2012 Q3

PI P R E V I E W S PROFESSIONAL & INSTITUTIONAL PORTFOLIO

2012 Q3

Partners

2012 Q3 PIP Reviews

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Contents

01 02 03 04

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Deborah Fuhr - ETFGI Global ETF and ETP Industry Insights, July 2012 Detlef Glow – ETFs in Europe–Pleasure and Pressure Deutsche Bank - The way to create commodity products for Investors Lyxor Asset Management - Index 2.0 – New innovation through Risk-Weighted Benchmarks

4 7 8 9

05 06 07

ISIS Management – AlphaDEX Fundamentally Different iShares - Trading Fixed Income ETFs BNP Paribas – Indexing: Don’t Miss the Trend!

12 14 16

ETFGI

ETFGI Global ETF and ETP industry insights, July 2012 Please find below a report that has been prepared for the press.

We will shortly be offering an annual, paid-for subscription which will provide a more detailed monthly report, an ETF and ETP directory report and access to tools to find and compare ETFs and ETPs.

ETFGI Global ETF and ETP industry insights, July 2012 Download the global report here

Flows • In July 2012, ETFs/ETPs saw net inflows of US$23 Bn. YTD through end of July 2012, ETFs/ETPs saw net inflows of US$131 Bn. • iShares gathered the largest net ETF/ETP inflows in July with US$6,008 Mn, followed by SPDR ETFs with US$4,556 Mn and Vanguard with US$4,317 Mn net inflows.

Summary for ETFs listed globally

• Vanguard gathered the largest net ETF/ETP inflows YTD with US$34,254 Mn, followed by iShares with US$31,463 Mn and SPDR ETFs with US$16,228 Mn net inflows.

At the end of July 2012, the global ETF industry had 3,327 ETFs, with 7,477 listings, assets of US$1,541 Bn, from 172 providers on 50 exchanges.

Assets

• Commerzbank experienced the largest net ETF/ETP outflows in July with US$211 Mn, followed by United States Commodity Funds with US$207 Mn and Daiwa Asset Management with US$154 Mn net outflows.

ETF assets have increased by 2.4% from US$1,505 Bn in June 2012 to US$1,541 Bn in July 2012.

• DB/x-trackers experienced the largest net ETF/ETP outflows YTD with US$1,686 Mn, followed by Commerzbank with US$1,086 Mn and EasyETF with US$775 Mn net outflows.

YTD through end of July 2012, ETF assets have increased by 13.9% from US$1,353 Bn to US$1,541 Bn.

Flows In July 2012, ETFs saw net inflows of US$24 Bn. YTD through end of July 2012, ETFs saw net inflows of US$123 Bn. SPDR ETFs gathered the largest net ETF inflows in July with US$5,941 Mn, followed by iShares with US$5,875 Mn and Vanguard with US$4,317 Mn net inflows.

• Vanguard gathered the largest net ETF inflows YTD with US$34,254 Mn, followed by iShares with US$30,791 Mn and SPDR ETFs with US$16,048 Mn net inflows.

• db x-trackers experienced the largest net ETF outflows in July with US$293 Mn, followed by Commerzbank with US$211 Mn and Daiwa Asset Management with US$154 Mn net outflows.

• db x-trackers experienced the largest net ETF outflows YTD with US$1,742 Mn, followed by Commerzbank with US$1,086 Mn and EasyETF with US$775 Mn net outflows.

Summary for United States ETFs and ETPs At the end of July 2012, the US ETF industry had 1,190 ETFs, assets of US$1,083 Bn, from 34 providers on 3 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the US ETF/ETP industry had 1,486 ETFs/ETPs, assets of US$1,209 Bn, from 52 providers on 3 exchanges.

Download the United States report here

Summary for European listed ETFs and ETPs At the end of July 2012, the European ETF industry had 1,332 ETFs, with 4,782 listings, assets of US$284 Bn, from 39 providers on 21 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the European ETF/ETP industry had 1,942 ETFs/ETPs, with 6,029 listings, assets of US$319 Bn, from 45 providers on 22 exchanges.

Download the European report here

Summary for ETFs and ETPs listed globally

Summary for Asia Pacific (ex-Japan) listed ETFs and ETPs

Including other Exchange Traded Products (ETPs), at the end of July 2012, the global ETF/ETP industry had 4,722 ETFs/ETPs, with 9,597 listings, assets of US$1,722 Bn, from 203 providers on 54 exchanges.

At the end of July 2012, the Asia Pacific (ex-Japan) ETF industry had 381 ETFs, with 496 listings, assets of US$68 Bn, from 86 providers on 14 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Asia Pacific (ex-Japan) ETF/ETP industry had 400 ETFs/ETPs, with 518 listings, assets of US$69 Bn, from 88 providers on 14 exchanges.

Assets • ETF/ETP assets have increased by 2.3% from US$1,683 Bn in June 2012 to US$1,722 Bn in July 2012.

• YTD through end of July 2012, ETF/ETP assets have increased by 12.9% from US$1,526 Bn to US$1,722 Bn.

Download the Asia Pacific (ex-Japan) report here

Summary for Canada listed ETFs and ETPs At the end of July 2012, the Canadian ETF industry had 253 ETFs, with 335 listings, assets of US$50 Bn, from 7 providers on 1 exchange. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Canadian ETF/ETP

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ETFGI

ETFGI Global ETF and ETP industry insights, July 2012 industry had 256 ETFs/ETPs, with 362 listings, assets of US$50 Bn, from 9 providers on 1 exchange.

Download the Canada report here

Summary for Japan listed ETFs and ETPs At the end of July 2012, the Japanese ETF industry had 96 ETFs, with 100 listings, assets of US$43 Bn, from 11 providers on 3 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Japanese ETF/ETP industry had 105 ETFs/ETPs, with 139 listings, assets of US$44 Bn, from 15 providers on 3 exchanges.

Download the Japan report here

Summary for Latin America listed ETFs and ETPs At the end of July 2012, the Latin American ETF industry had 35 ETFs, with 533 listings, assets of US$10 Bn, from 16 providers on 4 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Latin American ETF/ETP industry had 35 ETFs/ETPs, with 562 listings, assets of US$10 Bn, from 19 providers on 4 exchanges.

Download the Latin America report here

For further information please contact: Deborah Fuhr Partner ETFGI LLP 100 Pall Mall, St James London, SW1Y 5NQ United Kingdom Phone: 44 207 321 5650 Mobile: 44 777 5823 111 Email: deborah.fuhr@etfgi.com  ETFGI LLP is a limited liability partnership registered in England and Wales with registered number OC372221. Our registered office is at St Albans House, 57/59 Haymarket, 4th Floor, London, SW1Y 4QX.

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Detlef Glow

ETFs in Europe–Pleasure and Pressure

By Detlef Glow, Head of Lipper EMEA Research at Thomson Reuters.

The views expressed are by his own.

Fund promoters may make the decision to liquidate funds that are not contributing to earnings.

The exchange-traded fund (ETF) market has shown a high growth pattern since the inception of these products in Europe. Many different fund promoters have entered the scene. To diversify themselves from their competitors and to fulfill the needs of their customers, the fund promoters have been very innovative in their product offerings in terms of asset classes and replication techniques. This has led to a broad variety of ETFs competing for the assets of investors.

Before analyzing the ETF market from this point of view, one needs to look at the different kinds of costs and the income streams related to ETFs.

A highly concentrated market Even though there are many types of funds offered to investors, in terms of assets under management the European ETF market is highly concentrated. The five top promoters account for more than 75% of the overall assets under management of the ETF industry. On a fund-by-fund basis the concentration of the industry is even higher. The ten top funds by assets under management account for 25.68% of the overall assets under management, while the largest fund in the European ETF universe, iShares DAX (DE0005933931), accounts for 11.624 billion euros or 4.75% of the overall market.

The pleasure of being a billionaire A closer examination of the assets under management shows that only 47 of the 1,727 ETFs registered for sale in Europe hold assets above one billion euros.

These funds account for 49.92% of the overall assets under management. Because of the high assets under management the 47 “billionaires” are highly profitable for the fund promoters and can be called their “bread and butter” funds.

According to iShares, the world’s largest ETF provider, assets under management show a high correlation with turnover in an ETF. This means the largest funds in the markets also tend to have the highest turnover, making these products attractive to institutional investors, who can buy and sell large amounts of these products without making a significant market impact. In addition, institutional investors such as funds of funds are, under the UCITS regime, not allowed to hold a major stake in any given fund in their portfolios, making a fund with high assets under management even more attractive to them. In other words, in an industry where size is one of the key factors successful products becomes even more successful as size in assets under management and liquidity attracts even more new money.

What’s on with the other funds?

Since only a few funds account for the majority of assets under management in the ETF industry, there must be a lot of funds with low assets under management. With regard to the actively managed funds, where funds can get merged or liquidated if they don’t gather a certain amount of money over time, this raises the question: are these funds now more subject to possible consolidation within the ETF segment?

The pressure of low assets under management Opposite to the billionaires, the “poor funds” holding low assets under management have to deal with a lot of pressure. All funds in the product range of a fund promoter cost money for the management and general maintenance of the funds, i.e., there are costs for accounting and legal consultation as well as for marketing and listing. Since these costs exist anyway, some of the funds are not profitable for the promoter and need subsidies from other parts of the business.

As long as the industry is enjoying healthy growth, where the overall assets under management of a promoter are rising on a steady basis, this seems to be no problem. But in an unstable environment that comes with decreasing earnings and an increasing number of regulations fund promoters need to review their product ranges to reduce the overall complexity and to maintain their earnings.

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Different kinds of fees and expenses The expenses of managing the portfolio of an ETF depend on different factors and can be split into fixed and variable costs. The fixed costs are in general the costs for the listings on the different exchanges, fees for accounting, as well as fees for legal and compliance. The variable charges, such as costs for the index license or custodian fees, are based on the assets under management. The variable costs follow different patterns: First of all there is the cost for the index license, which follows the rule of exclusivity, i.e., the lower the number of licenses for an index, the higher the costs are for these licenses. The second cost type is the cost for the management of the ETF. These costs follow the rule of complexity, i.e., the more complex the underlying index of an ETF, the higher the costs are for maintaining the fund.

The underlying index is also the driver of fees and expenses that need to be paid to buy the individual securities within the index, meaning the underlying index also has an impact on the spreads of an ETF.

Various streams of income On the other side, one needs to look at the different streams of income that come from offering an ETF. The first thing that comes to mind is the management fee, which is dependent on the assets under management. Secondly, there might also be some income from securities lending, which the fund has to share with its investors, i.e., the investors shall get all income after fees and expenses related to the securities lending process. In addition, the fund and/or its parent organization can receive income from the so-called “creation and redemption” fees—paid by the authorized participants for the creation and redemption of shares. These fees depend on the trading activity within an ETF; a fund with low assets under management might be very profitable for the promoter if there is a lot of intraday trading activity within the shares of the fund (as there is for inverse, short, and leveraged strategies because of their revaluation process at the end of any given trading day or calculation cycle). Another stream of income for the parent of the promoter could be generated from the fees for the use of derivatives such as SWAPs when they are issued by a counterparty that belongs to the same parent organization.

The ETF death list With regard to the different costs and the various streams of income, the level of assets under management a fund needs to gather to be profitable varies from fund to fund. But I learned from my discussions with industry participants that a fund seems to become profitable when the assets under management are above one hundred million euros. This level means the fund promoter has a solid stream of income from the management fee and may in addition be able to receive income from trading in the fund as well as from securities lending.

To estimate what may happen to funds that are not able to hit their target, looking at the active fund management industry might be helpful. It is common sense in the active fund management industry that a fund that seems to not be successful, i.e., does not gather enough assets under management from the promoter’s perspective, will be liquidated or merged to bring down overall costs and the complexity of the product range. In some cases even profitable funds will be merged with similar funds to reduce the overall number of funds and therefore the complexity of the product range.

From my point of view an ETF that has not been able to gather at least one hundred million euros over a three-year period is in danger of closure. A detailed view of the European ETF industry shows there are 294 of the 1,727 funds as of June 30, 2012, that have never held assets of more than one hundred million

Detlef Glow

ETFs in Europe–Pleasure and Pressure euros over the last three years. This means that around one out of six funds are in danger of closure. Even though this already sounds tough for the industry, the number of funds with assets under management below 100 million euros dramatically increases if we do not limit the examination to funds that are older than three years.

Summary Taking all the different types of expenses and possible income streams into account, the assets under management of an ETF are not a fully valid measure to estimate the profitability of an ETF. But it can be taken as granted that funds that hold a large amount of assets under management are more unlikely to be closed than funds that do not generate any revenue for the fund promoter. Small funds that are not able to attract enough investors to reach their target in terms of assets under management are likely to be closed. This can be seen in the product range of ETF Securities, which liquidated nine of its funds in June because they didn’t meet the target in terms of assets under management and the expected turnover volume.

That said, in a number of cases the fund promoter will keep an ETF in its product range even if it is not profitable, since some products are needed to complete the product offering of the promoter. Especially for the large players in the ETF market, it is important to have an almost-complete product range offering, since investors expect them to be a one-stop shop.

Even though we are in a tough market environment in which some promoters have started to review product ranges, there is no foreseeable general trend at the moment toward consolidation in the ETF industry. A closer view of the overall picture shows an opposite picture: index providers have started new initiatives toward more active indices, i.e., indices that optimize their risk-return profile, to enhance their product ranges. These new index offerings might lead to even more new products competing for the money of investors. But, since there is no broad acceptance for new strategy indices by investors at the moment, ETFs tracking these are still niche products.

All in all, despite the fund closures we are seeing over the short term, from my point of view the ETF industry will grow further in all areas, not just in terms of assets under management. We will see more ETFs that track an even broader range of indices coming to the market in the future. This behavior is rational, since product innovation and investor demand are the growth drivers of the industry. Nobody can know what will be the next strategy index to become a mega seller, so index providers and ETF promoters need to continue to be creative.

Detlef Glow Head of Lipper EMEA Research at Thomson Reuters detlef@thomsonreuters.com

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Deutsche Bank

The way to create commodity products for investors Introduction Starting in 2007, the European market experienced the proliferation of a new exchange traded product (ETP) asset class: Commodities. The first products made their appearance in the European market in 2004/5 and were launched by ETF Securities and BNP Paribas.

However, it took a few years for investors to warm up to this concept and it wasn’t until 2007 that the number of such products began reaching a critical mass.

European investors have long grappled with the best means to achieve exposure to commodity returns. Direct exposure to a specific commodity return profile has not been readily attainable historically. Storage capacity and costs, seasonality, uniqueness of production batches, perishability, and difficulty to transport are just a few of the reasons that make direct investment in commodities both unpractical and expensive. Historically, investors have primarily used derivatives (more commonly futures) and purchased shares in companies that operate in the commodities sector in order to achieve their desired investment objectives.

Trading futures and other derivatives requires additional expertise and constant investment supervision to ensure, for example, continuous rolls. Holding shares in commodity companies often generates imperfect results in addition to being costly and requiring scale and additional expertise. C-ETPs made gaining direct investment exposure in a diverse set of commodity return profiles more practical and cost effective.

The creation of C-ETPs was propelled by two forces that, together, fused to build the momentum for the creation of these products. The first brewed with rapidly growing assets and increasing popularity of exchange- traded equity funds.

The second push came from investors and investment managers looking for opportunities to enhance return diversification in their portfolios. These forces culminated circa 2007, and with the credit crisis in full swing, providers sought to create products that utilized the, now, popular characteristics of exchangetraded funds and also afforded more widely reachable exposure to uncorrelated (to equity and fixed income) return streams: commodities.

In order to facilitate creation of commodity ETPs, providers in Europe have utilized a variety of financial instruments as building blocks (mainly futures, total return swaps, direct investment in underlying commodities) and have worked with what existing regulatory framework parameters permit. In Europe, the Undertakings for Collective Investment in Transferable Securities’ (more commonly known as UCITS III) regime, governs the rules for creating and passporting funds throughout the European Union. However, in its current incarnation, III, UCITS only permits the creation of funds that provide exposure to broad commodity indices.

While UCITS III facilitated the creation of a number of C-ETPs tracking broad commodity indices, providers went back to the drawing board to find an avenue which would enable the creation of products that could track a wider variety of commodity narrow benchmark returns and that could be easily registered for sale across-the European Union. The European Prospectus Directive (EUPD) provided the platform which ETP providers utilized to structure and passport exchange -traded debt instruments that could offer direct exposure to a wide variety of specific commodity return profiles.

Debt issuing C-ETPs in the European Union are issued in two forms: as exchangetraded commodities (ETCs) and exchange- traded notes (ETNs). While there are a number of structural and legal differences between ETCs and ETNs, perhaps the most important is that for ETCs, notes/certificates are issued by a special purpose vehicle whose sole purpose is to generate the vehicle’s return profile. The market risk and return profile of the ETC issued notes/certificates is (more often) dependent on a total return swap with a counterparty in an over-the-counter (OTC) derivative transaction. On the other hand, the value and return profile of an ETN is dependent on the credit worthiness of its issuer, most commonly an established financial services institution. In order to reduce counterparty risk, virtually all ETCs are collateralized – though the degree, form and mechanics of collateralization can differ greatly from one ETC to the next. ETNs are not always collateralized as they are issued by highly rated financial institutions.

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Commodity futures pricing fundamentals In simple terms, the future price of a commodity is composed of today’s (spot) price plus the cost of storing it and transporting it to its point of sale. This is a simplistic way of looking at what determines the future value of an asset. In reality, depending on each commodity a number of additional factors are also relevant, such as perishability, pricing and availability of substitutes, supply and demand chain factors etc. For the purposes of explaining future pricing fundamental concepts however, we have assumed that storage and transportation are the only costs.

A spot or future return could be ‘funded’ or ‘unfunded’, depending on the assumption made about the source of the funds used to make the investment. The assumption behind an ‘unfunded’ return is that the funds have been borrowed to make this investment, and thus the cost of borrowing needs to be deducted from the return. The assumption behind a ‘funded’ return is that the funds are held in cash and therefore the cash return needs to be added to the return.

Equation 1: Spot funded return = Spot return of security (cash is used to purchase the security) Equation 2: Spot unfunded return = Spot return-Cost of funding (cost of borrowing) As discussed earlier, for most commodities, the concept of spot return is not attainable and therefore these equations need to be adjusted to account for the futures valuation.

Equation 3: Future asset price= Spot price+Storage costs+Transportation costs Similarly, the futures position could be funded or unfunded and thus the cost of borrowing needs to be deducted (unfunded) and the cash return added (funded), as appropriate. In addition to the costs associated with funding and maintaining a commodity to a future date, an additional element needs to be considered: the roll impact. As futures contracts are exchange- traded instruments, their expiration cycles are standardized and most tend to be monthly, quarterly or annual. A C-ETP will need to obtain continuous exposure to its commodity return benchmark, and thus the impact of rolling one futures contract into another needs to be accounted when estimating a C-ETP’s benchmark return.

Equation 4: C-ETP Return = (Spot return+/- roll impact) + Funding return = Futures Return+Funding Return Note that as C-ETPs employ synthetic means of creating their target benchmark’s return, there will not be a direct investment of the ETP in futures. However, since the benchmark’s constituents are futures the roll impact needs to be accounted for. Synthetic replication is facilitated most commonly by a total return swap, the total return payable by the TRS counterparty to the C-ETP will account for the roll impact.

Certain indices will attempt to minimize the roll cost by deploying what is known as optimum yield roll methodology. This ensures that the index futures rebalance is done dynamically in an attempt to select an optimal future expiration.

This aims to maximize potential roll returns or minimize or minimize potential roll costs. This dynamic roll approach may also result sometimes in rolling into contracts of a different term than the current, depending on what will offer the optimum roll yield.

Shape of the futures curve: Backwardation and Contango While logic dictates that the spot price of a commodity will be lower than its future price, due primarily to costs (such as storage) that need to be incurred to take the commodity to a future date, this is not always the case. When the spot price is lower than the futures price, the cost of carry is negative; the futures curve is described as being in Contango, a state more applicable to non perishable commodities. If the spot price is higher than the future price, the cost of carry is positive, the curve is described as being in backwardation, a state driven

Deutsche Bank

The way to create commodity products for investors by market fundamentals and more applicable to perishable commodities.

In theory, as a future contract approaches its expiration date, spot and future prices will typically converge. This will not always be the case though when it comes to commodities.

Uneven marginal production costs and supply and demand factors cause futures curves to invert thus often resulting in losses, translating into roll costs when rolling from one contract to the next.

Both the roll costs as well as the financing costs (especially when benchmark return calculation assumes reinvestment of gains) can end up having a very significant impact on a commodity investor’s return. While the funding return remains relatively small, the roll return impact on many occasions eclipses the spot price return. This is absolutely crucial to observe and understand as the benchmark constituents of the vast majority of C-ETPs are futures and that makes the CETP’s returns subject to the roll effect. The roll effect is not C-ETP specific, it is a direct result of how futures contracts work and impacted by variability in the pricing of different commodity production batches.

This fact can often lead to confusion as the media/news channels will often describe change in spot prices rather than what can actually be achieved. For example, the spot change in crude oil in 2009 was 78% but an investor in crude oil would have potentially earned 17% due to the futures roll costs.

This article is based on the report “The Race for Assets in the European Commodity Exchange- Traded Products market” by Christos Costandinides, Deutsche Bank ETF Research.

Philip Knüppel Sales ETF & ETC

Since graduating from the University of Constance with a degree in economics in 2005, Philip Knueppel has worked in the area of structuring for derivatives-based investment products. He is currently responsible for product management and sales at Deutsche Bank’s exchange-traded funds (ETFs) and exchange traded commodities (ETCs) platforms in Frankfurt, where he has worked since 2010.

Prior to working for Deutsche Bank, Philip was a product manager on the structured products desk at ABN Amro in Zurich and Frankfurt.

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Lyxor

Index 2.0 – New innovation through Risk-Weighted Benchmarks Capitalization-weighted indexation is the most common way to gain access to broad equity market performance. It is often backed by results of modern portfolio theory: in the CAPM framework, the optimal investment strategy is to hold the market portfolio, which corresponds to the capitalization-weighted portfolio under some assumptions. Because of this presumed efficiency, capitalizationweighted indexes play a central role in the investment industry. First, they are a convenient investment solution. Second, they represent a benchmark for active management.

Lyxor has launched 2 new ETFs on risk based indices:

However, many empirical studies have shown that capitalization-weighted indexation is not generally the optimal portfolio. One explained that the CAPM hypotheses do not necessarily hold. For example, investors do not have the same expectations, elasticity of demand and supply is not infinite, trading costs are not zero, etc. However, the main argument remains the fact that expected returns (or risk premiums) are very difficult to forecast. Other criticism has recently been made about capitalization-weighted indexes: • By construction, a capitalized weighted (CW) index is a trend following strategy; it incorporates a momentum bias, which leads to bubble exposure risk as weights of the best performers increase and weights of the worst performers decrease; • A CW index generally contains a growth bias, because high valuation leads to greater weight than low valuation with equivalent realized earnings; • A CW index generally suffers from the lack of risk diversification (it may be concentrated in a few stocks) and high drawdown risk.

In this context, alternative-weighted indexation has recently prompted great interest from both academic researchers and market professionals. An alternative weighted index is defined as an index in which assets are weighted in a different way than those based on market capitalization. Alternative-weighted indexation can be split in two families: fundamental indexation and risk-based indexation. Fundamental indexation defines the weights as a function of economic metrics like dividends or earnings whereas risk-based indexation defines the weights as a function of individual and common risks.

Disclaimer This is a commercial and not a regulatory document. Provisions contained in this document are provided for information purpose only and has no contractual value. The Lyxor ETF presented herein are UCITS III open-ended funds and have been authorized by the Autorité des Marchés Financiers. Each Lyxor ETF has a prospectus available on simple demand sent to Lyxor Asset Management (contact details are mentioned below) or on www.LyxorETF.com The investment in the Lyxor ETFs may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or in said countries. It is the investor’s responsibility to ascertain that they are authorized to invest into these products. By investing into these products, the investor certifies to Lyxor that he is duly authorized to do so. Investors are advised to consult the “Risk Factors” heading in the prospectus. Any investment in a Lyxor ETF involves

Two well-known examples are the minimum-variance (MV) portfolio and the equally-weighted (1/n) portfolio. The first one is the portfolio located on the mean-variance efficient frontier presenting the lowest risk. The second one is simply constructed by attributing the same weight to all of the components of the portfolio. Recently, academic and professional researchers have proposed two other risk-based indexation methods.

certain risks; the main ones are as follows:Market risk and risk of capital loss associated. In particular investors may experience substantial or sudden loss, including, in the worst case scenario, the loss of the investor’s entire investment; Counterparty risk.

Non achievement of the Fund’s objectives: The Fund may not always be able to replicate exactly the performance of the index (or indices).

This document does not purport to summarize or contain all of the provisions that would be set forth in the relevant prospectuses. Any purchase or sale of any Lyxor ETF may be made only pursuant to final relevant prospectuses. This document does not consider specific investment objectives, financial situations or the particular needs of any specific entity or person and may not

The most diversified portfolio (MDP) is based on the optimization of a diversification measure. It is also known as the maximum Sharpe ratio (MSR) portfolio, because it is the optimal portfolio if all of the assets have the same Sharpe ratio.

In the equally-weighted risk-contribution (ERC) portfolio, the weights are computed in such a way that every asset in the portfolio has the same risk contribution.

be relied upon as investment, legal, accounting or tax advice regarding the appropriateness of investing in any Lyxor ETF or participating in any investment strategy stated herein. Any decision to invest in a Lyxor ETF should be made only after reading the relevant prospectus for that ETF, conducting such investigations as the prospective investor deems necessary after consulting with the prospective investor’s own independent investment, legal, accounting and tax advisors in order to make an informed determination of the suitability and consequences of an investment in such product.

The figures relating to past performances refer to past periods and are not a reliable indicator of future results. Information presented in this document is based in pertinent part on market data collected at a given moment and such information is sub-

These four methods present some interesting mathematical and statistical properties. In particular, they coincide in some limiting cases. Using an empirical application with the DJ Euro Stoxx 50 universe over the period 1992-2009, we obtain some appealing results in terms of performance, volatility, draw downs, diversification, etc. Our study also shows that restrictive constraints on weights should be imposed in the MV or MDP/MSR methods to avoid concentration in some assets. Indeed, it appears that these two methods take bigger bets on some portfolio components unlike the ERC and 1/n methods. Another important issue of alternative-weighted indexation is the question of transaction costs. To control them, an estimated covariance matrix with a long historical period must be used. For the MV and MDP/MSR methods, it is important to add some constraints to limit concentration and market price impact.

ject to modification and may change from time to time. Certain information presented herein has been obtained from sources believed by Lyxor AM, or Société Générale (“SG”) to be reliable. However, Lyxor AM or SG has not verified the accuracy of such information and Lyxor AM makes no representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of such information, nor does Lyxor AM accept any liability arising from its use (nor for any material or typographic error that may appear in this document). Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice.

The EURO iSTOXX 50 Equal Risk® index and the trademarks used in the index name are the intellectual property of STOXX Limited, Zurich, Switzerland and/or its licensors. The index is used under license from STOXX. The securities based on the index are in no way sponsored, endorsed, sold or promoted by STOXX and/or its licensors and neither STOXX nor its licensors shall have any liability with respect thereto.

The MSCI indexes are the exclusive property of Morgan Stanley Capital International Inc. (“MSCI”). MSCI and the MSCI Indexes are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by Lyxor. Any funds referred to herein have not been passed on by MSCI, any of its affiliates or any other party involved in, or related to, making or compiling any MSCI index as to their legality or suitability, and are not issued, sponsored, endorsed, sold, managed or promoted by MSCI, any of its affiliates or any other party involved in, or related to, making or compiling any MSCI index, none of which makes any warranties or bears any liability with respect to any funds referred to herein. The Prospectus contains a more detailed description of the limited relationship MSCI has with Lyxor and any related funds.

The indices sponsor does not under any circumstances provide any guarantee, whether explicitly or implicitly, as to the data linked to the index, as well as to its quality, accuracy and/or completeness, or concerning the financial rating of any issuing entity and has no responsibility resulting from the use of the index and/or its composition. The indices sponsor cannot be held liable for p p any reason whatsoever in terms of an error in the indices, and the indices sponsor is not required to inform of such an

10

2012 Q3

error, in the event it would occur.

ISIS Management

AlphaDEX Fundamentally Different What is Alpha?

First Trust Portfolios L.P. • First Trust Advisors L.P. www.ftportfolios.com

Traditional indexing Originally, indexes were designed to measure the average performance of a group of stocks that were considered representative of either the broad market or a specific segment of the market. Indexes were also developed to serve as benchmarks that investors could use to gauge the performance of an active portfolio manager. Because indexes are intended to mirror the market, the vast majority weight stocks based on their market capitalization. Later, mutual funds and exchange-traded funds (ETFs) were introduced which were designed to track the performance of these traditional indexes. These funds invest in the same group of securities, or a sampling of the securities, that compose the index.1

Alpha is a measure of the portion of a return arising from non-market risk. In other words, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. For example, if an investment returns more than what you’d expect given the market for the asset class it is invested in, it has a positive alpha. Conversely, if an investment returns less than the asset class, it has a negative alpha. Because of the additional benefits provided by ETFs such as tax efficiency, exchange-traded liquidity, and transparency, we believe ETFs may be a better alternative to active management when seeking alpha.

AlphaDEX® Enhanced Index ETFs The indexes which provide the basis for the AlphaDEX funds start with a broadbased index and are enhanced through the use of the methodology shown in the chart.

The problem with cap-weighted indexes The market is extremely efficient at reflecting the prices investors are currently willing to pay for a company based on available information. However, the market is not immune to speculation and changes in investor sentiment which can cause a company’s price to deviate significantly from its fundamental value. This scenario became clearly evident during the internet and technology-driven bull market that took place in the late 1990s and the subsequent bursting of the bubble in 2000. This period of market speculation also exposed a potential flaw inherent in capitalization-weighted indexes. Cap-weighted indexes, by their very nature, were forced to overweight larger, potentially overvalued companies and underweight smaller, potentially undervalued companies causing a drag on an index’s returns.

Fundamentals still matter Because stock prices are subject to factors that can make them deviate from a company’s true value, fundamental indexing has been gaining favor with investors. Unlike traditional cap-weighted indexes which rely solely on the price that the market places on a company to determine its weight in an index, fundamentally-weighted indexes employ fundamental measures of evaluating a company such as price to book value, price to cash flow, price to sales and return on assets to determine how much weight it should represent within an index.

Fundamental weighting attempts to limit exposure to over-priced stocks and increase exposure to those which are trading at more attractive valuations. While different methods of indexing will have inherent limitations at different times, we believe that fundamental indexes have the potential to generate higher long-term returns, and often times reduce volatility, compared to similar capweighted indexes.

Traditional index

Enhanced index

Index representation

Own all stocks

Own a select group

Weighting method

Size

Fundamentals

Performance objective

Beta

Alpha

Indexes are unmanaged and an investor cannot invest directly in an index. Unmanaged index returns do

1

not reflect any fees, expenses, or sales charges. Past performance is not a guarantee of future results. Index performance is not representative of any AlphaDEX fund.

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2012 Q3

Because indexing has historically implied broad market matching returns through passive investing, investors have commonly turned to active management when seeking market outperformance. We believe that the passive investing structure provided by indexing can be used as an effective way to generate positive alpha.

The goal of an enhanced index is to identify those stocks from within a traditional broad-based index which exhibit the fundamental characteristics that enable them to provide the greatest potential for capital appreciation.

The enhanced indexing approach seeks to generate positive alpha relative to the broad-based passive index from which it selects its stocks. Enhanced indexing is itself inherently passive. No active judgement is made when evaluating stocks and every step in the process is driven by a transparent, repeatable quantitative process.

ISIS Management

AlphaDEX Fundamentally Different The AlphaDEX® family of ETFs The First Trust AlphaDEX® exchange-traded funds are designed to track the performance of a group of custom “enhanced” indexes which employ the proprietary, rules-based AlphaDEX fundamental stock selection methodology. The AlphaDEX family of funds consists of a diverse range of sector, style, multi cap, and international funds.

Martin MOLERE First Trust Global Portfolios Tel: +44 (0)203 440 7421 mmolere@ftgportfolios.com

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2012 Q3

iShares/BlackRock

Trading Fixed Income ETFs FOR PROFESSIONAL INVESTORS ONLY AND FOR PROFESSIONAL INVESTORS ON A REVERSE SOLICITATION BASIS ONLY IN JERSEY

Executive Summary Fixed Income Exchange Traded Funds (FI ETFs) are an efficient way for investors to gain exposure to bond markets. There are two markets associated with FI ETF trading: the primary (or underlying market) and the secondary market.

APs can use an internet-based matching platform for iShares funds to advertise buy and sell interest anonymously and execute with other counterparties. Crossing transactions in this manner reduces the need to create and redeem in the primary market. The iShares Capital markets team has access to this platform, enabling them to match client interests with appropriate brokers with a natural axe often resulting in more competitive pricing.

In the primary market, securities in the proportion of the existing holdings of the fund are bought or sold, often on the back of creation or redemption orders from Authorised Participants (APs). This process operates in conjunction with the secondary market, which includes on-exchange and Over-The-Counter (OTC) transactions.

Underlying bond prices are used to calculate a fund’s Net Asset Value (NAV) and evaluate its bid/offer spread. In the primary market there are a variety of types of trades: in-kind, cash and NAV plus. The nature of a trade will normally determine which market, primary or secondary, is the most suitable market for a particular trade. As trading on both markets is often the most appropriate solution for trade execution, it is important to place FI ETF orders with market-makers that regularly trade in these funds in order to achieve best price execution. With access to more than 40 APs and 100 market-makers/brokers, iShares® has expert knowledge on where to source liquidity, be it on-exchange or OTC.

iShares Capital Markets Team The iShares Capital markets team is a dedicated markets desk that focuses on ensuring the best liquidity for the iShares FI product range. The team leverages the trading expertise of Blackrock, in order to help clients navigate the ETP landscape effectively, and is uniquely positioned to help clients trade cost efficiently by partnering with broker-dealers and trading venues across EmEA to identif y the sources of liquidity and trading data. This places them in a good position to match trading interests with those with natural axes, reducing the cost of trading for our clients.

Secondary Market Trading The secondary market encompasses trading between the market-maker/broker and the investor, both on-exchange and OTC. A number of market-makers quote bid and offer prices for FI ETFs during the trading day. In Europe, iShares FI ETFs are cross-listed on six primary exchanges. These are: London Stock Exchange (LSE), NYSE Euronext Paris, NYSE Euronext Amsterdam, Xetrra (deutsche Börse), Borsa Italiana and SIX Swiss Exchange.

Pricing of Fixed Income ETFs The price of a FI ETF is driven by four main factors: ``the value of the underlying securities ``the level of supply and demand in the secondary market ``the cost of share creation through the underlying FI markets

Primary Market Trading In the primary market, APs, who are typically large institutional intermediaries, can create and redeem FI ETF units directly from an ETF provider, such as iShares. In the case of physically replicating FI ETFs, trading on the primary market is done in blocks of FI ETF shares. There are different types of primary market trades available depending on the FI ETFs: in-kind, cash and NAV plus. In-kind creation trades are trades where units are exchanged with baskets of the underlying securities of the same type and proportion held within the FI ETF. For cash creations, the market-maker pays a cash amount to the FI ETF provider, (e.g. iShares), who then purchases the underlying securities within the fund. Similarly, for NAV plus creations, the AP pays the NAV equivalent in cash plus the spread to the FI ETF provider. In this trade, the spread is pre-set taking into consideration underlying bond prices and market conditions. It is published on a daily basis and distributed directly to market-makers pricing the FI ETF. Importantly, the FI ETF provider also publishes a threshold amount up to which the market-maker can create or redeem shares at this fixed spread. Should a market-maker wish to trade above this threshold, the order is executed at cost.

13

2012 Q3

``the level of FI market volatility Due to the OTC nature of the bond market, transparency of underlying bond prices within an ETF is limited. iShares publishes the bond holdings of a FI ETF, with maturity, coupon and weight on a daily basis, enabling the market-makers to price the fund. The NAVs calculation of the fund uses either bid or mid prices.

While NAV is provided at the end of each trading day, various sources (including deutsche Börse) also publish indicative Net Asset Value (iNAV) during European trading hours. iNAV can be often seen as a good estimate for the fair value of a FI ETF. Usually it is the bid/offer spread of the underlying bonds that drives the spread of a FI ETF. The FI ETF spread and the brokerage commission are the main constituents of the cost of a trade. If there is strong demand for a FI ETF in the secondary market, its price can rise above its fair value (i.e. NAV plus or minus the cost of creating/redeeming units). A similar process applies when there is strong selling of a FI ETF, resulting in its units trading at a discount to its fair value. If the price of a FI ETF moves sufficiently far outside the bid/offer band of the underlying basket of securities, then an arbitrage opportunity exists.

A FI ETF can trade at a premium or discount to its fair value and this can continue

iShares/BlackRock

Trading Fixed Income ETFs

for as long as the premium or the discount is not large enough to trigger an arbitrage opportunity.

Participants incur transaction costs in executing underlying transactions. As mentioned earlier, in FI markets a fund’s NAV is determined using the bid or mid of the underlying market, while individual bonds purchased to facilitate the creation of new FI ETF shares are acquired on the offer side of the market. As a result, creation costs are meaningful when there is sufficient buying pressure to result in the creation of new shares. Strong selling pressure, on the other hand, results in securities redemptions executed on the bid side of the market, which is in line with where the fund is valued. As long as the premium or discount is less than these transactions costs, there is no arbitrage opportunity.

Creation costs for a given FI ETF, and the resultant impact on the fund’s premium is dependent upon the cost of executing the underlying bonds, taxes, custodian fees and F x charges. As the impact of creation costs on a FI ETF premium is incurred only by new investors, existing investors in the fund are not affected.

To what extent transaction costs are reflected in the price of a FI ETF is a function of trading flows. In balanced markets (i.e. symmetrical buy versus sell orders), for smaller trades there is no need for APs to access the underlying market, therefore only a fraction of the underlying market bid/offer spread is reflected in the price of the FI ETF. In unbalanced markets (e.g. excessive buy orders), the entire underlying bid/offer spread may be priced in.

Other factors besides creation costs impact on the arbitrage opportunity. For example, it can be difficult for APs to execute what appears to be arbitrage opportunity during periods of high market volatility.

Combining these factors, the level of the premium or discount to fair value for any FI ETF is a function of the creation/redemption cost of the fund, the fund flows in the secondary market and the level of execution risk for creating and redeeming shares in the underlying market.

Spread size and liquidity The bid/offer spreads of FI ETFs on-exchange are quite often tighter than the traditional underlying bond spreads. For example, this can be seen when comparing the on-exchange spread of the iShares markit iBoxx Euro Corporate Bond with the weighted spread of the index bonds shown in the chart below.

To ensure the best execution for its clients, iShares operates a ‘multi-dealer model’, whereby multiple market-makers price its FI ETF offering where possible. This generally provides for tighter spreads, typically increases order book depth and enables clients to trade without difficulty especially during volatile periods.

Both spreads and volumes should be considered when assessing how easy it is to trade in and out of a FI ETF. Funds with wide spreads may be supported by

14

2012 Q3

high volume at these levels, so that large orders may not shift the spreads, whereas funds with tight spreads but limited liquidity may not be able to absorb large orders at these tight levels and, as a result, will be more costly to trade.

Market liquidity is a term referring to the amount of volume that can be traded without moving the market against the trader (market impact). The available trading volume is driven by the size of the underlying bond market capitalisation, rather than the size of a FI ETF, given the ability of APs to create and redeem shares. Typically, market-makers show on the screen a fraction of the size they can trade at any moment in time and, generally, larger orders can be executed inside the spread. iShares markit iBoxx Euro High Yield Bond is a good example of a FI ETF, which periodically is traded in larger deal sizes than its Average daily Volume (AdV). The chart below shows trading activity over a three month period.

iShares/BlackRock

Trading Fixed Income ETFs Currency Impact A further factor to consider when trading FI ETFs is currency. A FI ETF’s official currency is its base currency, and it is this currency which is used to calculate a FI ETF’s official NAV. iShares FI ETFs are not hedged for currency exposure. For example, when buying the iShares Barclays Capital global Inflation-Linked Bond in USD, an investor will have exposure to all currencies in the basket against his local currency. The fund’s base currency is USD, but bond currencies are not hedged against the USd or any other currency. Pricing in the secondary and primary markets will use the applicable spot rates to the USD.

For investors in France This document does not constitute an of fer or solicitation in relation to the shares of the Companies. All subscriptions for shares in a sub-fund of one of the Companies are carried out on the terms of the Company’s Prospectus, Key Investor Information document and other documents, the French addendum and the Supplements of the Companies as the case may be. Investors should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus. These documents can be obtained by contacting the paying agent of the Companies: BNP Paribas Securities Ser vices, 3 rue d’Antin, 75002 Paris, tel: 00 33 1 42 98 10 00 or by visiting the French section of www.iShares.com. The Companies are under takings for collective investment in transferable securities (“UCITS”) governed by foreign laws and authorised by the Central Bank of Ireland as UCITS complying with European regulations on 14 Februar y 2000 and 23 december 1999 respectively. The

Blackrock Advisors (UK) Limited, which is authorised and regulated by the Financial

European directive on collective investment schemes (UCITS), n° 85-611 dated 20 december

Ser vices Authorit y (‘FSA’), having its registered of fice at 12 Throgmor ton Avenue, London,

1985, established a set of common rules in order to permit the cross border marketing of

EC2N 2dL, England, Tel +44 (0)20 7743 3000, has issued this document for access by

collective investment schemes complying with the directive. This common foundation did

Professional Clients only and no other person should rely upon the information contained

not prohibit dif ferent methods of implementation. This is why a European collective

within it. iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc and iShares VI

investment scheme may be marketed in France even though the activit y of such scheme

plc (together ‘the Companies’) are open-ended investment companies with variable capital

would not respect rules identical to those which govern the approval of this t ype of product

having segregated liabilit y between their funds organised under the laws of Ireland and

in France. Please note that the distribution of shares in cer tain sub-funds of the Companies

authorised by the Financial regulator.

is not authorised in France.

For investors in Austria

For investors in Germany

The funds mentioned in this document are registered for public of fer in Austria. The sales

The sales prospectus and Key Investor Information document, as well as the annual and

prospectuses for the Companies, Key Investor Information document and other documents

semi-annual repor ts are available free of charge from Commerzbank Ag, Jürgen-Ponto-

as well as the annual and semi-annual repor ts have been published in Austria and are

Platz 1, 60301 Frankfur t. In respect of the Irish-domiciled funds, the Companies intend to

available free of charge from raif feisen Zentralbank Österreich Ag, Am Stadtpark 9, 1030

fulfil the prerequisites for treatment of their sub-funds as so-called “transparent funds”

Vienna, the Austrian paying and information agent and are also available on the website

pursuant to §§ 2 and 4 of the german Investment Tax Act (Investmentsteuergesetz – InvStg).

www.ishares.com. Any decision to invest must be based solely on the information contained

Any decision to invest must be based solely on the information contained in the Company’s

in the Company’s Prospectus, Key Investor Information document and the latest half-yearly

Prospectus, Key Investor Information document and the latest half-yearly repor t and

repor t and unaudited accounts and/or annual repor t and audited accounts. Investors

unaudited accounts and/or annual repor t and audited accounts. Investors should read the

should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus. In respect of the Irish-domiciled funds, the Companies intend to

fund specific risks in the Key Investor Information document and the Company’s Prospectus. However, it

fulfil the requirements for treatment of all of their sub-funds as ‘white’ funds. Therefore the

cannot be guaranteed that the requirements will be met. The Companies reser ve the right to give up the “

Companies have an Austrian tax representative who calculates the Austrian deemed

transparent status” and to not under take the necessar y publications.

distributed Income figures once a year and files an electronic tax return with the Austrian ministr y of Finance. However, it cannot be guaranteed that the requirements will be met in

For investors in Iceland

the future. The Companies reser ve the right to give up the ‘white’ status and to not under take

The funds mentioned in this document are not registered for public distribution in Iceland.

such tax filings.

The investment described in this memorandum is not a public of fering of securities. It is not registered for public distribution in Iceland with the Financial Super visor y Authorit y

For investors in Denmark

pursuant to the Icelandic Act on Under takings for Collective Investment in Transferable

This document is directed at Professional Investors in denmark only and are authorised by

Securities (UCITS) and investment Funds No. 30/2003 and supplementar y regulations. The

Finanstilsynet, the danish Financial Super visor y Authorit y.

investment may not be of fered or sold by means of this memorandum or any way later resold otherwise than in accordance with Ar ticle 13 of the regulation on UCITS and Investment

Any decision to invest must be based solely on the information contained in the Company’s Prospectus,

Funds No. 792/2003. This document is intended for information purposes only and does not

Key Investor Information document and the latest half-yearly report and unaudited accounts and/or annual

constitute investment advice or an of fer to sell or a solicitation of an of fer to buy the funds

report and audited accounts. Investors should read the fund specific risks in the Key Investor Information

described within and no steps may be taken which would constitute or result in a public

document and the Company’s Prospectus. Copies of all documentation can be obtained free of charge

of fering of the funds in Iceland. This document is strictly confidential and may not be

from (i) offices of the local agent in denmark, Nordea Bank danmark A /S, Strandgade 3, dK 0900 Copen-

distributed without authorisation from Blackrock Advisors (UK) Limited.

hagen C, denmark Tel: +45 33 33 33 01 Fax: +45 33 33 10 31 email: issuerservice.dk@nordea.com and (ii) on the Companies’ in-

Please read the prospectus and ensure that you are eligible to invest under the local regulator y and finan-

ternet website at the address www.iShares.com (http://www.ishares.com/ global/content/europe/ishares_

cial rules, and comply with restrictions on foreign currency investments, that exist for Icelandic investors.

danish_country_supplement.pdf and http://www.ishares. com/global/content/europe/ishares_2_dan-

We recommend that you seek independent financial advice before making any investment decision. This

ish_country_supplement.pdf ). This document is strictly confidential and may not be distributed without

document is for your information only. Accordingly, this document and relevant information may not be

authorisation from Blackrock Advisors (UK) Limited. In line with most other non-danish funds, the iShares

used for any other purpose or passed on to any other person in Iceland. The funds described in this docu-

range will not have distributor status under danish tax law, for which reason investors will generally be

ment are not registered for public distribution in Iceland and may not be of fered, sold or resold to the pub-

subject to tax based on the annual change in value of their investment irrespective of whether iShares are

lic in Iceland. Any decision to invest must be based solely on the information contained in the Company’s

sold or not (mark-to-market taxation). For individuals this may be less tax efficient than upon investment in

Prospectus, Key Investor Information document and the latest half-yearly repor t and unaudited accounts

a comparable danish investment fund with distributor status.

and/or annual repor t and audited accounts. Investors should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus.

For investors in Finland The funds mentioned are registered for public distribution in Finland and are authorised by

For investors in Ireland

the Finanssivalvonta (Fiva), the Financial Super visor y Authorit y (FIN-FSA), in Finland. Any

This document is strictly confidential and may not be distributed without authorisation from

decision to invest must be based solely on the information contained in the Company’s

Blackrock Advisors (UK) Limited. With respect to funds that are registered for public of fer in

Prospectus, Key Investor Information document and the latest half-yearly repor t and

Ireland, impor tant information on the Companies is contained in the relevant Prospectus,

unaudited accounts and/or annual repor t and audited accounts. Investors should read the

Key Investor Information document and other documents, copies of which can be obtained

fund specific risks in the Key Investor Information document and the Company’s Prospectus.

by calling 0845 357 7000, from your broker or financial adviser, by writing to Blackrock

This document is strictly confidential and may not be distributed without authorisation from

Advisors (UK) Limited, iShares Business development, 12 Throgmor ton Avenue, London,

Blackrock Advisors (UK) Limited.

15

2012 Q3

iShares/BlackRock

Trading Fixed Income ETFs EC2N 2dL or by writing to the manager of the Companies: Blackrock Asset management

registered of fice: 12

Ireland Limited, New Centur y House, International Financial Ser vices Center, mayor Street

Throgmor ton Avenue, London, EC2N 2dL. registered in England No. 2020394. Tel: 020 7743

Lower, dublin 1, Ireland. Investors should read the fund specific risks in the Key Investor

3000 Website: blackrock.co.uk. For your protection, telephone calls received by Blackrock

Information document and the Company’s Prospectus.

Investment management (UK) Limited are usually recorded. Blackrock is a trading name of Blackrock Investment management (UK) Limited. Any decision to invest must be based

For investors in Israel

solely on the information contained in the Company’s Prospectus, Key Investor Information

Blackrock Advisors (UK) Limited is not licensed under Israel’s regulation of Investment

document and the latest half-yearly repor t and unaudited accounts and/or annual repor t

Advice, Investment marketing and Por tfolio management Law, 5755-1995. No action has

and audited accounts. Investors should read the fund specific risks in the Key Investor

been or will be taken in Israel that would permit a public of fering or distribution of the Funds

Information document and the Company’s Prospectus.

mentioned in this document to the public in Israel. The Funds mentioned in this document have not been approved by the Israeli Securities Authorit y. In addition, the Funds mentioned

For investors in Luxembourg

in this document are not regulated under the provisions of Israel’s Joint Investment Trusts

The Companies have been notified to the Commission de Sur veillance du Secteur Financier

law, 5754-1994 (the “Joint Investment Trusts Law”). This document has not been approved

in Luxembourg in order to market their shares for sale to the public in Luxembourg and the

by the Israel Securities Authorit y and will only be distributed to Israeli residents in a manner

Companies are notified Under taking in Collective Investment for Transferable Securities

that will not constitute “an of fer to the public” under sections 15 and 15a of the Israel

(UCITS). The Companies have not been listed on the Luxembourg Stock Exchange, investors

Securities Law, 5728-1968 (the “Securities Law”) or section 25 of the Joint Investment

should contact their broker for fur ther information. Investment is subject to the Prospectus,

Trusts Law, as applicable.

Key Investor Information document and all documents (the main/umbrella Prospectus, the Supplement[s], the latest and any previous annual and semi-annual repor ts of the

The document is being of fered to those categories of investors listed in the First Addendum (the

Companies and the memorandum and Ar ticles of Association of the Companies) will be

“Addendum”) to the Securities Law, (“Institutional Investors”); in all cases under circumstances that will fall

available in the Luxembourg, free of charge, from the of fices of the Local Agent, BNP Paribas

within the private placement or other exemptions of the Joint Investment Trusts Law, the Securities Law

Securities Ser vices, Luxembourg Branch 33, rue de gasperich Howald – Hesperange L-2085

and any applicable guidelines, pronouncements or rulings issued from time to time by the Israel Securities

Luxembourg or by visiting the website on www.iShares.com. Investors should read the fund

Authorit y. This document may not be reproduced or used for any other purpose, nor be furnished to any

specific risks in the Key Investor Information document and the Company’s Prospectus.

other person other than those to whom copies have been sent. Nothing in this document should be considered investment advice or investment marketing as defined in the regulation of Investment Coun-

For investors in Norway

selling, Investment marketing and Por t folio management Law, 5755-1995. This document does

The funds mentioned are registered for public distribution in Norway and are authorised by

not constitute an of fer to sell or solicitation of an of fer to buy any securities, nor does it constitute an of

Kredittilsynet, the Financial Super visor y Authorit y of Norway. Any application for shares in

fer to sell to or solicitation of an of fer to buy from any person or persons in any state or other jurisdiction in

the funds is on the terms of the prospectus, Key Investor Information document for the

which such of fer or solicitation would be unlaw ful, or in which the person making such of fer or solicitation

Companies. Any decision to invest must be based solely on the information contained in the

is not qualified to do so, or to a person or persons to whom it is unlaw ful to make such of fer or solicitation.

Company’s Prospectus, Key Investor Information document and the latest half-yearly repor t and unaudited accounts and/or annual repor t and audited accounts. Investors

For investors in Italy

should read the fund specific risks in the Key Investor Information document and the

Any application for shares in the funds is on the terms of the prospectus, Key Investor

Company’s Prospectus. This document is strictly confidential and may not be distributed

Information document, for the Companies. The Shares of cer tain sub-funds in the

without authorisation from Blackrock Advisors (UK) Limited.

Companies have been admitted to listing in Italy and are currently listed on the mercato Telematico Fondi of Borsa Italiana S.p.A. The list of the sub-funds listed in Italy, the

For investors in Spain

Prospectus, of the Companies, the documento di quotazione of the iShares funds, the latest

The funds mentioned are registered for public distribution in Spain the sales prospectus has been

annual and semi annual repor t of the Companies are published (i) on the Companies’

registered with the Spanish Securities market Commission (Comisión Nacional del mercado de

internet website at the address www.iShares.com (ii) on the Irish Stock Exchange internet

Valores (‘CNmV’)). The funds which are registered in the official registry of the Spanish Securities

website at the address www.ise.ie and (iii) on Borsa Italiana S.p.A’s website at the address

and Exchange Commission (CNmV) are iShares plc (registration number 801), iShares II plc

www.borsaitalia.it. These documents are available for the public in Italian version with

(registration number 802) and iShares III plc (registration number 806). In order to check which

cer tification that such documents are a faithful translation of the original documents.

subfunds pertaining to the aforementioned funds are registered for public distribution in Spain,

Investors are entitled to receive free of charge, even at home, a copy of the above documents,

the official registry CNmV must be always previously checked. Any decision to invest must be

upon written request forwarded to the Companies. Investors should read the fund specific

based solely on the information contained in the Company’s Prospectus, Key Investor Information

risks in the Key Investor Information document and the Company’s Prospectus. For

document and the latest half-yearly report and unaudited accounts and/or annual report and

comprehensive information on the expenses charged to a fund and fees applicable to

audited accounts, copies of which can be obtained free of charge on the Companies’ internet

investors, see the documento di quotazione and the Prospectus.

website at the address www.iShares.es. Investors should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus.

For investors in Jersey This promotional material may not be of fered to the public in Jersey and only persons to

For investors in Sweden

whom it has been directly communicated by Blackrock Advisors (UK) Limited or its

The funds mentioned are registered for public distribution in Sweden and are authorised by

appointed agent may accept the of fer contained herein. The consent or approval of the

Finansinspektionen, the Swedish Financial Super visor y Authorit y. Any application for

Jersey Financial Ser vices Commission to or of the fund, the promoter or the distribution of

shares in the funds is on the terms of the prospectus, Key Investor Information document,

this promotional material in Jersey is not required and has not been obtained.

for the Companies. Impor tant information on the Companies is contained in the relevant Prospectus, Key Investor Information document and other documents, copies of which can

Blackrock Advisors (UK) Limited is not licensed or authorised under the Financial Ser vices (Jersey) Law

be obtained free of charge from of fices of the local agent SEB, merchant Banking, Custody

1998. This document is communicated to Jersey residents by Blackrock Advisors (UK) Limited in reliance

Ser vices, global Funds, rB6, rissnelden 110, SE-106 40 Stockholm, Sweden, Telephone:

on exemptions for cer tain overseas persons provided for by the Financial Ser vices (Jersey) Law 1998 and

+46 8 763 5960, Fax + 46 8 20 10 96. Any decision to invest must be based solely on the

its subordinate legislation.

information contained in the Company’s Prospectus, Key Investor Information document and the latest half-yearly repor t and unaudited accounts and/or annual repor t and audited

The consent or approval of the Jersey Financial Services Commission (under the Control of Borrowing (Jer-

accounts. Investors should read the fund specific risks in the Key Investor Information

sey) Order 1958 or otherwise) to or of the Funds / [ETCs] mentioned in this document or the distribution of

document and the Company’s Prospectus.

this document in Jersey is not required and has not been obtained.

For investors in Switzerland Issued by Blackrock (Channel Islands) Limited, (authorised and regulated by the Jersey Financial Ser vices

The Swiss Financial market Supervisory Authority FINmA has authorised Blackrock Asset

Commission). registered of fice: 4th Floor, One Waverley Place, Union Street, St. Helier, Jersey, JE1 0Br.

management Schweiz Ag, Claridenstrasse 25, 8002 Zurich, to act as Swiss representative and

registered in Jersey, Channel Islands No. 5719. Blackrock investment ser vices provided by Blackrock

JPmorgan Chase Bank, National Association, Columbus, Zurich branch, dreikönigstrasse 21,

Investment management (UK) Limited (authorised and regulated by the Financial Ser vices Authorit y).

8002 Zurich, to act as Swiss Paying Agent of the Company. The prospectus, Key Investor

16

2012 Q3

iShares/BlackRock

Trading Fixed Income ETFs Information document, the Articles of Incorporation, the latest and any previous annual and

Euro Corporate Bond ex-Financials and iShares Barclays Capital global Inflation-Linked Bond (‘the funds’) are not sponsored, endorsed, sold or promoted by Barclays Capital and Barclays

semi-annual reports of the Company are available free of charge from the Swiss representative. Investors

Capital makes no representation regarding the advisability of investing in the funds.

should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus.

markit iBox x is a registered trade mark of markit Indices Limited and has been licensed for use by Blackrock Advisors (UK) Limited. markit Indices Limited does not approve, endorse or recommend Blackrock

For investors in the Netherlands

Advisors (UK) Limited or iShares plc. These products are not sponsored, endorsed or sold by markit Indices

The Companies have been notified to the Authority Financial markets in the Netherlands in

Limited and markit Indices Limited makes no representation regarding the suitabilit y of investing in these

order to market their shares for sale to the public in the Netherlands and the Companies are,

products.

accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 dutch Financial markets Supervision Act of Investment Institutions. The Companies will consequently,

iShares® and Blackrock® are registered trademarks of Blackrock, Inc., or its subsidiaries in the United States

in respect of such notification, be subject to the Netherlands Act on the Supervision of

and elsewhere.

Investment Institutions, regulations enacted pursuant thereto and the supervision thereunder of the Authority Financial markets. The Companies have been admitted to listing on the stock

© 2012 Blackrock Advisors (UK) Limited. registered Company No. 00796793. All rights reser ved. Calls may

exchange of Euronext Amsterdam N.V. and are, consequently, subject to the regulations of

be monitored or recorded.

Euronext Amsterdam N.V. Copies of all documents (the main/umbrella Prospectus, Key Investor Information document, the Supplement[s], the latest and any previous annual and semi-annual

© 2012 Blackrock, Inc. All rights reser ved. BL ACKrOCK, BL ACKrOCK SOLUTIONS, AL AddIN, iSHArES,

reports of the Companies and the memorandum and Articles of Association of the Companies)

LIFEPATH, SO WHAT dO I dO WITH mY mONE Y, INVESTINg FOr A NEW WOrLd, and BUILT FOr THESE TImES

will be available in the Netherlands, free of charge, from the offices of the representative in the

are registered and unregistered trademarks of Blackrock, Inc. or its subsidiaries in the United States and

Netherlands, Blackrock Advisors (UK) Limited – dutch Branch, rembrandt Toren, 17th floor,

elsewhere. All other trademarks are those of their respective owners.

Amstelplein 1, 1096 HA Amsterdam, Netherlands or by calling the dutch representative’s information request line on 0800 0233 466. Investors should read the fund specific risks in the Key Investor Information document and the Company’s Prospectus.

Contact us

For investors in the UK most of the protections provided by the UK regulator y system do not apply to the operation

For more information on iShares ETFs, please visit our website on www.iShares.com

of the Companies, and compensation will not be available under the UK Financial Ser vices Compensation Scheme on its default. The Companies are recognised schemes for the

Alternatively, please call us on :

purposes of the Financial Ser vices and markets Act 2000. Any decision to invest must be

• From Sw1tzerland : 0800 33 66 88 • From t he Netherlands: 0800 0233 466 • From the UK: 0845 357 7000

based solely on the information contained in the Company’s Prospectus, Key Investor

• From Germany and Austria: +49 (0) 89 42729 58 58 • From Luxembourg g: +31 20 560 09 33 • From Italy:

Information document and the latest half-yearly repor t and unaudited accounts and/or

800 898085

annual repor t and audited accounts. Investors should read the fund specific risks in the Key

• From Spain : +34 91 788 94 00 • From Den mar k: 80 88 48 45 • From Fin land: 0800 918 277 • From Norway:

Investor Information document and the Company’s Prospectus.

800 14 3 24 • From Sweden: 020 796238 • From lsrael: +44 207 743 1 659

Restricted Investors

www.iShares.com • ISHARES

This document is not, and under no circumstances is to be construed as an adver tisement or any other step in fur therance of a public of fering of shares in the United States or Canada.

This document is not aimed at persons who are resident in the United States, Canada or any province or territor y thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulator y authorit y. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ErISA Plan.

Risk Warnings Investment in the products mentioned in this document may not be suitable for all investors.

Past per formance is not a guide to future per formance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be af fected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change.

Blackrock has not considered the suitabilit y of this investment against your individual needs and risk tolerance. The data displayed provides summar y information, investment should be made on the basis of the relevant Prospectus which is available from Blackrock Advisors (UK) Limited.

In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an of fer to sell or a solicitation of an of fer to buy the securities described within. This document may not be distributed without authorisation from Blackrock Advisors (UK) Limited.

Index Disclaimers ‘Barclays Capital’ is a trade mark of Barclays Capital, the investment banking division of Barclays Bank PLC (‘Barclays Capital’), and is used by Blackrock Advisors (UK) Limited under licence. With a distinctive business model, Barclays Capital provides corporates, financial institutions, governments and supranational organisations with solutions to their financing and risk management needs. Barclays Capital compiles, maintains and owns rights in and to the Barclays Capital Euro Corporate ex Financials Bond Index and Barclays Capital World government Inflation-Linked Bond Index (together the ‘indices’). iShares Barclays Capital

17

2012 Q3

BLACKROCK

BNP Paribas

Indexing: Don’t Miss The Trend!

Index fund management has gained much media attention in recent years, not least for the astonishingly rapid growth of the ETF market. However, we believe that there are more compelling reasons for the increasing presence of index products in institutional portfolios, as stand-alone investments or as bricks of a broader asset allocation portfolio.

Index fund management is relatively new to the fund management arena, its origins dating back only to the early 1970s. When one remembers that the birth of hedge funds dates back to the 1920s and that of private equity to the 1940s, we can appreciate how young indexing is. Indeed, the index fund management sector has yet to reach maturity: the undeniable success of ETFs in recent years is still spawning innovations for the whole asset management industry, both in terms of asset classes covered, easy market access and quick implementation of investment decisions.

Thirty years of debate Since the launch of the first index fund, much has been written about the relative merits of active management versus index management. After thirty years of debate, it is now well-recognised that these two investment approaches are not competing with one another. On the contrary, index products can be viable tools for active managers to gain quick and cheap exposure to specific asset classes, sectors, styles, countries, and so on.

With just one trade, the active manager can implement his views in his portfolio – opening or increasing exposure to Brazilian or Chinese equities, for example – without any of the operational issues he would face if he had to implement these portfolios himself.

We are well aware of this trend within THEAM: indeed, we see increasing numbers of active managers investing in our tracker and indexed funds and ETFs. This has led us to taking the decision a few years ago to significantly broaden our offer in order to keep pace with the increasing sophistication of clients’ needs.

Since then, we have widened our product offer to include new asset classes, new geographic regions and new investment themes. In doing so, we strived to keep the innovative edge that allowed us to launch the first real estate ETF on the market in 2004, the first commodities ETF in Europe in 2005 and the first infrastructure ETF in 2008.

While listed real estate funds are well suited for investors looking for income via their high dividend yields, commodity ETFs have the advantage of being lowly correlated to traditional asset classes and offer a hedge against inflation. Historical data show that commodities are the best performing asset class during periods of high inflation.

ETFs tracking global infrastructure indices benefit from public expenditure aimed at repairing or replacing aging infrastructure facilities in developed countries. Over the last 10 years, the NMX 30 Infrastructure Global index outperformed the MSCI World index with an annualised performance of 18.69% versus 5.43% for the reference global equity benchmark. This outperformance is well illustrated in the graph below.

400 350 300 250

100 50 0 31/07/2002

31/07/2004

31/07/2006

Source: Bloomberg, as of 31/07/2012

18

2012 Q3

This alternative to traditional market cap weighted indices has gained increasing popularity among institutional investors in recent months. Pension funds, in particular, are reallocating part of their equity exposure towards these smart beta strategies.

Nevertheless, not all approaches are equivalent and risk/returns profiles of “smart indices” on the same underlying can vary considerably from one index to another.

One of the reasons for that is that index providers impose more or less constraints to the index construction, diluting the Sharpe Ratio improvement effect.

As the product offer in this segment grows very rapidly, investors may get confused by the variety of optimisation techniques (min variance, max diversification, equal risk contribution, fundamental strategies, etc.). At THEAM, thanks to our in-house expertise in quantitative techniques we are well equipped to advise those investors in making the right choice based on their specific needs and constraints.

Replicating the indices – THEAM’s agnostic view We believe we bring an innovative approach in the choice of replication methodology – full, optimised or synthetic replication, as we take an agnostic view on indexing. We are convinced that the most cost-efficient technique can only be identified only after an in-depth analysis of factors such as index composition, market access, liquidity of underlying securities, fund domiciliation, tax rates, transaction costs, etc.

Any of the three replication methodologies can be implemented in different formats: ETF, index fund, dedicated fund or mandate.

For instance, for a mandate benchmarked against the MSCI World, an index including more than 1 600 firms, we use an optimised statistical approach to reduce transaction costs.

Thanks to their intrinsic qualities (cost-efficiency, liquidity and transparency), indexed vehicles have become an essential tool as core building blocks in portfolio allocation or to quickly implement tactical trading strategies into a portfolio.

MSCI World EUR

150

Our latest fund is a further example of our focus on innovation. Our investment objective is to closely follow the performance of a non capital-weighted index among a recently launched family of smart beta indices that are sometimes also referred to as optimised or alternative beta indices in academic literature. The idea behind this class of indices is that it is possible to identify better indices, in terms of Sharpe ratio, than traditional capital weighted ones, which are no longer unanimously considered efficient indices by the academic community.

Unlike traditional indices for which the weights of the underlying securities are based on their respective market capitalisations, these new indices include other criteria to take account of the riskiness of the constituents or the fundamentals. This created new benchmarks that should deliver a better expected return for the same level of risk, or a better profile of risk for a given level of expected return. We can cite FTSE EDHEC Risk Efficient indices and MSCI Minimum Volatility indices as examples of this new kind of indices.

Conclusion

NMX 30 Infrastructure Global EUR

200

Smart beta’ solutions gain ground over traditional market cap indices

31/07/2008

31/07/2010

31/07/2012

BNP Paribas

Indexing: Don’t Miss The Trend!

This material is issued and has been prepared by THEAM* a member of BNP Paribas Investment Partners (BNPP IP)**.

This material is produced for information purposes only and does not constitute: 1.

an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection

with any contract or commitment whatsoever or 2.

any investment advice.

This material makes reference to certain financial instruments (the “Financial Instrument(s)”) authorised and regulated in its/their jurisdiction(s) of incorporation.

No action has been taken which would permit the public offering of the Financial Instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material, as applicable, of the relevant Financial Instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such Financial Instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the Financial Instrument(s).

Investors considering subscribing for the Financial Instrument(s) should read carefully the most recent prospectus, offering document or other information material and consult the Financial Instrument(s)’ most recent financial reports. The prospectus, offering document or other information of the Financial Instrument(s) are available from your local BNPP IP correspondents, if any, or from the entities marketing the Financial Instrument(s).

Opinions included in this material constitute the judgment of THEAM at the time specified and may be subject to change without notice. THEAM is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted.

Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

Given the economic and market risks, there can be no assurance that the Financial Instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in Financial Instrument(s) may go down as well as up. Investors may not get back the amount they originally invested.

The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes. *THEAM is an investment manager registered with the “Autorité des marchés financiers” in France under number 04000048, a simplified joint stock company with a capital of 8.317.840 Euros with its registered office at 1, boulevard Haussmann 75009 Paris, France, RCS Paris 428 753 214 and is member of the Association Française de la Gestion Financière (AFG), a professional body for third-party asset management in France. www.theamfunds.com ** BNP Paribas Investment Partners is the global brand name of the BNP Paribas group’s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.

Guido Stucchi Head of Indexing and Global Quant Strategies at THEAM

19

2012 Q3

Š PIP Reviews 153 Fenchurch Street London, EC3M 6BB

Phone : +44(0)207 220 0440 Fax : +44(0)207 220 0445 Email : info@pipreviews.com Website : http://www.pipreviews.com

20

2012 Q3