future results. Buying commodity based investments allow for a source of diversification for those sophisticated persons who wish to add commodities to their portfolios and who are prepared to assume the risks inherent in these markets. Any investment represents a transaction in a non-income –producing commodity and is highly speculative. Therefore, commodities should not represent a significant portion of an individual’s portfolio. Futures trading is for individuals willing to accept a higher level of risk for the opportunity of greater returns. Past performance is not a guarantee of future results. The investment discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. This communication is not an offer to sell or solicitation of offers to buy any securities mentioned herein. This report is not a complete analysis of every material fact in respect to any fund or fund type. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable but its accuracy is not guaranteed Wachovia Securities does not render legal, accounting or tax advice. Please consult your tax or legal advisors before taking any action that may have tax consequences. The performance provided is past performance, which does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value will fluctuate when sold and may be worth more or less than the original cost. Please visit the following websites for more current monthly performance information: For information on SKF see: http://www/proshares.com For information on SKF see: http://www/proshares.com For information on ERX see: http:// www.direxionshares.com For information on ERY see: http:// www.direxionshares.com Wells Fargo Advisors is the trade name under which Wells Fargo Corporation provides brokerage services through two registered broker-dealers: Wells Fargo Advisors, LLC, Member NYSE/SIPC, and Wells Fargo Advisors Financial Network, LLC, Member FINRA/SIPC. Each brokerdealer is a separate non-bank affiliate of Wells Fargo Corporation. Securities and Insurance Products: NOT INSURED BY FDIC OR ANY FEDERAL GOVERNMENT AGENCY - MAY LOSE VALUE - NOT A DEPOSIT OF OR GUARANTEED BY A BANK OR ANY BANK AFFILIATE Important notice to our readers: The views and expectations presented in the analyses, data and product presentations in this publication should not be viewed as investment recommendations of and by the ETF Radar Magazine or any of its affiliates or associates. Investors should seek independent professional advice. Contributors of this publication and/or its affiliates may invest in or act as a market maker for the securities or indices or other products referred to in this publication for its own account or the account of a third party. Editorial contributors may also have a business relationship with issuers of such securities or providers of such indices or products and may represent members of such issuers' or providers' decision-making bodies. While the information in this publication has been obtained from sources believed to be reliable, neither the ETF Radar Magazine nor any contributor makes any representation as to its accuracy or completeness. The ETF Radar Magazine does not act as an registered investment advisor or fiduciary for anyone unless otherwise agreed. Any evaluations in this publication reflect only the author's opinion at the time of the analysis. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. This publication is general and for information only and does not constitute any form of recommendation, an offer to sell or a solicitation to buy any security or other financial instrument. Prospective investors should understand the risks associated with the products mentioned in this publication and should reach an investment decision on the basis of the information in the relevant offering circulars. Neither the staff of the ETF Radar Magazine nor any other person shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary loss or damages, including without limitation lost profits arising in any way from the information contained in the material. All designated trademarks and brands are the property of their respective owners.

ETF Radar Magazine • J u l y - A u g u s t

2009

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