ETF Radar Magazine (Q4/2010) by ETF Radar

News • Market Intelligence • Rankings

4 Quarter 2010

etfRADAR M

Issue No. 8 ISSN 2150-9166

Insights&Strategy

ACTIVE ASSET ALLOCATION Marketplace

AMERICAS, EUROPE AND ASIA-PACIFIC AT A GLANCE Research

SHORT AND LEVERAGED ETFS Coverstory

ETFS VS. FUTURES

Interview

INDXIS’ ALAN PRICE

FROM AN ASSET MANAGERS PERSPECTIVE

Contents 3 EDITORIAL 13 MARKET PLACE

5 MARKET SUMMARY Selected statistics and news from all over the world.

Global ETF news and selected market statistics at a glance.

14 AMERICAS

6 SECTOR MAP Performance of the 19 Supersectors represented by the Dow Jones Sector Titans IndexesSM.

15 EUROPE 16 MIDDLE EAST & ASIA-PACIFIC

7 COVERSTORY ETFS VS. FUTURES from an asset managers perspective

17 PORTFOLIO

Indxis’ Alan Price

ALLOCATOR SECTOR UPDATE

22 CAREER &

Telco’s calling for tactical investors.

11 INSIGHTS & STRATEGY ACTIVE ASSET ALLOCATION A key to generate alpha within the jungle of ETFs

21 INTERVIEW

19 RESEARCH

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

Short and leveraged ETFs – The path between insanity and brilliancy

COMPANY AND INSTITUTIONS-INDEX (Name, page)

Amundi ETF Arrow Funds Axis Funds Claymore CME Group DBX Strat. Advisors Direxion ETF Securities FINRA Global X Funds Indxis IRS iShares Lyxor NextETFs PowerShares Proshares Proshares Russel Investments

ETF Radar Magazine | Issue 4th Quarter 2010

10, 15 10 16 5 9 5 5 14 8 5 21 9 15 16 4 5 5 5 5

Russel Investments Rydex SGI Singapore Exchange SIX Swiss Exchange Societe Generale SSgA Stuttgart Stock Exchnage Veritas Trust Wellington Management Co. WisdomTree

5 5 4 15 4 5, 14, 16 12 11 9 5, 14

Editorial CONTACTS & INFORMATION

An exciting year draws to a close

he year 2010 is linked to many attributes. Some may it call challenging, hopeful, horrible and exciting. The challenge will still remain daily reality for some of the G20 economies. Hope and fear closely accompanied the people on the U.S. gulf coast. Most of them will never forget April 20, 2010. This was the day when the oil rig “Deepwater Horizon”, jointly operated by Transocean and BP, exploded and became the new synonym for the largest oil spill in the American history. The aftermaths of this disaster are still unclear as “unclear” as some of the water in the Gulf of Mexico.

The ETF Radar Magazine NORTH AMERICA eMail: americas@etf-radar.com Phone: +1 239 384 6090 Mailing address: 2316 Pine Ridge Road #402 Naples, FL 34109 (USA) EUROPE, MIDDLE EAST and ASIA-PACIFIC eMail: europe.asiapacific@etf-radar.com Phone: +41 43 233 5658 Mailing address: Melchrütistr. 13 8304 Wallisellen (Switzerland)

Exciting moments the financial community shared in May this year during the so called “flash crash”. When USD 1 trillion briefly evaporated from the U.S. stock market on May 6, no group of securities got hurt more than exchange-traded funds, as attempts to protect against snowballing losses may have made the decline worse, a report released by federal regulators showed. ETFs made up 70 percent of securities with trades that were later canceled because of excessive declines, the joint study by the Securities and Exchange Commission and Commodity Futures Trading Commission found. Traders selling the funds to offset falling stocks may have created “unusual liquidity demands,” causing buyers to pull out of the market, the report said. The SEC's solution was to create circuit breakers that would halt trading for five minutes should individual stocks in the S&P 500 lose 10 percent of their value in a five-minute span. We will see if this new rule could really fix the problem. The good message for the ETF industry: The growth in Exchange Traded Funds hasn't stopped. According to the latest figures, the global ETF AuM reached by end of August 2010 the record level of USD 1'061 billion. With view on the year 2011, the industries massive growth is expected to slow a little bit in the US but remain on high levels. The powerhouses for Exchange Traded Solutions will be Europe and Asia. Also the emerging investor base in Mexico, Brazil and the Middle East is keen to use passive investment products. All things considered, the coming year 2011 will be potentially a good one for the ETF business and in the next 12 months the success story will be continued!

RESEARCH DIRECTOR Sebastian Stahn DESIGN DIRECTOR Cathrine Corbeau TECHNICAL DIRECTOR Tobias Stoeger WEBSITE www.etf-radar.com ISSN 2150-9166 SINGLE ISSUE PRICE 12 USD SUBSCRIPTION Subscriptions to the magazine are complimentary for qualified readers and 72 USD for others. 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. THE ETF RADAR MAGAZINE IS A PRIVATE AND INDEPENDENT PUBLICATION.

All the best

a rti n

GLOBAL PUBLISHER Martin Raab, CAIA

Ra a b

Global Publisher martinraab@etf-radar.com

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» ETF Radar Magazine | Issue 4th Quarter 2010

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Snapshots THE WORLD’S LARGEST ETF INDEX PROVIDERS

NEWCOMER

(Sorted descending by Assets-under-Management of licensed index products) MSCI 24.8% S&P 22.1% Barclays Capital 9.6% Russell 5.8% FTSE 4.3% STOXX 4% Markit 3.9% Dow Jones 3.6% NASDAQ OMX 2.6% Deutsche Boerse 2.2% Topix 1.5% Hang Seng 1.2% Nikkei 1% EuroMTS 0.9% NYSE Euronext 0.7% SIX Swiss Exchange 0.7% WisdomTree 0.6% CAC 0.6% Indxis 0.4% CSI 0.3% BNY Mellon 0.2%

SMALL ETF START-UP WITH BIG PLANS. Next ETFs LLC, a wholly-owned subsidiary of Next Investments, announced its intention to sponsor a new series of ETFs. The Bedminster, New Jersey, based start-up has big plans to expand in the ETF business.

Intellidex 0.2% Morningstar 0.1% S-Network 0.1% Zacks 0.1% Value Line 0% Other 8.6%

Sources: BlackRock ETF Research and Implementation Strategy Team and Bloomberg as of September 30, 2010

UP & DOWN

Magnus Böcker CEO of Singapore Exchange, a merger maestro, is poised to offer a premium of up to 40% to acquire the Australian Securities Exchange. The move by stateowned SGX could create Asia's biggest exchange at a time when SGX is facing pressure to outshine Hong Kong, and establish itself as a strong commodities player in Asia. If a deal between Singapore and the ASX gets through the mire of regulatory hurdles, it will trigger a new round of consolidation in the Asian region, where shares and derivatives trading is growing faster than anywhere else. No doubt, the consolidation of the global exchanges landscape has started right away.

ETF Radar Magazine | Issue 4th Quarter 2010

Their first ETF will be linked to the Nikkei225. Next Investments, through an arrangement with Mitsubishi UFJ Asset Management Co., has been granted an exclusive license to establish the only U.S. Nikkei 225 ETF. Obviously the principals of Next Investments have already gained a lot of experience in the ETF business. They provided the intellectual capital and execution in the development of the first physical U.S. commodity exchange-traded product (SPDR Gold Shares) and developed the world's first family of currency-backed ETFs in conjunction with Rydex Investments and JP Morgan. Good luck guys! ETF Radar loves diversity in the global ETF business.

Jerome

Kerviel the most famous French rogue trader and former employee of French bank giant Société Générale has been sentenced to jail and EUR 4.9bn fine. Accused of breach of trust, computer abuse and forgery, the 33-year-old was convicted of all three charges and was sentenced to five years' imprisonment, with two years suspended. According to judge Dominique Pauthe, the Brittanyborn computer whizz was a quietly cynical operator who exploited his technological knowhow and market understanding to pull the wool over his employers' eyes. How Kerviel should repay the 4.9bn fine the court didn’t comment in detail. Maybe he will start his own hedge fund in 2015 – and try to clear his debt by using the performance fees?

Market Summary

THE ETF MARKET AT A GLANCE TOP 10 BEST PERFORMING ETFS (Year-to-Date performace in percent, base currency USD)

Fund name B2B Internet HOLDRs ProShares Ultra Silver Global X/Colombia 20 Direxion Real Estate Bull3X iPath DJ-UBS Cotton TR iPath DJ-UBS Tin TR iShares MSCI Thailand ProShares Ultra Real Estate iShares MSCI Turkey Direxion 20+ Yr Trsy Bull 3X

Ticker BHH AGQ GXG DRN BAL JJT THD URE TUR TMF

AuM 3.14 150.85 33.36 156.33 36.59 27.44 331.12 511.82 509.07 19.61

INDUSTRY HIGHLIGHTS

Last Price $0.76 $93.83 $46.58 $57.12 $59.28 $62.06 $63.89 $49.97 $77.01 $44.45

4Weeks % 9.43 18.93 10.25 15.70 10.50 13.08 8.00 10.21 14.67 –8.56

YTD % 70.02 67.10 64.23 64.21 62.37 55.46 53.76 46.45 45.43 44.22

GLOBAL TOP 10 MOST ACTIVE ISSUERS (Launched ETFs/ETCs as of October 2010)

• The most-popular ETF asset class by end of September was U.S. stocks, with inflows of $16.7 billion. While inflows into the heavily traded SPDR S&P 500 SPY and PowerShares QQQ bolstered assets for U.S. stock ETFs overall, the predominant theme in the current environment is investor appetite for dividends. iShares Dow Jones Select Dividend DVY and Vanguard Dividend Appreciation VIG have seen a spike in demand in recent months. • While TIPS ETFs have seen outflows on deflationary concerns, commodities, REITs, and dividend-paying ETFs have enjoyed increasing popularity. REITs serve as a solid inflation hedge, and iShares Dow Jones US Real Estate IYR and Vanguard REIT Index VNQ saw $312 million and $371 million in net inflows in the third quarter, respectively.

Rank 1

Name

Fund Type

Sector

Direxion

ETF

Various

Proshares

ETF

Equity Indexes

Rydex SGI

ETF

Various

WisdomTree

ETF

Equity Indexes

PowerShares

ETF

Various

SSgA

ETF

Various

Global X Funds

ETF

Various

Claymore

ETF

DBX Strat. Advisors ETF

Multi-Asset

Russel Investments

Various

ETF

Various

• Gold ETFs remained attractive in September, but iShares Silver Trust SLV gathered assets of more than $421 million to lead precious-metals ETF flows during the month. • Strong demand for emerging-markets ETFs continued in September. Of the $14.5 billion in inflows that investors added to international-stock ETFs in the third quarter, more than $12.5 billion, or 86 percent, went to ETFs covering broad emerging-market indexes. Conversely, ETFs offering exposure to developed international markets continued to experience outflows.

Sources: Bloomberg, BlackRock, ETF Radar Global Research | Data as of October 22, 2010.

NUMBER CRUNCHER

2’300

Number of pages the Dodd-Frank Wall Street Reform Act consist.

129

USD 18’000 Nightly rate of the world’s most expensive hotel suite (The Martinez Hotel, Cannes).

Number of active ETF providers worldwide.

Sources: Reuters, BlackRock, ETF Global Research | Data as of October 2010.

ETF Radar Magazine | Issue 4th Quarter 2010

Sector Map

THE GLOBAL SECTOR TITANS AT A GLANCE DOW JONES SECTOR TITANS INDEXES (Sector performace in percent â&#x20AC;&#x201C; 3M, USD)

Official Index Partner SM

The Dow Jones Sector Titans Indexes reflect the composition and performance of the 19 Supersectors defined by the Industry Classification Benchmark (ICB). Stocks are chosen based on float-adjusted market capitalization, revenue and net income. The top 30 companies are selected as index components.

WORST PERFORMING SECTORS

Food & Beverage 7.58% Construction & Materials 9.32%

Retail 11.25%

Real Estate 18.11%

Financial Services 5.53%

Banks 3.13%

Health Care 7.82%

Media 10.12%

Industrial Goods & Services 13.08%

Technology 7.14%

Utilities 6.27%

Personal & Household Goods 9.09%

Insurance 8.10%

Travel & Leisure 10.67%

Oil & Gas 11.09%

Telecommunications 14.68%

Automobiles & Parts 15.91%

Chemicals 21.70%

Basic Resources

23.52%

BEST PERFORMING SECTORS Sector (Price Return USD) Dow Jones Banks Titans 30 Index Dow Jones Financial Services Titans 30 Index Dow Jones Utilities Titans 30 Index Dow Jones Technology Titans 30 Index Dow Jones Food & Beverage Titans 30 Index Dow Jones Health Care Titans 30 Index Dow Jones Insurance Titans 30 Index Dow Jones Personal & Household Goods Titans 30 Index Dow Jones Construction & Materials Titans 30 Index Dow Jones Media Titans 30 Index Dow Jones Travel & Leisure Titans 30 Index Dow Jones Oil & Gas Titans 30 Index Dow Jones Retail Titans 30 Index Dow Jones Industrial Goods & Services Titans 30 Index Dow Jones Telecommunications Titans 30 Index Dow Jones Automobiles & Parts Titans 30 Index Dow Jones Real Estate Titans 30 Index Dow Jones Chemicals Titans 30 Index Dow Jones Basic Resources Titans 30 Index

3 Month Performance

YTD Performance

(7/15/10-10/15/10)

(12/31/09-10/15/10)

3.13% 5.53% 6.27% 7.14% 7.58% 7.82% 8.10% 9.09% 9.32% 10.12% 10.67% 11.09% 11.25% 13.08% 14.68% 15.91% 18.11% 21.70% 23.52%

-4.73% -4.29% -7.00% 2.85% 4.79% -0.98% -0.89% 11.17% -4.51% 12.31% 22.25% -3.58% 6.95% 14.17% 7.85% 18.52% 17.23% 14.24% 7.38% Source: DJ Indexes as of October 18, 2010

ETF Radar Magazine | Issue 4th Quarter 2010

ETFS VS. FUTURES FROM AN ASSET MANAGERS PERSPECTIVE

Today ETFs on major indices are almost an alternative to futures. Also, using ETFs could simplify the internal trading process and decrease operational costs. Little wonder that an increasing number of asset managers now rethink about their product toolkit. Nevertheless one should carefully look to the details of both instruments.

BY MARTIN RAAB, CAIA | GLOBAL PUBLISHER | ETF-RADAR MAGAZINE | NAPLES/ZURICH

ince the occurrences of September 2008 (“Lehman effect”), three issues have become increasingly important to most traders and asset managers. First of all, counterparty risk has become a major topic. Nowadays, as we all know, asset managers around the globe are significantly less comfortable with any sort of counterparty risk. This is why swaps, the classic over-thecounter product, are no longer the “ultra” instrument for portfolio management, even though there are not many alternatives when it comes to gaining exposure to things such as correlation. However, many institutions struggle with the involved counterparty risk and switch to the plain-vanilla exposure of futures and ETFs.

return swaps. Ironically, this “better performance” or reduced tracking error in the specific ETF is because of the usage of total-return swaps between the ETF issuer and an investment bank.

Fees and Spreads - Devil is in detail The second and third topics include liquidity and spreads. Today, many asset managers focus on the liquidity of a product and its bid and ask-spreads during various market conditions. Not many in the financial community are interested in a situation where portfolio positions are becoming rapidly illiquid and creating large bid and askspreads. Here a quick perspective with regards to the cost of ETFs: When buying and selling ETFs, one will incur Usage of swaps decreased more than just a trading commission. As with other According to the latest data from the Bank of securities, there is a difference between what the market International Settlements, the amount of outstanding maker will charge an ETF buyer and what that same equity-linked swaps has decreased 31% from June 2008 dealer will pay a seller (“bid-ask spread"). For asset to December 2009. Trading in commodity-linked swaps managers, the smaller the spread, the lower the cost. This declined more than 77%. is a very important issue when Obviously, many traders and the ETF position is used for asset managers are keeping cash equalization or tactical “Today, many asset managers their hands off swaps except asset allocation reasons. focus on the liquidity of a product.” with currency and foreignexchange deals. Though in When there is little trading the global swap trading activity in the ETF , bid-ask environment, FX-linked swaps still dominate the spreads can get quite wide; but the devil is in the details. marketplace. A recent market study found a further Some funds have larger expense ratios (i.e. 0.30%) but a reason why swaps linked to some asset-classes are no smaller average bid-ask ratio (i.e. 0.05%). The higher the longer state of the art. According to the “EDHEC trading frequency, the more an asset manager has to European ETF Survey 2010, many respondents believe research which fund is finally the better choice. As a rule that Exchange Traded Funds generally perform much of thumb, the more exotic the indices are, the higher their better (and closer to the benchmark index) than totalexpense ratios, bid-ask spreads as well the illiquidity.»

ETF Radar Magazine | Issue 4th Quarter 2010

Coverstory

Soaring inflows boost liquidity levels ETFs mastered all three issues counterparty risk, liquidity and spread-size during the financial meltdown superbly. For instance, during the last 12 months, equity, fixed-income and commodity-based ETFs enjoyed heavy inflows from institutional investors. In addition, the soaring numbers of retail investors which switched from traditional mutual funds or structured retail derivatives into ETFs, especially in Europe and AsiaPacific, have boosted the liquidity levels of many Exchange Traded Funds dramatically. The average intraday volume in most ETFs remained stable on high levels. For example, the SPDR S&P 500 (SPY) currently has an average daily volume (ADV) of approximately USD 21.1 billion and is the most liquid ETF worldwide. On the other side of the Atlantic, the ETF market in Europe has to set its sights much lower when compared to the eleven-digit figure of the SPDR S&P 500 or the tendigit ADV of the iShares Russell 2000 Index Fund. The ADV of the top ranked Lyxor Euro STOXX 50, the ETF brand of Société Générale group, is just about EUR 102 million EUR. Also the turnover of ETFs in the Asia-Pacific region is still much lower. The Nikkei 225 ETF's average daily volume is USD 55 million. Leverage and Margins More than ever, leverage is still a double-edged sword and the wrong tool for traders and asset managers whose skills aren't refined or for highly skilled portfolio professionals going through a slump. Yet with the ability to trade ETFs with an intraday leverage, the futures advantage has diminished a bit. But if an asset manager prefers real leverage without surprising “reset effects” over a longer time horizon, the futures still get the edge there. Here it's important to distinguish between the money ETF Radar Magazine | Issue 4th Quarter 2010

management issue when using ETFs vs. futures and the leverage effect itself (“daily reset”). In this paragraph we focus on the money management, better known as the margining process. The advantages and disadvantages of leveraged ETFs are covered in detail within the

Overnight Margin”. This is the amount needed to carry one contract through the 16:15 closing of the day session). The leverage is 10 to 1. In other words, an asset manager who trades the e-mini S&P 500 futures contract, trades at around USD 55,000 (USD 50 times the value of

TOP 10 MOST LIQUID ETFS WORLDWIDE Ranked by USD Average Daily Trading Volumes (ADV) ETF SPDR S&P 500 iShares Russell 2000 PowerShares QQQ iShares MSCI EM iShares MSCI Brazil iShares MSCI EAFE Financial Sector SPDR ProShares UShort S&P500 iShares Barclays 20+Y Trsy Energy Sector SPDR

Ticker SPY IWM QQQQ EEM EWZ EFA XLF SDS TLT XLE

ADV (Mn) 20,513.7 3,726.1 3,287.9 2,084.1 1,193.3 1,005.4 969.8 891.0 858.4 759.0

ADV ('000 shs) 182,428 57,084 68,801 48,380 16,336 18,666 66,945 28,965 8,272 13,896

AUM (Mn) 78,243.9 13,185.5 22,249.5 44,906.1 10,512.5 35,123.5 5,255.8 3,433.4 2,987.9 6,583.3

Sources: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg as of September, 31 2010.

section “Research” just some pages behind this story. A key point when writing about leverage and margins is the amended policy (“regulatory notice 09-53”) on leveraged ETFs of the U.S. market regulator FINRA which came up in September 2009. Since that time, the required intraday (!) margins doubled for bull leveraged ETFs and triple for bear leveraged ETFs, meaning the required margins on leveraged ETFs will range from 50% to 90% of the ETF price. All U.S. based brokers amended its margin policy accordingly. Some require a 100% cash or securities backing when keeping 3x leveraged ETFs overnight. Hence any account which reports a margin deficit under the amended rule is subject to immediate liquidation by the broker. One's more the ETF lost some of its advantage regarding the minimum amount an asset manager needs to keep in its account. Today a future position i.e in the e-mini S&P 500 could established with a minimum amount of USD 5,625 (“Initial

the S&P 500 stock index) for a margin requirement over USD 5,000. The corresponding ETF on the S&P 500 (SPY) is trading currently at just over USD 115 but you have to maintain at least usually 25% of the amount into your brokerage account. This equates a leverage of 4 to 1. ETFs. A new rival for e-Mini futures? Some market participants recently established the bold thesis that in the near future, heavily traded ETFs, including the SPDR S&P500, iShares Russell 2000 and PowerShares QQQ, could become a substitute for some future contracts; more especially the CME Group's e-Mini futures. For example, one future contract for the e-Mini S&P 500 equals 500 ETF shares. It was introduced by the Chicago Mercantile Exchange on September 9th, 1997, after the value of the existing S&P 500 contract became too large for traders managing smaller portfolios who were looking for a hedge with more »

Coverstory

precise exposure to the S&P500 confirmation that the trade cleared futures contracts per the Internal index. Nowadays an asset manager and is on the futures commission Revenue Service, are taxed at 60% could easily use the ETF instead of merchant's (FCM) books is not using long term capital gains rates, the future in order to gain short term enough. Clients' now desire more except in its hedging transactions. IRS beta-exposure to the US equity detailed reports and the FCMs want Pubilcation 550, covering Investment market. Will this lead to the end of to know exactly where they and their Income and Expenses, addressed the downsized future contracts customers stand. Furthermore, this. It doesn't matter if the asset because ETFs would attract more everybody who already witnessed a manager holds the future contract for liquidity? “I'd have to disagree with margin call from the exchange or two seconds or two months. For the thesis since that's not the case. future broker now knows about the ETFs, you must hold the index fund The notional turnover in the e-mini latent risk of having future positions for more than one year in order to S&P is roughly USD 140 billion per in the market; especially when the receive long-term capital gains day while the corresponding ETF market moves into the opposite treatment. If you hold the security for trades about USD 20 billion per day direction. To say it clearly: A future is one year or less, then it will receive in notional.” says Michael Shore, not any riskier than ETF, but using short-term capital gains treatment. Associate Director, Corporate futures produces more complexity Communications at Chicago-based a n d s o m e t i m e s n e e d s m o r e Another issue is an asset manager CME Group. Furthermore, most operational resources and IT- using leveraged or inverse-themed US future exchanges do not see ETFs infrastructure. This occurs especially ETFs. Several funds in this category as competition. “Rather ETFs and for smaller asset management paid out impressive returns. However, the IRS presented sizable futures are complementary products” companies and investment advisors tax bills. The reason for the liability he adds. Another point one should so this definitely gives ETFs an was the fact that within the consider here are the spreads funds, short-term on futures. No doubt, when investments were used to using futures in contrast to “By using ETFs, asset managers generate these returns. Due to ETFs, liquidity and spreads could reduce some of their the nature of this type of are in most cases very ETF, the tax due on the shortcompetitive. The minimum operational hassle.” term capital gains is passed price movement between the through the fund to the bid and ask of a future is advantage over futures. An surprising known as a tick. For example, the e- reaction provided Wellington investor. This means that the mini S&P 500 future trades in 25 US- Management Company, a Boston investors will have to pay short-term Cent increments. One Tick equals 25 based investment advisor and asset capital gains tax on the appreciation of their shares, even if they have held cents; 4 ticks equals one point. manager, which holds more than them for a long period of time. These USD 1.2 billion in ETFs, declined to taxes are due annually, even if the Simplifying the trading process share its thoughts about the benefits investor decides not to sell. Nevertheless, in the US and Europe, of ETFs vs. futures. „Unfortunately, more and more asset managers jump we can't longer comment this topic“ In addition to the U.S. federal taxes, on the bandwagon in favor of ETFs, was the simple answer. it's important to know which state the but the motivation is caused by asset manager resides in. Florida taxes different reasons. They prefer ETFs Death and taxes capital gains differently than New not only for their lower costs and “Nothing is certain but death and York State or Massachusetts. It is also more advantag eous tax and taxes,” Benjamin Franklin penned in important to note the following for regulatory issues, but also because of November 1789, anticipating the each asset manager based in the U.S. the fewer operational constraints. By annual agonies of tax day. In fact, who trades for his or her own private using ETFs, asset managers could taxes are a large issue for most asset account: If your capital losses exceed reduce some of the hassle that its managers. Not all of them are aware your capital gains, the excess can be back-offices usually have with the of all the specific tax laws, but at the deducted on your tax return and used daily margin management and end of the day, taxes could harm the to reduce other income, such as your reconciliation process, as well disburden the trading operations portfolio performance considerably. salary, up to an annual limit of USD from calculating exact allocations for This can occur even for proprietary 3,000, or USD 1,500 if you are smaller portfolios and tracking the traders responsible for discretionary married filing separately. Also in future contracts' collaterals. Today, portfolios. In the United States, index Europe, taxes are a big issue. »

ETF Radar Magazine | Issue 4th Quarter 2010

Coverstory

Describing the specific tax laws in the UK, Germany, Switzerland and other countries would fill probably more than 10 pages. Hence we described the taxation details just for the United States. As one can above see, it's tricky enough. Mixed signals from Europe The above mentioned, recently performed “EDHEC European ETF Survey 2010”, a joint-project between the French Ivy League University and Amundi ETF, show a clear price leadership of the ETF market over the spot market and increasing price efficiency vs. the futures market thanks to index funds. 31% of survey respondents have observed the improved liquidity in the underlying market. Many practitioners, then, seem to share the views of academics that is, that the liquidity of underlying markets and the price efficiency of the futures market improve significantly after the introduction of ETFs.

FUTURE CONTRACT VS. ETFS Selected specifications of future contract vs. ETF E-mini S&P 500 Futures

SPDR Trust

iShares S&P 500

Underlying Index

S&P 500

Ticker Symbol

SPY

IVV

Unit Size

USD 50 x Index

~1/10th of Index

Unit Dollar Value

USD 57,150

USD 114.82

Av. Daily Volume

USD 138.41 billion

USD 21.1 billion

USD 0.3 billion

Open Trade Volume

USD 153.00 billion

USD 62.70 billion

USD 12.95 billion

Trading Venue

CME Globex

AMEX, NYSE, ECNs

Capital Requirements Minimum initial spec margin of USD 9.144 per contract or ~15.9%

50% Reg T margin required

24-Hour Trading

Yes

Broker Fees

Yes

Operating Expenses

None

0.09% p.a.

Sources: State Street Global Advisors, ETF Radar Global Research as of October 2010.

A surprising outcome is that most of term allocations. “Although many this topic will remain ver y the 272 survery participants, the ETFs do offer a high level of controversal. Finally Exchange majority of them European liquidity, from an asset management Traded Funds – and even Exchange institutional asset managers and perspective, we tend to use them for Traded Commodities (ETCs) or pension trusts, do not yet use ETFs their diversified exposure. But from a Exchange Traded Notes (ETCs) – widely for tactical asset allocation r i s k a n d c a s h m a n a g e m e n t provide a great way to gain broad strategies actually the field where perspective, we may turn to futures exposure to any given market or implement more or less ETFs would be the most sophisticated commodity appropriate instr ument exposure into an existing c o m p a r e d t o f u t u r e s. “We may turn to futures contracts portfolio structure. On the Nevertheless, investors and due to their twenty-four hour other side, futures are still a asset managers in Europe are trading accessibility and lower perfect tool for experienced well aware of the diversity of professionals and will be part margin requirements.” ETFs. So the theoretical of the daily investment knowledge of asset managers business. No doubt, there is about the ETFs' advantages is contracts due to their twenty-four there but turning this know-how into hour trading accessibility and lower room for both. It’s just a question reality would still need some time. margin requirements. In either case, it from the individual perspective.  67% of respondents of the study really is more of a matter of efficacy >>TO BE CONTINUED believe that futures are very good in and purpose than liquidity.” explains For more information about this topic visit terms of liquidity. The liquidity of CME Group’s Indexsite Dan Gillespie, Portfolio Manager at www.cmegroup.com/trading/equity-index ETFs ranks second. Obviously, the Arrow Funds, a large institutional majority of asset managers knows user of ETFs in the United States. EDHEC ETF Survey Results http://faculty-research.edhec.com/jsp/ about the advantages of ETFs but Eventually Exchange Traded Funds fiche_document.jsp?CODE=1276693826017 still prefer using futures for most of and futures are still more &LANGUE=1 the hedging transactions and short- complementary goods than rivals but ETF Radar Magazine | Issue 4th Quarter 2010

Coverstory Insights&Strategy

ACTIVE ASSET ALLOCATION

Instead of investing in single ETFs, the use of an ETF wrapper that incorporates active investing strategies with ETFs might be a convenient alternative to generate alpha.

A KEY TO GENERATE ALPHA WITHIN THE JUNGLE OF ETFS

BY THORSTEN WINKLER | HEAD OF FUND OF FUNDS | VERITAS INVESTMENT TRUST | FRANKFURT/M.

fter decades of emphasising the importance of stock picking as the key to successful investing, in recent years more and more investors have shifted their focus to asset allocation. Instead of generating alpha through individual securities selection, they aim at delivering alpha through asset allocation by using indexlinked products such as ETFs. However, we can expect that stock picking will not vanish. Beta products depend on the efficiency and liquidity of financial markets. For this reason markets need analysts and investors who try to find mispriced securities and profit from it. As Grossman and Stiglitz (1980) discover, without such profit opportunities, there will be no incentive to search for information, and the price discovery mechanism of financial markets will collapse. Therefore it may be assumed that there are profit opportunities out there for stock picking as well as for active index picking strategies.

Yet, using ETFs per se does not ensure investment success. With regard to the increasing amount of ETFs investors are spoilt for choice. Particularly retail investors might have difficulties to select an appropriate ETF for their investment needs among hundreds of different products. Apart from that, even after having found ETFs of high quality, there still is no guarantee for good performance. Instead it is essential to have a clear idea of how you view the markets. By using a passive product the investment success mainly depends on the development of the index that is replicated. As a result you might experience heavy losses when picking the wrong index at the wrong time. So there is a danger that primarily retail investors get their fingers burnt if they do not understand entirely the functionality of ETFs.

The ETF jungle is growing rapidly Over the last few years we have seen an impressing growth of the global ETF industry with more than 2,300 ETFs available at end of September 2010. ETFs track hundreds of market indices that provide exposure to nearly every asset-class including equity, fixed income, currency, commodity and alternatives such as hedge funds. As a result professional investors like us who use index-based investments in active ways nowadays have available a powerful tool kit to implement their investment strategies. Although ETFs are still predominantly used by institutional investors in Germany, they are gaining increasing popularity with retail investors. One reason for that might be the exceptionally positive media coverage. Because of their transparency and low cost structure ETFs are generally viewed as a good investment tool by financial journalists.

should dominate a static one in the long run.”

ETF Radar Magazine | Issue 4th Quarter 2010

“A flexible asset allocation

Veritas Investment Trusts´ ETF approach Instead of investing in single ETFs, the use of an ETF wrapper that incorporates active investing strategies with ETFs might be a convenient alternative. In April 2007 we at Veritas Investment Trust launched ETF-DACHFONDS a retail fund of ETFs. With that move we have been pioneer on the German market for asset allocation solutions with ETFs. We are an active manager using ETFs to implement our strategies. We follow a rule-based and forecast-free investment process. The philosophy behind the fund is a wealth management concept. We have the flexibility to switch between 0% and 100% global equity or bond »

Insights&Strategy

The index selection is based on a selfdeveloped technical model. Over 150 indices for different asset classes are analysed by the model. It uses historical time series on a daily and weekly basis. The algorithm employs over 50 different technical indicators such as moving averages, oscillators and relative strength. Furthermore the model factors chart patterns in that have been proven to be quite reliable in indicating forthcoming market weakness e.g. does an index trade under a certain signal line. As a result of the market analysis the model provides the appropriate equity exposure given the current marketconditions. Furthermore it shows us a ranking of markets by regions, countries and sectors. In a second step we select adequate ETFs to execute our investment strategy. Thereby we attach great importance to accuracy of index tracking and liquidity. Beyond that we account for the fee structure. Active index picking pays off A look at the asset allocation chart reveals our active approach. Due to weak market-conditions caused by the global financial crisis we gradually reduced the equity exposure in the period from May 2007 to February 2009. In spring 2009 we got tactical ETF Radar Magazine | Issue 4th Quarter 2010

100% 80% 60% 40%

Fund performance: 30% (TR), 8% (p.a.) Benchmark performance: –23.9% (TR), –7,5% (p.a.)

20%

Equity-ETFs

Cash/MM-ETFs

Commodity ETFs

July 10

April 10

January 10

October 09

July 09

April 09

January 09

October 08

July 08

Aprill 08

January 08

October 07

July 07

0% April 07

Academic literature promotes the idea that risk preferences and expected returns change over time and are correlated with business cycles. Consequently a flexible asset allocation should dominate a static one in the long run. To be able to adapt to an ever-changing market environment we have chosen a dynamic approach. For us index picking i.e. market-selection is paramount.

ASSET ALLOCATION TREND SINCE FUND INCEPTION (in USD)

Asset class exposure

exposure. Our key competitive edge is getting the equity exposure right. The intention behind this approach is to benefit from the global equity risk premium in the long term and at the same time reducing the possible downside risk.

Bond-ETFs

Source: Veritas Investment Trust as of September 2010.

buy signals for the equity markets that were confirmed in the following weeks by strategic buy signals. As a result we increased the equity exposure quite fast and could benefit from the strong equity markets in 2009. In the course of the European government debt crisis that came along with weak equity markets in the second quarter of 2010 we reduced the equity exposure down to 20%. During the third quarter we raised our equity exposure to around 85% on the basis of several buy signals. In particular emerging markets like India, Turkey, Malaysia and South Korea showed relative strength. As at the end of September around half of our equity exposure was invested in emerging markets ETFs with a focus to Asia. In Europe, where we follow a sector rotation approach due to the enhanced availability of sector ETFs, we favoured basic resources, automobiles, retail and industrial goods. An evaluation of the risk and return parameters since fund inception shows that our dynamic allocation strategy dominates a buy and hold approach in terms of return, volatility and maximal drawdown. So far active index picking has paid off.  >>TO BE CONTINUED Veritas Fund of Funds ISIN DE0005561674 Tradable on Stuttgart Stock Exchange www.veritassg.de

Marketplace

Global

TOP 25 ETF PROVIDER WORLDWIDE September 2010 Provider iShares State Street Global A dvisors V anguard Lyxor A sset Management db x-trackers PowerShares ProShares Nomura A sset Management V an Eck A ssociates Corp Credit Suisse A sset Mgt. Bank of New York Zurich Cantonal Bank WisdomTree Investments Guggenheim Funds Commerzbank Direxion Shares A mundi ETF Source Markets Hang Seng Investment Mgt. Nikko A sset Management ETFlab Investment UBS Global A sset Mgt. EasyETF Daiwa A sset Management Swiss & Global A sset Mgt.

AUM # ETFs (US$ Bn) 461 $534.6 113 $163.8 63 $126.2 149 $48.1 163 $43.9 136 $40.9 99 $23.1 32 $17.8 27 $16.6 54 $13.3 1 $10.4 7 $10.2 44 $8.3 66 $7.4 86 $7.4 38 $6.8 87 $6.8 52 $6.3 3 $6.3 14 $5.8 35 $5.7 22 $5.6 64 $5.5 23 $5.0 16 $3.9

% total 45.3% 13.9% 10.7% 4.1% 3.7% 3.5% 2.0% 1.5% 1.4% 1.1% 0.9% 0.9% 0.7% 0.6% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.3%

Year-to-date # planned 22 33 8 1 15 39 99 0 18 0 0 0 67 34 0 147 0 19 0 0 0 9 1 1 0

# ETFs 48 6 16 24 42 11 21 2 4 27 0 3 -8 9 24 12 24 20 0 4 4 8 0 0 12

AUM % ETFs (US$ Bn) 11.6% $45.7 5.6% $2.8 34.0% $34.2 19.2% $1.8 34.7% $6.5 8.8% $6.3 26.9% -$0.1 6.7% $4.5 17.4% $4.2 100.0% $3.6 0.0% $1.8 75.0% $3.5 -15.4% $1.8 15.8% $1.2 38.7% $1.2 46.2% $1.8 38.1% $2.0 62.5% $3.5 0.0% $1.0 40.0% $0.0 12.9% -$1.3 57.1% $2.1 0.0% -$0.3 0.0% $0.1 300.0% $1.8

% AUM 9.3% 1.7% 37.1% 3.8% 17.5% 18.2% -0.5% 33.4% 33.6% 37.7% 21.0% 51.8% 28.1% 20.2% 18.8% 35.1% 41.4% 123.7% 18.5% 0.6% -19.0% 60.2% -5.5% 1.6% 84.3%

TOP 10 ETFS WORLDWIDE (ADV)

TOP 10 ETFS WORLDWIDE (TOTAL AUM)

(sorted descending by Average Daily Volume, in USD) ADV Adv (US$ Mn) ('000 shares) ETF

(sorted descending by Assets-under-Management, in USD)

SPDR S&P 500

AUM (US$ Mn)

ETF

% market share -1.9% -1.7% 1.8% -0.4% 0.1% 0.1% -0.3% 0.2% 0.2% 0.2% 0.1% 0.2% 0.1% 0.0% 0.0% 0.1% 0.1% 0.3% 0.0% -0.1% -0.2% 0.1% -0.1% -0.1% 0.1%

AUM (US$ Mn)

ADV ('000 shares)

ADV (US$ Mn)

$20,513.7

182,428

$78,243.9

SPDR S&P 500

$78,243.9

182,428

$20,513.7

iShares Russell 2000 Index Fund

$3,726.1

57,084

$13,185.5

iShares MSCI Emg. Mkts Ind. Fund

$44,906.1

48,380

$2,084.1

PowerShares QQQ Trust

$3,287.9

68,801

$22,249.5

Vanguard Emerging Markets

$36,107.6

11,537

$505.6

iShares MSCI Emg. Mkts Ind. Fund

$2,084.1

48,380

$44,906.1

iShares MSCI EAFE Index Fund

$35,123.5

18,666

$1,005.4

iShares MSCI Brazil Index Fund

$1,193.3

16,336

$10,512.5

iShares S&P 500 Index Fund

$22,747.8

2,843

$320.8

iShares MSCI EAFE Index Fund

$1,005.4

18,666

$35,123.5

PowerShares QQQ Trust

$22,249.5

68,801

$3,287.9

Financial Select Sector SPDR Fund

$969.8

66,945

$5,255.8

iShares Barclays TIPS Bond Fund

$20,373.5

749

$81.1

ProShares UltraShort S&P500

$891.0

28,965

$3,433.4

iShares iBoxx $ Inv. Grd. Cp. Bd. Fund $14,874.4

1,110

$123.9

iShares Barclays 20+ Yr. T Bond Fund

$858.4

8,272

$2,987.9

Vanguard Total Stock Market ETF

$14,660.3

1,896

$109.0

Energy Select Sector SPDR Fund

$759.0

13,896

$6,583.3

iShares Russell 2000 Index Fund

$13,185.5

57,084

$3,726.1

Sources: BlackRock ETF Research and Implementation Strategy Team, Bloomberg as of September 30, 2010

In association with

ETF Radar Magazine | Issue 4th Quarter 2010

BlackRock | ETF Research and Implementation Strategy Team Deborah Fuhr, Managing Director Murray House, 1 Royal Mint Court, London EC3N 4HH Tel +44 20 7668 4276 | deborah.fuhr@blackrock.com

Marketplace

Americas AMERICAN EXCHANGES AT A GLANCE (sorted alphabetical)

Exchange

# of Chg. ETFs

BM&FBOV ESPA Lima SE Mexican Exchange NA SDA Q OMX NYSE Euronext (US) Santiago SE TSX Group

7 4 314 78 1,116 50 177

+ + + + + + +

Turnover (YTD)

# of Trades (YTD)

Chg.

2,844.1 0.7 62,720.1 781,114.4 3,251,918.8 35.1 87,236.2

+ + = = = + =

Chg.

123.0 0.0 202.4 29,663.0 181,034.7 0.2 8,018.0

+ – + = + –

October 22, 2010

+++NEWSRADAR+++

TOP 10 ETFS IN THE U.S. (TOTAL AUM)

+++NEWSRADAR+++

(sorted descending by Assets-under-Management, in USD) AUM (US$ Mn)

ADV ('000 shares)

ADV (US$ Mn)

SPDR S&P 500

$78,243.9

182,428

$20,513.7

iShares MSCI Emg. Mkts Ind. Fund

$44,906.1

48,380

$2,084.1

Vanguard Emerging Markets

$36,107.6

11,537

$505.6

iShares MSCI EAFE Index Fund

$35,123.5

18,666

$1,005.4

iShares S&P 500 Index Fund

$22,747.8

2,843

$320.8

PowerShares QQQ Trust

$22,249.5

68,801

$3,287.9

iShares Barclays TIPS Bond Fund

$20,373.5

749

$81.1

iShares iBoxx $ Inv. Grd. Cp. Bd. Fund $14,874.4

1,110

$123.9

ETF

Vanguard Total Stock Market ETF

$14,660.3

1,896

$109.0

iShares Russell 2000 Index Fund

$13,185.5

57,084

$3,726.1

TOP 10 ETFS IN THE U.S. (ADTV) (sorted descending by Average Daily Trading Volumes, in USD) ADV (US$ Mn)

ADV ('000 shares)

$20,513.7

182,428

$78,243.9

$3,726.1

57,084

$13,185.5

PowerShares QQQ Trust

$3,287.9

68,801

$22,249.5

iShares MSCI Emg. Mkts Ind. Fund

$2,084.1

48,380

$44,906.1

iShares MSCI Brazil Index Fund

$1,193.3

16,336

$10,512.5

iShares MSCI EAFE Index Fund

$1,005.4

18,666

$35,123.5

Financial Select Sector SPDR Fund

$969.8

66,945

$5,255.8

ProShares UltraShort S&P500

$891.0

28,965

$3,433.4

iShares Barclays 20+ Yr. T Bond Fund

$858.4

8,272

$2,987.9

Energy Select Sector SPDR Fund

$759.0

13,896

$6,583.3

ETF SPDR S&P 500 iShares Russell 2000 Index Fund

AUM (US$ Mn)

USA: WisdomTree Investments is launching three new actively managed funds focused on Asia, LatAm and EMEA. The Asia Bond Fund, the Latin America Bond Fund and the EMEA Bond Fund will hold locally denominated debt. All funds will own investment-grade and noninvestment grade fixed-income securities from government and corporate entities, apart from debt issued by supranational organizations. The new ETFs will be listed on the NYSE Arca. USA: ETF Securities’ palladium exchange-traded product has crossed the $500 million mark in AuM. The ETFS Palladium Trust, available to U.S. investors, currently has 8.45 million outstanding shares. The fund is backed by palladium allocated bullion in plate and ingot form stored in vaults in London and Switzerland by custodian J.P. Morgan Chase. Currently, ETF Securities has four precious metal ETFs available to investors, which includes gold, silver, platinum and palladium. USA: State Street has rolled out a new service for ETFs. The firm’s Assisted Trading service will help clients process ETF orders more efficiently and in an automated and streamlined fashion. The service will enable authorized participants, typically market makers or specialists who obtain the underlying assets to create ETFs, to simultaneously enter the ETFs they want to trade and identify any restricted shares. The Assisted Trading service is accessed via FundConnect, State Street’s online trading platform for ETFs.

Sources: BlackRock ETF Research and Implementation Strategy Team, Bloomberg, World Federation of Exchanges, ETF Radar Global Research as of September 30, 2010

ETF Radar Magazine | Issue 4th Quarter 2010

Marketplace

Europe EUROPEAN EXCHANGES AT A GLANCE (sorted alphabetical) Exchange

# of Chg. ETFs

A thens Exchange BME Spanish Exchanges Budapest SE Deutsche Börse Irish SE Ljubljana SE London SE Group NA SDA Q OMX Nordic NYSE Euronext (Europe) Oslo Børs SIX Swiss Exchange Wiener Börse

2 43 1 719 14 1 1,207 63 551 6 415 22

+ + + + + + + + + + + +

Turnover (YTD) 58.2 6,669.5 2.6 152,543.9 39.2 0.1 173,472.3 17,212.6 115,579.1 13,501.0 48,669.0 57.1

# of Chg. Trades (YTD) 1.9 – 0.0 – 0.5 – 1,326.3 – 0.7 = 0.0 = 3,370.0 = 499.5 = 1,725.3 + 445.5 = 494.3 = 1.3 =

Chg.

– – – = = – = + = = = =

October 22, 2010

TOP 10 ETFS IN EUROPE (TOTAL AUM)

+++NEWSRADAR+++

(sorted descending by Assets-under-Management, in USD)

+++NEWSRADAR+++

AUM (US$ Mn)

ETF Lyxor Euro STOXX 50

7,297

ZKB Gold ETF (CHF) iShares S&P 500

ADV ADV ('000 shares) (US$ Mn) $1,947.8

$75

7,174

$11.2

$21

6,916

$3,995.4

$45

iShares FTSE 100

5,592

$9,258.5

$85.76

iShares Markit iBoxx EUR Corp. Bd.

5,243

$142.7

$23.95

db x-trackers MSCI Emg. Mkt TRN Index ETF4,971

$790.8

$31.36

iShares MSCI Emerging Markets

4,729

$890.0

$36.77

iShares DAX® (DE)

4,706

$1,371.7

$107.18

iShares EURO STOXX 50 (DE)

4,562

$932.6

$35.48

iShares EURO STOXX 50

4,420

$819.2

$30.69

TOP 10 ETFS IN EUROPE (ADTV) (sorted descending by Average Daily Trading Volumes, in USD) ETF

ADV (US$ Mn)

ADV ('000 shares)

AUM (US$ Mn)

iShares DAX® (DE)

$107.2

1,372

$4,705.8

iShares FTSE 100

$85.8

9,258

$5,592.5

Lyxor ETF Leverage CAC 40

$76.2

6,903

$427.3

Lyxor Euro STOXX 50

$75.7

1,948

$7,297.2

Lyxor ETF XBEAR CAC 40

$72.7

1,197

$510.4

Lyxor CAC 40

$69.7

1,357

$3,700.8

STOXX 600 Opt. Bks. Source ETF

$67.0

670

$225.3

STOXX 600 Optm. B. Res. Source ETF

$65.2

151

$509.5

db x-trackers Euro Stoxx 50 ETF

$64.6

1,677

$3,302.9

db x-trackers DAX ETF

$57.9

691

$2,915.0

SPAIN: iShares has listed 74 new ETFs for sale in Spain. The new suite of funds includes equity index trackers for developed and emerging markets. The new products also include thematic, individual country and sovereign and corporate bond ETFs. The total number of ETFs offered by iShares in Spain has now increased to 91. SWITZERLAND: Amundi ETF has listed 23 new ETFs on the SIX Swiss Exchange. The listing includes 12 equity ETFs, which provide exposure to main developed countries. The series also comprises three ETFs that offer the U.S. exposure, replicating the Nasdaq 100, MSCI USA and S&P 500 indices and three ETFs that invest in the emerging markets. The other six ETFs track a family of long and short U.S. Treasury bond indices and two funds track the MSCI World Energy and the MSCI World Financials indices. ITALY: FTSE Group and ECPI have launched the first investment index series for the Italian market. The FTSE ECPI Italia SRI Index Series will enable investors to track the performance of companies listed on the Italian Exchange with environmental, social and corporate governance practices.

Sources: BlackRock ETF Research and Implementation Strategy Team, Bloomberg, World Federation of Exchanges, ETF Radar Global Research as of September 30, 2010

ETF Radar Magazine | Issue 4th Quarter 2010

Marketplace

Middle East & Asia-Pacific MIDDLE AND FAR EAST EXCHANGES AT A GLANCE (sorted alphabetical) # of Chg. ETFs

Exchange

A ustralian SE 33 Bombay SE 24 Bursa Malaysia 5 Hong Kong Exchanges 66 Indonesia SE 2 Istanbul SE 11 Korea Exchange 61 National Stock Exchange India 22 Osaka SE 13 Shanghai SE 9 Shenzhen SE 3 Singapore Exchange 76 Taiwan SE Corp. 14 The Stock Exchange of Thailand 3 Tokyo SE 93

Turnover (YTD)

+ + + + + + + + + + + + + + +

# of Trades (YTD)

Chg.

3,940.7 137.9 52.0 49,130.5 0.3 7,098.2 16,881.8 1,304.5 15,605.7 41,986.0 20,147.6 3,183.5 4,388.1 87.0 16,249.4

+ + + + = – = + = – = = = = =

Chg.

n/a 176.9 5,143.1 1,632.8 0.5 189.9 5,620.7 1,177.4 n/a 5,267.0 2,032.0 n/a 626.5 57.1 n/a

+ + = = = = + + + = =

October 22, 2010

+++NEWSRADAR+++

TOP 10 ETFS IN ASIA-PACIFIC (TOTAL AUM) (sorted descending by Assets-under-Management, in USD) AUM ADV (US$ Mn) ('000 shares) ETF TOPIX ETF

ADV (US$ Mn)

$10,392.7

2,774

$27.9

iShares FTSE/Xinhua A50 CN

$7,475.9

83,147

$131.6

NIKKEI 225 ETF

$6,010.7

576

$65.4

Tracker Fund of Hong Kong

$5,947.7

11,679

$34.5

Hang Seng Index ETF

$3,587.9

$2.2

E Fund SZSE 100

$3,286.5

160,918

$88.3

China AMC SSE 50

$3,150.4

316,655

$90.0

Hang Seng H-Share Index ETF

$2,649.4

1,709

$27.6

SPDR S&P/ASX 200 Fund

$2,433.5

278

$11.7

ABF Pan Asia Bond Index Fund

$2,346.4

$0.5

TOP 10 ETFS IN ASIA-PACIFIC (ADTV) (sorted descending by Average Daily Trading Volumes, in USD) ADV (US$ Mn)

ETF iShares FTSE/Xinhua A50 CN

ADV ('000 shares)

AUM (US$ Mn)

132

$83,147.3

$7,475.89

China AMC SSE 50

$316,654.9

$3,150.35

E Fund SZSE 100

$160,918.0

$3,286.49

SHANGHAI SSE180 ETF

$479,547.0

$886.42

Listed Index Fund 225

$321.3

$2,903.91

Tracker Fund of Hong Kong (TraHK)

$11,679.5

$5,947.68

China SME ETF

$77,071.5

$630.73

Samsung Kodex200 ETF

$1,392.7

$1,668.58

TOPIX ETF

$2,773.6

$1,0392.73

Hang Seng H-Share Index ETF

$1,709.4

$2,649.39

+++NEWSRADAR+++ SINGAPORE: Lyxor AM to list three new ETFs on SGX. Lyxor, a wholly owned subsidiary of French Société Générale, recently listed three new ETFs on SGX. The latest additions (Lyxor ETF Dow Jones Industrial Average, Lyxor ETF MSCI Europe and Lyxor ETF Russia) will further complement the existing Lyxor ETF range in Singapore, providing convenient and cost-efficient access to global markets. INDIA: Axis Mutual Fund has launched a new openended Gold ETF. The Axis Gold ETF is focused on goldrelated investment and derivatives. The fund will allot a maximum of 100% of its corpus for investment in gold and derivatives. It may also invest 10% of its corpus in money market instruments. The ETFs will be listed on the National Stock Exchange (NSE). HONG KONG: SSgA rolls out first Greater China ETF in Hong Kong. The new ETF – SPDR FTSE Greater China ETF – is targeted at both retail and institutional investors in Hong Kong, with the minimum investment amount set at HKD 5’000. The investment returns of the new ETF closely correspond to the performance of the FTSE Greater China HKD Index, which is a new customised version of FTSE Greater China Index created by FTSE Group for SSgA.

Sources: BlackRock ETF Research and Implementation Strategy Team, Bloomberg, World Federation of Exchanges, ETF Radar Global Research as of September 30, 2010

ETF Radar Magazine | Issue 4th Quarter 2010

Currently stocks of businesses in TV, internet and radio as well as telephone companies perform very well. The iShares DJ US Telecommunications (IYZ) is currently the top ranked sector in our tactical ETF ranking. Tactical investors should consider an investment chance accordingly.

TELCO’S CALLING FOR TACTICAL INVESTORS BY DAVID COHNE | PRESIDENT | COHNE INVESTMENT GROUP | BOSTON, MA.

his is the fourth article in a series of ETF product reviews based on my proprietary ETF sector rankings. In the previous articles, I covered the iShares DJ U.S. Real Estate ETF, the SPDR Consumer Discretionary ETF (XLY) and the SPDR Gold Shares ETF (GLD). In this issue, I am going to cover the iShares DJ U.S. Telecommunications ETF (IYZ) which is ranked #1 in the 9/30/2010 rankings. The SPDR Consumer Discretionary ETF (XLY) and the SPDR Industrials ETF (XLI) round out the top three ranked ETFs for the month. The iShares DJ U.S. Telecommunications ETF (IYZ) gives investors access to U.S. Telecommunication stocks. Telecommunication stocks are stocks of companies in the telecommunications sector. This sector of the economy includes companies that are essentially involved in sending information via different technologies. This includes businesses in TV, radio, cable and satellite TV as well as telephone companies, internet business and wireless providers. IYZ was up 9.4% for September and 11.5% for the year while the S&P 500 experienced gains of 8.9% and 3.8% for the month and year respectively. IYZ tracks the returns of the Dow Jones U.S. Telecommunications Index. The fund which trades on the NYSE Arca Exchange was launched on May 22nd, 2000. It has an expense ratio of 0.48% and has an average daily trading volume of 631 thousand shares. As of October 13th, the fund had over 36 million shares outstanding with net assets over $800 million. Top h o l d i n g s i n c l u d e AT & T I n c ( T ) , Ve r i z o n Communications Inc (VZ), American Tower Corp (AMT), Sprint Nextel Corp (S), CenturyLink Inc (CTL), Crown Castle International Group (CCI), Quest

ETF Radar Magazine | Issue 4th Quarter 2010

TACTICAL ETF RANKING RANK

SYMBOL

ETF

IYZ

iShares DJ U.S. Telecommunications

XLY

SPDR Consumer Discretionary

XLI

SPDR Industrials

XLK

SPDR Technology

XLE

SPDR Energy

XLB

SPDR Materials

IYR

iShares DJ U.S. Real Estate

XLV

SPDR Health Care

GLD

SPDR Gold Shares

XLP

SPDR Consumer Staples

IN THIS ISSUE

Source: Cohne Investment Group | October 2010 Ranking.

Communications International (Q), Frontier Communications Corp (FTR), NII Holdings Inc (NIHD), and Virgin Media Inc (VMED). Other ETFs that also give you exposure to the telecommunications sector include the iShares MSCI ACWI ex US Telecommunications ETF (AXTE), the iShares Global Telecommunications Sector ETF (IXP), the PowerShares Dynamic Telecom & Wireless ETF (PTE), the Vanguard Telecom Services ETF (VOX), the Telecom HOLDRS ETF (TTH) and the leveraged ProShares Ultra Telecommunications ETF (LTL). 

Portfolio Allocator Sector Update

FACTSHEET

ISHARES DOW JONES U.S. TELECOMMUNICATIONS SECTOR INDEX FUND EXCHANGE TRADED FUND | TICKER: IYZ | SECTOR: TELECOMMUNICATIONS

RISK-REWARD-ANALYSIS

AT&T INC

15,48%

Ticker Symbol

IYZ (NYSE)

VERIZON COMMUNICATIONS INC

11,79%

AUM (USD)

805,244,189

AMERICAN TOWER CORP-CL A

6,62%

CUSIP

464287713

SPRINT NEXTEL CORP

5,49%

Marginable

Yes

Short Selling Allowed

Yes

(based on an investment horizon of 12 months)

High

FUND PROFILE

5,24% 4,66%

Options Available

Yes

QWEST COMMUNICATIONS INTL

4,51%

Gross Expense Ratio

0.48%

FRONTIER COMMUNICATIONS CORP

4,46%

Inception Date

05/22/2000

VIRGIN MEDIA INC

4,02%

WINDSTREAM CORP

3,53%

RETURN

CENTURYLINK INC CROWN CASTLE INTL CORP

Investment Manager

BlackRock Fund Adv.

Distributor

SEI

Moderate

IYZ

Low

HOLDINGS (TOP 10)

Low

Moderate

High

RISK

PERFORMANCE Year to date May 31 2010 1 month

+11.28%

3 months

+17.22%

1 year

+19.04%

Since inception

USD

+9.09%

–6.48%

Risk Parameters Standard Deviation:

22.01

Sharpe Ratio:

0.75

Beta vs. S&P500:

1.03

Sources: Cohne Investment Group, iShares, Bloomberg as of October 19, 2010

Please note that the ETFs presented in the Portfolio Allocator Sector Update have been selected independently. This section is not sponsored by an ETF issuer or associated with an ETF issuer and its products or an ETF distributor. Investors act on their own risk. The value of the products presented within this section could increase and decrease. For further information please see the magazine’s disclaimer page.

ETF Radar Magazine | Issue 4th Quarter 2010

Research

SHORT AND LEVERAGED ETFS

More and more short and leveraged ETFs are launched. Be aware that you know and understand the functionality and risks of short and leveraged ETFs – otherwise using this instruments could be very disappointing!

THE PATH BETWEEN INSANITY AND BRILLIANCY BY SEBASTIAN STAHN | RESEARCH DIRECTOR | ETF RADAR MAGAZINE | NAPLES/ZURICH

owna Jones, a woman who is interested in investing money in stocks, held an equity portfolio with several stocks listed in the Dow Jones Industrial Average Index with round about the same beta as the index. In June she decided to make holidays in Europe for three weeks. Because she was afraid of temporary falling stock prices she wanted to protect her portfolio without selling all her shares. In the last time she read more and more about short and leveraged ETFs but never invested in one of them. So she tried it and bought a short ETF on the Dow Jones Industrial Average Index to hedge her equity investments. As she came back three weeks later from her trip to Europe Downa was very upset, because the Dow Jones Industrial Average Index was down about 13% and her short ETF just rose 5%. But what has happened? Daily changes are the root of all evil Exactly this is the problem which many people still don't know. Short ETFs can be exactly negative correlated to their long index but they don't have to. The reason is simply math. Daily compounding (recalculation) will cause the returns to deviate substantially from the underlying index. Also know that the measure for the inversion just the daily changes are. This can result to extreme distortions on the long run. Let's make an example: If the index rises three percent today and falls five percent tomorrow you would have lost 2.15%. An adequate short ETF would lose three percent the today and go up ETF Radar Magazine | Issue 4th Quarter 2010

five percent tomorrow which is in sum 1.85%. So there is a divergence of 0.3% just after two days. A double short ETF would have lost six percent the first day and risen ten percent the next day. All in all a performance of 3.4% compared to a linear increase of 4.3%. But all this is harmless compared to the following! Extreme Examples of index tracking An extreme example is the S&P 500 Financial Index, which lost about 55% in 2008. Investors who hedged their Financials with adequate short ETFs got a nasty surprise. Their short ETF only rose poor 3.6% during the same period. Even worse was the performance of a double short ETF on the Dow Jones Financial Index you bought at the end of 2008 for six months. The index declined almost 20%. Very good for you, you might think now, because your double short ETF should be up about 40%. But in reality your investment declined almost 60%, as much as a double long ETF of the same underlying index. Furious development within the last years In my opinion there could be a huge danger in the ETF market in a couple of years, if the ETF industry keeps on launching more and more “extreme” ETFs.

“Short ETFs can be exactly negative correlated to their long index but they don't have to.”

All started in February 2005 with the launch of the first inverse or leveraged ETF according to Blackrock. The Assets under Management in short and leveraged ETFs quadruplicated from EUR 643 Mn in 2008 to »

Research

180% 160% 140% 120% 100% 80% 60% 40% 20%

Double short ETF

March 09

January 09

DJ Financial Index

February 09

0% December 08

All in all be aware that you know and understand the functionality and risks of short and leveraged ETFs. If you do so, investing over a short term in such ETFs makes sense. But the longer you are invested, the more imprecise your tracking will be. For this reason ETF providers like db x-trackers started to add the word “daily” to their short and leveraged ETFs – a good start to let people better understand short and leveraged ETFs. 

THE GOOD, THE BAD AND THE UGLY Performance comparison of selected ETFs vs. Index

November 08

EUR 2.72 Bn at the end of 2009. But the growth is still exponential. There are currently 76 inverse and leveraged ETFs in the US and 97 inverse and leveraged ETFs listed on exchanges outside the US. Especially Direxion and ProShares plan to launch a further series of short ETFs in Q4 of 2010. The insanity doesn't stop. After developing single short and leveraged ETFs, the industry passed over to double and triple ETFs and further strategies. If this goes on we will soon see ETFs with a leverage of six and more. As mentioned there is a huge danger in the market because ETF providers egg each other on in the dirty battle for market shares and money.

Double long ETF

Source: ETF Radar Global Research. As of October 2010.

ETF Radar Magazine | Issue 4th Quarter 2010

––

Interview

INDXISâ&#x20AC;&#x2122;

ALAN PRICE

about the new one-stop-shop in the index business, fast-tomarket solutions for structured products & ETFs and the latest trends in the business.

VITA Alan Price is sales director at Indxis, the leading independent provider of index technology and investment products. He is responsible for the development of Indxis' customised solutions including its calculation and distribution technology and investment product creation and licensing capabilities. Alan has over 20 years' experience in the financial services and systems industry.

Tell me about Indxis and the services you offer. Indxis is a leading independent provider of index technology and investment products. Indxis' services include index creation and licensing, as well as real-time index calculation and technology services. Our indexing technology platform provides real-time low-latency calculations and has been used to calculate some of the world's most recognizable indexes for over 10 years. Our index technology is also used to create investment products for asset management firms, which are then licensed through a white-label solution. Indxis works closely with its parent company, Mergent, to calculate and maintain the Mergent Dividend Achievers Index and products.

the potential new index-based products are protected by a framework of intellectual property rights and NDAs. We discuss the desired key features of the new index and can then turn out a first calculation sample within a few days. Of course, timings are dependent on the complexity of the calculations, but we are usually able to provide very fast-to-market products. We have a team of CFAs, which validate the outcomes and advise on the index calculation. After the index calculation and its outcomes are approved by the client, we then take care of the daily index calculation, rebalancing of constituents etc. Our services are already used by large investment firms including BlackRock, Russell Investments and Invesco PowerShares.

Are you are one-stop-shop for asset managers which have new index ideas or more an index calculator? We are definitely a one-stop-shop. We offer the full spectrum of index services and provide an efficient route to market for quality structured products in any market, region, sector, asset class or currency. Asset and fund managers with great investment product ideas often lack the infrastructure to get these products in to the market quickly and efficiently. We work with our clients to develop and backtest their investment ideas. We can take care of all their index calculation needs, offering the industry's most efficient route to market for structured products. Asset managers just need a clear vision about the investment idea and we can do the rest.

Are there minimum durations regarding the contract between the asset manager and Indxis? No, the contracts are flexible. The fees are usually linked to the assets-under-management. If the fundraising for your new index doesn't work in the way you imagined, we negotiate a fair termination of the contract, claiming just the costs we had until the moment the asset manager decided to stop the new index-linked product.

If an asset manager would approach you, what are the steps until the new index gets in place? First of all, our conversations with asset managers about

ETF Radar Magazine | Issue 4th Quarter 2010

What would be the trends in the indexing business within the next two years? We will see continued growth in the structured product market and increased demand for independent indexing services which offer real-time calculation and dissemination. A key differentiator for asset managers looking to create new structured products will be how fast they are able offer these to the market, giving them first moveradvantage. ď Ž

Career&Events

GLOBAL RECRUITING SENTIMENT CURRENT JOB OFFERS

ACTIVE EMPLOYERS

(Total amount and global allocation of ETP relevant job offers)

(Top 10 Hiring Companies incl. Recruiting Agencies; worldwide)

Region North America United States Canada Latin-/South America Brazil Europe United Kingdom Germany Switzerland France Middle East UAE (Dubai) Asia-Pacific Singapore Hong Kong Australia Africa South Africa

Rank

Offers

Trend

486 2



Country

Location(s)

BlackRock

USA

NYC/SFsco CA

Charles Schwab

USA

New York

Russell Investments

USA

SFsco CA

ETF Securities

USA

New York

Mitchell Martin

USA

New York

165 22 9 6

Vanguard

USA

New York

2 2 5 0

Morgan Stanley

USA

New York

Citifocus

USA

Pennsylvania

ProFunds Advisors

ENG

London

J.P. Morgan Chase

USA

New York

GLOBAL SALARY SCALE

702

United States

7 8

(Annual salary excl. bonus and additional incentives in USD)

TOTAL

Name

NEW YORK METRO REGION $98,800 + 0%–25% Bonus Associate Exchange Traded Products Min. 77k – Max. 115k

$175,000 + 35–80% Bonus Vice President Exchange Traded Products Min. 91k – Max. 188k

CITY OF LONDON $90,700 + 0%–30% Bonus Associate Exchange Traded Products Min. 75k – Max. 110k

$135,000 + 20%–100% Bonus Vice President Exchange Traded Products Min. 87k – Max. 155k

GREATER ZURICH AREA $95,500 + 0%–30% Bonus Associate Exchange Traded Products Min. 78k – Max. 100k

$166,000 + 30%–90% Bonus Vice President Exchange Traded Products Min. 90k – Max. 178k

SINGAPORE $92,000 + 0%–40% Bonus Associate Exchange Traded Products Min. 65k – Max. 100k

$145,000 + 20%–100% Bonus Vice President Exchange Traded Products Min. 89k – Max. 165k

United States

69%

Canada Brazil

Brazil 1%

United Kingdom United Kingdom 24%

Germany Switzerland France

Germany 3% Switzerland 1% Hong Kong 1%

UAE (Dubai) Singapore Hong Kong

Sources: ETF Radar Global Research, eFinancialCareers, Michael Page Intl., Glassdoor Recruiting, Monster Inc., Robert Half Intl. as of Oct, 1 2010.

ETF Radar Magazine | Issue 4th Quarter 2010

Career&Events

EVENT

GLOBAL ETF EVENT CALENDAR

Calendar PREVIEW ON SELECTED EVENTS

NOVEMBER

DECEMBER

Markit ETF and Fixed Income Indices Seminar

1/2 December 2010

9 November 2010

Location

Implementing Asset Allocation with ETFs

SPECIAL ADVERTISMENT

Chicago (1 Dec.) and Boston (2 Dec.)

TheADVISORS MONEYSHOW

Milan

Organizer information

Orlando | November 17 – 19, 2010

ASSOSIM

RSVP via eMail ebalchunas@bloomberg.net or

Location

ETFresearch@blackrock.com

Piazza Borromeo, 1

Registration Fee

Organizer information

Complimentary for qualified investors

RSVP online at www.markit.com Registration Fee Complimentary for qualified investors

15th Annual Super Bowl of Indexing 5 – 8 December 2010

Trends in Implementing Asset Allocation through ETFs

Location Phoenix, AZ

10 November 2010

Arizona Biltmore Resort & Spa

Location

2400 E Missouri Ave.

Brussels

Organizer information

RSVP via eMail mail@imn.org or register at

RSVP via eMail conferences@bloomberg.net or

www.imn.org

ETFresearch@blackrock.com

Registration Fee

TBA

Complimentary for qualified investors

The World Cup of Trading ETFs 13/14 December 2010

Indexing and ETF Investments Asia

Location

22/23 November 2010

New York City

Location

The Helmsley Park Lane Hotel

Hong Kong

36 Central Park South

Harbour Grand Hotel

Organizer information

Fortress Hill, 23 Oil Street, HK

http://www.worldrg.com/

Organizer information

Registration Fee

www.terrapinn.com/2010/indexasia

Starting at USD 1‘095 ENDED

EVEN

OM EC M

Registration Fee TBA

Trends in Implementing Asset Allocation through ETFs

16 December 2010 Location London

Gain Insightful Perspectives on the Economy, the Markets, and the ETF Business! For three days in November, a stellar roster of industry experts will gather to help you identify emerging trends and steer you towards the best new opportunities for your clients and your business. You’ll learn how some of the most successful financial advisors are navigating these uncertain waters, top portfolio managers will steer you through the chaotic financial markets, and hardhitting panels will discuss the best ways to incorporate ETFs and alternative strategies and vehicles into your clients' portfolios.

! Register now

www.moneyshow.com/flfa

Organizer information RSVP via eMail conferences@bloomberg.net or ETFresearch@blackrock.com Registration Fee Complimentary for qualified investors

ETF Radar Magazine | Issue 4th Quarter 2010

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

Disclaimer

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' decisionmaking 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. 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. 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. The ETF Radar Magazine 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. 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.

ETF Radar Magazine | Issue 4th Quarter 2010