Etf october 2015 lr2

www.etf-magazine.com FIRST EDITION OCTOBER 2015 ISSUE 01

A G u i d e t o E x c h a n g e Tr a d e d F u n d s

CHALLENGES, OPPORTUNITIES AND SOLUTIONS FOR ADVISERS IN THE CURRENT MARKET

SMART BETA

EXPLAINED

FOR TODAY’S DISCERNING FINANCIAL AND INVESTMENT PROFESSIONAL / LATEST NEWS October 2015 · www.etf-magazine.com 1

05 Editor’s Welcome

A year to remember, by Michael Wilson, Editor

06 News

A monthly round-up of ETF news from ETF Securities and Roubini Global Economics

08 Getting Back to Basics

WisdomTree Europe sets out how ETFs work and how they can benefit your clients

22 Talking Point: Robo-advice

Friend or foe? ETF Securities looks into the future in this month’s talking point

ROBO ADVice p22 25 Currency Conundrum

Deutsche Bank talks about why currency matters in our internationalised world

29 Know your ETF portfolios

JM Finn explains why Socrates would have loved ETF portfolios

32 Featured ETFs

Currency Conundrum P25

We pick a selection of ETFs from around the world to highlight some available funds

12 Hot Topic: Smart Thinking

State Street Global Advisors delve into this month’s hot topic: smart beta

18

38 ETF Doctor

ETF expert Christopher Mellor on how to utilise smart beta

Pricing Point

Vanguard explores the cost effectiveness of ETFs and the charges to look out for

ETF Magazine is published by

IFA Magazine Publications Limited, The Old Wheelwrights, Ham, Berkley, Gloucestershire GL13 9QH ETF Magazine is for professional advisors only. Full subscription details and eligibility criteria are available at www.etf-magazine.com +44 (0)117 9089 686 ©2015. All rights reserved.

Editor: Michael Wilson editor@ifamagazine.com Publishing director: Alex Sullivan alex.sullivan@ifamagazine.com Design: Fanatic www.fanaticdesign.co.uk ETF Directory: To place a ETF directory lisitng please contact: richard.morris@ifamagazine.com simon.broch@ifamagazine.com

ETF Magazine is a trademark of IFA Magazine Publications Limited.

No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies, independent research and where necesary legal advice should be sought before acting on any information contained in this publication.

October 2015 · www.etf-magazine.com 3

Intelligent access Commodities FX Equities Fundamental fixed income via our partnership with Lombard Odier Asset Managers

We offer one of the most comprehensive ranges of specialist exchange traded products (ETPs) providing a range of exposures from delta 1 through to short and leveraged.

etfsecurities.com This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited which is authorised and regulated by the United Kingdom Financial Conduct Authority. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

Short and/or leveraged exchange-traded products are only intended for investors who understand the risks involved in investing in a product with short and/or leveraged exposure and who intend to invest on a short term basis. Potential losses from short and leveraged exchange-traded products may be magnified in comparison to products that provide an unleveraged exposure.

ED’S WELCOME

A Year to Remember A Few Words From Michael Wilson, Editor

In a year when so many of the global financial markets have been wrecked by uncertainty about everything from China to the US bank rate to the depressed state of the global oil market, it’s remarkably good to be able to report that one sector of the investment scene is up and growing strongly. And, moreover, that, just for once, the very best growth is happening on this side of the Atlantic.

That’s what this, the first ETF magazine from IFA Publications, is here to celebrate. Today, almost 26 years since the first exchange traded funds (ETFs) were listed in Canada, the ETF concept is finding favour among both institutional and private investors – for its cost-effectiveness, its simplicity and its success in accessing entire market sectors at the click of a mouse. Here in Britain, the liquidity, the absence of stamp duty on purchases and the ultra-low total costs of ETFs make them especially attractive.

New Variants Did we say simplicity? As we’ll see, the ETF market is moving out of its original, conservative forms into new variants which embrace risk in carefully-metered quantities. We’ll be hearing a lot more in the coming years about enhanced beta funds, and about new variants on the traditional synthetic ETFs which hold derivatives rather than actual share portfolios. We’ll also be finding out about specialist ETFs which can get an investor into places where he can’t go on his own – such as the Shanghai A shares market, for instance.

For many advisors, these exotic variants are for the future: for the time being, bread-and-butter index-tracking ETFs will provide more than enough of a learning curve. But let’s not make any mistake: the sheer weight of client demand will soon ensure that any IFA who doesn’t know his ETF basics will eventually find himself at a disadvantage.

the last record set during the same three quarters of 2014.

What’s interesting here, I think, is that Europe and Japan are currently growing so much faster than the United States, which can be considered a relatively mature market. The US has just short of $2 trillion of ETF assets, easily four times as much as Europe; yet Europe raised its new investments by 30% during the first three quarters, compared with only an 8.5% increase in America. Japan’s 143% growth was even more heart-stopping, albeit from a lower starting point.

All told, the Global ETF/ETP industry had 5,978 ETPs in September, with global assets of US$2.8 trillion being managed by 270 providers listed in 51 countries.

The Future This, in other words, is no short-term flash in the pan.

Instead, it’s a global phenomenon which all advisers in the UK are now expected to understand in the whole-of-market sense. But at ETF Magazine we appreciate that there’s a lot to learn. That’s why we’ll be featuring regular tutorials and explanatory features on all the many new variants, alongside surveys of the more traditional forms.

Please write to me at editor@ifamagazine.com, and let me know what you think of ETF Magazine. If you’ve got queries about anything at all, send them to me. I’ll look forward to hearing from you.

Sincerely Michael Wilson - Editor in Chief, IFA Magazine

Huge Growth Let’s start with some headline figures. In September, according to ETFGI, global investors allocated a stunning US$32 billion in net new assets to ETFs and ETPs (including their cousins, exchange traded commodities and exchange traded notes). That was the twentieth successive month of positive net inflows, and it brought the year to date figure for inflows to a staggering US$251 billion - a 25% increase over

Sept 2015 · www.etfmagazine.com 5

ETF

News

A Round Up of The Latest Industry News

Fed May Hike, But US Treasury Yields Are Going to Drop

UBS Launches Sustainable US Corporate Bond ETF on LSE

If central banks ever get around to hiking interest rates, they will do so only very slowly, one of the world’s largest brokers predicted on Thursday.

In fact, almost regardless of what official rates in the US do, long-term market rates are headed lower, Steven Major at HSBC said in a research report sent to clients.

Major predicted the yield on the benchmark 10-year US Treasury note would end 2015 at 2.1% and fall to 1.5% towards the end of 2016, despite the risk of the US FOMC hiking rates in December.

Those forecasts were 38 and 153 basis points less, respectively, than expected by the Bloomberg consensus.

“We recognise that the risk of a December hike remains but the bond’s valuation is also a function of what happens afterwards.”

Major also saw the European Central Bank stuck in easing mode “well beyond” the end of 2016. The ECB would be forced to increase its easing plans, with its looser policy expected to weigh not only on euro area yields but also on those Stateside.

The strategist made a ‘neutral’ call on emerging market fixed income, saying it was cautious on countries including Brazil, Malaysia, South Africa, Turkey and Russia due to their negative rating trajectories, but looking at names such as Korea, India and Hungary revealed “a more positive story”.

Lastly, it was time to buy short-dated inflation linked debt across all the major markets: the US, Eurozone and UK. ETF

UBS Global Asset Management says that the UBS ETF (LU) Barclays MSCI US Liquid Corporates Sustainable UCITS ETF is the first sustainable fixed income ETF to be listed on the London Stock Exchange by UBS ETFs. It tracks the Barclays MSCI US Liquid Corporate Sustainable Index which targets fixed-rate, investment grade, taxable, USD-denominated securities issued by US corporate issuers with an MSCI ESG (environmental, social and governance) rating of BBB, or higher.

The index includes publicly issued securities from industrial, utility and financial companies that meet specific maturity, credit quality, liquidity and ESG requirements.

Included securities must have been issued within the previous two years. The index limits the exposure of each issuer to 5% of the total market value and redistributes the excess market value index-wide on a pro rata basis. Excluded are securities issued by corporations whose business activities are inconsistent with socially responsible investing criteria.

Head of UBS ETF sales UK and Ireland Andrew Walsh said: “Demand for ethical investments continues to grow not only in the equities space, but also in fixed income. Our new ETF listing is a reflection of meeting clients’ needs for an easy to access US corporate bond product that tracks an index which screens for companies which have strong ESG profiles. This launch adds to our growing suite of ethical ETFs following the recent listing of the UBS ETF MSCI Japan Socially Responsible UCITS ETF.” ETF

BlackRock Slashes Passive Fees - Hargreaves Lansdown’s Reaction BlackRock has slashed the fees on five key tracker funds.

On four of the funds in question, the fees have been chopped by 50%, or more. The cuts came into force on 11th August.

BlackRock’s passive fund range is made up of a total of 17 trackers and prices remain unchanged on the other 12 funds.

These include their popular corporate bond and emerging market equity funds.

Hargreaves Lansdown’s head of passive investments Adam Laird said: “BlackRock has halved the fees on some of its most popular tracker funds, which is fantastic news for thousands of investors whose charges have been slashed. These are good quality funds at a competitive price.

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“There is still further ground to be gained in the passive price war, though the arms race in UK and US equities means that battles are likely to rage on new fronts, such as in corporate bonds and emerging markets. There are also some passive providers who are simply sitting in their bunkers and hoping no-one notices they are charging way above the going rate for their funds.

“We haven’t made any changes to our Core Tracker Fund List as a result of BlackRock’s price cut. While the reduction is substantial we already have cheaper options available from Legal & General in each of the areas in question”. ETF

ETF Highlights

More ETF Cuts as Vanguard Removes Costs

Some highlights from the ETF Securities research team and Roubini Global Economics which discusses policy divergence and the Fed’s ‘Lift-Off’.

• The attention of investors is dominated by EM turbulence and speculation about the Federal Reserve’s tightening cycle. Our view on the most likely timing of the Fed’s first rate hike has moved to December. Given current turbulence and market volatility there is a risk of further delay into early 2016 but the speed and duration of hikes after the first rate rise in nine years is still more important than the initial lift off. Persistent disinflationary pressures have made a delay until December increasingly probable, while a slower-than-normal “normalisation” path after the first hike is a near certainty.

• The first hike and messaging will set the tone for the longer normalisation cycle. The Fed seems likely to be followed in tightening by the Bank of England, even as other key central banks (in Europe and Japan) ease further.

Shortly after the news that BlackRock had slashed the fees on five of its ETFs, Vanguard has announced that it has removed the upfront cost on five of its funds.

Vanguard has removed the dilution levy on their LifeStrategy range of funds. These consist of five multi asset funds which combine bonds and equity in fixed proportions by investing in Vanguard’s trackers. Formerly charged at 0.1%, the dilution levy was charged on all purchases and covered the funds’ transaction costs.

Head of passive investments at Hargreaves Lansdown said: “Vanguard’s move is more evidence of providers battling for position in this rapidly growing market.

“There is a real dearth of options for passive mixed asset funds, with few contenders beyond Vanguard’s LifeStrategy range and BlackRock’s Consensus funds. Although not traditional tracker funds, these funds are a low cost way for passive investors to buy a diversified portfolio in one trade.

Active-multi asset funds have raised their head above the parapet but active, often short term, asset trading makes these considerably more expensive.” ETF

Roubini Global Economics commented: “Investors’ attention is dominated by speculation about the Fed’s tightening cycle. Our view is that “lift-off” will happen in December with persistent disinflation keeping a delay until Spring 2016 possible. Keep in mind that the speed and duration of hikes after lift-off is more important.”

On the implications for commodities and FX, ETF Securities commented: “We feel that currency reforms will continue and that the knee jerk market reaction will fade. Most markets, particularly commodities and commodity currencies, should begin to stabilise. We expect that as investors begin to see the volatility moderate that currencies like the Canadian dollar and the Norwegian Krone will begin to post gains, especially if the oil market begins to experience support at depressed price levels.” ETF

Europe’s First Cyber Security ETF Launches ETFS ISE Cyber Security GO UCITS ETF is the result of a partnership between ETF Securities and ISE ETF Ventures.

It’s intended that the ETF will provide exposure to the fast-growing global cyber security industry. This is a market which is forecast to grow at a compound annual growth rate of over 9.8% to $170bn by 2020.

US near-equivalent PureFunds ISE Cyber Security ETF (HACK) has, since its launch ten months ago, attracted over US$1.1bn The firms claim that this ETF will provide investors with a simple, liquid and cost effective way to gain access to this high profile and rapidly growing sector.

Co-Head of Canvas at ETF Securities Howie Li said: “We are delighted to partner with ISE ETF Ventures to launch this innovative ETF in an exciting growth sector. With the success that ISE ETF Ventures has found bringing this exposure to the US market, this investment solution will provide European investors with a global portfolio of listed cyber security companies that capture activity from both emerging and established organisations.

“The dynamic world of disruptive technologies continues to advance and ETF Securities will continue to focus on harnessing the growth opportunities highlighted by technological advances and industry trends with new and innovative products.”

Head of ISE ETF Ventures Kris Monaco said: “As cyber crime continues to grow, governments and companies are prioritising cyber security as an essential investment. With 42.8 million cyber attacks in 2014 and global cyber crime costing an estimated $400 billion[ii] this is a sector we can expect to dominate headlines and corporate budgets.

The ISE Cyber Security UCITS Index demonstrates our continued commitment to growth and expansion in the indexing and ETF space. ETF

October 2015 · www.etf-magazine.com 7

Introduction to ETFs: How ETFs work, the main features and advantages Nizam Hamid, head of sales, WisdomTree Europe

ETFs represent one of the most revolutionary innovations in terms of investment products over the past two decades. They bring substantial benefits to individual investors in terms of ease of investing, transparency and low cost investment strategies in a manner that was previously unheard of. ETFs as a product have grown substantially with assets in the US ETF market having reached over £1.3 trillion, while in Europe they hit a record high of £325 billion at the end of July 2015.

In the US market, flows into ETFs have outpaced flows into mutual funds consistently over the past 10 years. ETF flows have grown 56% per annum compared to only 12% for mutual funds.

This rapid growth in the US market means that ETFs currently account for over 15% of all mutual fund assets. In Europe over the past five years, ETF assets have grown from 2.7% of mutual fund assets to 3.5%. Additionally, there are a number of key changes to the European regulatory environment, similar to the Retail Distribution Review (RDR) in the UK, that are likely to encourage the use of ETFs in the long run.

WHAT ARE ETFS? The best way to consider the core features of UCITS ETFs is that they are transparent funds tracking indices, across a number of asset classes, and which, due to being listed on an exchange, offer both ease of investment and intraday liquidity and market access. In addition to these advantages with respect to choice and liquidity, ETFs typically have a 8 October 2015 · etfmagazine

lower total cost of ownership than equivalent mutual funds.

As the ETF market has grown, so has the choice of asset class and investment style available to investors. There are now close to 1,500 ETFs in the European market with over 750 listed on the London Stock Exchange.

ACCESSING INDICES In the equity space, investors have access to traditional market capitalisation-weighted indices across individual markets such as the FTSE 100, S&P 500 and DAX, regional benchmarks such as the Euro STOXX 50, FTSE Europe and broad global benchmarks that track both developed and emerging market indices from both MSCI and FTSE. In the equity space there are also a growing number of ETFs that track alternatively weighted indices that focus on different types of strategies. Some of the more common new indices include income strategies that are built on dividends, fundamental indices focusing on factors such as quality and value and others where there are a combination of different styles.

ETFs also track a growing number of fixed-income indices covering UK government bonds, Eurozone sovereign debt and US treasuries. One area that has gathered significant assets among UK investors has been corporate debt and high yield. These products have experienced consistent flows, particularly during the current prolonged low interest rate environment.

REPLICATING THE INDEX

TRANSPARENCY AND ACCESS

An important aspect of ETFs is understanding how they track their indices and deliver returns as close to the index as possible. The most prevalent form of ETF is one that physically owns the underlying assets that are in the index.

Known as physical replication the funds use cash from investors in the fund to buy the underlying securities in the index. In very straightforward indices such as the FTSE 100 and the S&P 500 it is common for the funds to fully replicate the index. This means that they will own all the underlying securities in exactly the proportions that they exist in the index and they will monitor and track accurately changes to the index. This ensures that the ETF will deliver performance that is in line with that of the index, after the fees associated with managing the ETF. In the case of extremely broad indices covering global markets, and particularly hard to access emerging markets, physical ETFs will still hold the underlying securities.

However they are likely to hold a sample of securities that is representative of the index rather than the index in its entirety. This form of replication is designed to track the index in an efficient way that manages the trade-off between full index coverage and total cost of managing all the securities in the index.

Irrespective of the form of index replication one of the great benefits of ETFs is the transparency that they offer investors. In the case of physical ETFs, the holdings of the fund are visible on a daily basis giving investors total visibility of the portfolio that the fund is invested in. This high level of transparency compares favourably with active funds where disclosure is on a much less frequent basis.

One of the key features of ETFs, and one that has helped make them so successful, is that they are listed on an exchange and trade just like a normal stock. This provides users with direct access to a broad basket of underlying securities in a single trade. Trading on exchange is a process that is managed efficiently through a combination of market makers, who make prices on screen and provide liquidity, together with authorised participants who can interact with the fund. This trading infrastructure and ecosystem is key to both the liquidity that investors can access on the exchange, together with ensuring that ETF prices trade in a tight range close to the asset value of the underlying securities in the ETF.

ETFS AS A PRODUCT HAVE GROWN S U B STAN TI ALLY £1.3 TRILLION *Source: Deutsche Bank/ Ibbotson ETF/ London Stock Exchange

US ETF MARKET*

££325 BILLION EUROPEAN ETF MARKET

ETF FLOWS HAVE GROWN 56% PER ANNUM COMPARED TO ONLY 12% FOR MUTUAL FUNDS IN THE US MARKET OVER 10 YEARS 1,500 ETFS IN THE EUROPEAN MARKET WITH OVER 750 LISTED ON THE LONDON STOCK EXCHANGE.

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FOCUS ON THE TOTAL COST OF OWNERSHIP OF AN ETF RATHER THAN JUST THE HEADLINE TOTAL EXPENSE RATIO LIQUIDITY ETFs are open-ended funds which means that shares in the fund can be created and redeemed on demand to satisfy flows in the market. This creation and redemption mechanism is key to ensuring that ETFs trade as close as possible to their fair value and that any ETF price discrepancies can easily be arbitraged. This ensures that investors receive the most efficient pricing for their ETFs. It is important to understand that ETF liquidity is mainly a function of the liquidity of the securities that are held by the ETF. The liquidity and trading volumes that are often seen in the market do not represent the full picture. The best way to consider this is to take the example of an ETF tracking a broad index such as the FTSE 100. In this instance the ETF should be as liquid as the securities in the FTSE 100 index that it tracks. The bid/ask spread, the difference between the price one can buy and sell the ETF, should also reflect the bid/ ask spread of the underlying securities. Similarly for an ETF that tracks small cap securities on a global basis, the liquidity will reflect the ability to trade the basket of underlying equities across all the individual markets.

COST ETF users should focus on the total cost of ownership of an ETF rather than just the headline total expense ratio (TER). An ETF can have a low TER but only once all the other costs are taken into account; specifically how the ETF performs versus the index it tracks, the bid/ask spread and other costs such as trading commission and custody, will the investor know the full cost. Understanding the components of cost is actually relatively easy given that ETFs are very transparent with respect to spreads on exchange and performance.

ACCESS ON PLATFORMS As ETFs have become increasingly popular they have become more widely available on the main platforms used by IFAs. This is an important factor which will enhance usage by IFAs, so that that they can build ETFs into portfolio strategies.

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Platforms in some instances offer real time market access to trade ETFs, while in other cases they aggregate orders at the end of day. Those platforms that have historically had better access to the LSE may offer better opportunities to trade ETFs. As the market evolves and as ETF assets take a larger share of overall mutual fund assets, it is likely that platforms will provide even wider access and availability of ETFs.

BUILDING BLOCKS OF A PORTFOLIO Their efficiency means ETFs lend themselves to being used as the main building blocks within asset allocation models.

Academic research has shown the inherent benefits of both diversification across asset classes in a portfolio and within asset classes. Investors can focus on broad allocations at low cost, especially in comparison to mutual funds. When building asset allocation models some of the key elements to focus on are the type of asset class exposure, how easy it is to efficiently rebalance the portfolio – something that even if done relatively infrequently can be done most efficiently using the on-exchange pricing and liquidity provided by ETFs. As ETFs track indices there is a reduction in the risks associated with active manager selection, in addition at a portfolio level, there are no behavioral or styles biases outside of the asset allocation decision.

ETFs allow investors to build low cost asset allocation solutions for long term portfolios. Due to their flexibility and features such as on exchange liquidity, ETFs also allow investors to manage risk allocation and broad diversification. As the ETF market grows, the choice of product will increase and so investors will be have wider access to even more sophisticated strategies and investment styles.

As the fastest growing area in the asset management industry, ETFs offer many advantages with a focus on low cost, efficient trading and innovation. ETF

Adviser’s Alpha (you make the difference)

At Vanguard we believe in the value of advice. Our research shows that you add about 3% a year in value to your clients’ returns.

To find out more about our Adviser’s Alpha research and how it can help you demonstrate your value to clients, visit: Vanguard.co.uk/AdvisersAlpha or call 0800 917 5508 for more information.

Vanguard - committed to advisers vanguard.co.uk

This information is directed at professional investors and should not be distributed to, or relied upon by retail investors. This information is designed for use by, and is directed only at persons resident in the UK. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. © 2015 Vanguard Asset Management, Limited. All rights reserved.

VAM-2015-01-05-2264

HOT TOPICS

Smart Beta Alexi Marinof, Managing Director of State Street Global Advisors And Emea Head of SPDR ETFS

Smart beta is a well-known catch-all phrase for describing a third-way for investment management that sits between passive and active investment, but scratch between the surface and you can see smart beta offers much more.

This hybrid investment solution has gained market share quickly, growing to $544 billion in global assets, which represents a five-fold increase since the 2008 financial crisis, according to Morningstar.

Here’s what you need to know: What is smart beta?

Traditional index investment strategies track indices that weight equities or bonds according to their market capitalisation. This method means that companies with the largest market capitalisation automatically have the largest weight in the index.

While this type of indexing still dominates the world of passive investing, a growing range of strategies that seek to capture certain risk premium are becoming increasingly popular because of the compelling performance advantages they can potentially offer.

These strategies are known as smart beta and are defined by an objective, consistent, transparent process for capturing a defined investment exposure.

There are many factors which smart beta strategies can focus on but the five main ones are: value, size, low volatility, quality and momentum.

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What they do Smart beta strategies are designed to capture specific returns, diversify portfolios, reduce risk or express specific investment views that may not be achievable simply by tracking capitalisation-weighted indices. They also have the potential for higher absolute, or risk-adjusted, returns than those available from more traditional indices. Significantly, these advantages are combined with the transparency, predictability and low costs of traditional passive investing.

Decades of academic research show that it is possible to have strong long-term performance by focusing on specific factors or exposures and not necessarily following an index construction centred on market capitalisation. The academic research behind Smart beta strategies exists from the 1970s and tests date back even further.

Comparing smart beta to active strategies Historically, investors may have paid an active manager to identify low value stocks, for example. However indices are now available that enable investors to target the value premium but without paying an active manager to do so, while benefitting from the transparency, predictability and low cost advantages of passive investing.

Using a smart beta strategy could be an attractive proposition when compared to an active strategy where the main source of alpha from an active manager is not actually alpha but rather a systematically targetable factor such as lower valuation.

Active investing involves many judgement calls and decisions. It is likely to be more dynamic in terms of trading and high turnover, factors that will act as a drag on performance. These processes add multiple layers of complexity for investors. In contrast, smart beta is systematic and rules-driven, and is a great low-cost way to access these factor premiums over the medium to long term.

What factors can be targeted?

A number of factors can be targeted through specific smart beta strategies:

Value, Size, Quality Momentum, Factors that impact performance, Risk management, Costs, Lower management fees, Lower manager search and on-going due diligence costs.

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14

Value Size Quality Momentum

Factors that impact performance

Value stocks are those that trade at a lower price than their fundamentals (earnings, sales etc.) would imply. Value stocks have been shown to outperform the broader market indices over the long term.

The size effect has been reproduced for numerous sample periods and for most major securities markets around the world. The effect observed here is that smaller capitalisation companies have tended to outperform larger capitalisation companies over the long term

Quality indices target those stocks that exhibit outstanding quality characteristics, such as profitability, earnings consistency and low leverage levels. It makes intuitive sense that higher quality companies are rewarded with better returns because they are better at deploying capital and generating wealth.

Stocks that have done well recently can carry on doing well in the near term. The momentum effect, although observable in various markets and through time, has proven difficult to capture through an index. These are high turnover strategies and in consequence can incur high trading costs, limiting their appeal for investors looking for passive-type solutions in this space.

The long-term proof is strong for smart beta strategies but their short-term performance is cyclical and they may at times lag the broader cap-weighted index. Investors who wish to implement these strategies should understand that they will behave differently to cap-weighted indices and will be positioned differently in terms of stocks, sectors and countries.

Smart beta strategies are long-term investments by nature, and may take significant risk relative to cap-weighted indices.

A solid understanding of the performance and risk profiles of these strategies will help ensure that investors do not give up on them just as they are about to deliver. This will also avoid unnecessary costs linked with strategy replacement in the portfolio. For example, during the tech bubble (September 1998 to December 1999) the MSCI Value-weighted index would have lagged the MSCI World by 6.8%. However, in the 10 years that followed it would have outperformed by 1.8% on an annualised basis. For the whole period (September 1998 – December 2012), this equates to an outperformance of 1.2% per annum.

Since the strategies perform differently to market-cap indices, the performance monitoring process needs to take this into account. Market cap-weighted indices should remain the primary reference point but due to the potential for large deviations when compared to cap-weighted, a published index that is similar in process to the strategy being managed may also need to be considered.

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Risk management

Costs Lower management fees Lower manager search

and on-going due diligence costs

The outlook for smart beta Smart investors are focusing more on outcomes than merely investment styles. The empirical evidence is strong, growing and consistent. There are also now live track records that investors can refer to when investing in smart beta.

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Long-term performance is not the only reason investors include smart beta strategies in their portfolios. The more defensive factors, such as quality and low volatility, are being used by investors as a way to limit the potential downside of their equity portfolios and help in terms of capital preservation over the long term.

A quality or low volatility allocation helps reduce overall portfolio risk but the portfolio remains fully exposed to equities. The fact that these strategies are indices means that their exposure to a given factor remains fairly constant over time. Their regular rebalancing schedule coupled with a predefined set of rules ensures consistency and predictability in terms of their exposures. Companies change and, for example, a quality company today may not be a quality company tomorrow, however, smart beta indices that target quality will rebalance to reflect such changes. In this way, smart beta indices don’t drift from their stated objective over time, in a way that an active managers might.

As purely passive approaches smart beta strategies offer a number of cost advantages:

The difference in investment management fees between a passive strategy and an active strategy is an initial hurdle that an active manager must overcome just to equal the passive manager’s return. Fees for smart beta are likely to fall between the two and significantly nearer the passive than the active end.

With a core investment in a passive portfolio, investors can reduce the number of managers and searches within a plan. Greenwich Associates estimate that it can cost a plan sponsor around 2% of its assets to fire and hire new managers. This cost is in addition to the time, effort and cost of identifying, screening, selecting, and overseeing a stable of active managers. Index funds ease this administrative burden and allow investors and plan sponsors to focus on the asset allocation decision, which drives the majority of a plan’s overall return.

As a complement to index investments, or a replacement for active, smart beta strategies can offer investors significant benefits in terms of greater return potential and/or improved diversification.

Passive investing through smart beta strategies gives investors the scope to gain efficient, cost-effective and diversified exposure to a wide range of asset classes, regions and sectors. It is a process-driven approach to gaining market exposure that can open up a wealth of additional beta opportunities, providing solutions to specific needs or novel investment opportunities that are simply not attainable from traditional index exposure. ETF

Innovation in ETFs Being independent allows us to collaborate with leading investment partners and bring fresh and innovative products to the Exchange Traded Fund market. Whether you’re looking to pick a new investment idea, or a better approach to an old one, try Source, the ETF innovators.

To find out how Source products could benefit your portfolio, speak to your adviser and visit www.sourceetf.co.uk

Source products place your capital at risk. Investors may not get back the original amount invested.

Please discuss all investments with your fi nancial adviser. Source ETFs are UCITS compliant and recognised under s.264 of the Financial Services and Markets Act 2000. You should refrain from entering into a transaction unless you have fully understood the associated risks and have independently determined that the transaction is appropriate for you. You should read all relevant prospectus information prior to investing.

The prospectus documentation describing the structure, risks and related costs of Source products is available for residents of countries where such products are authorised for sale at www.sourceetf.co.uk. Source products may not be sold to US persons. This advertisement has been issued by Source UK Services Limited, 110 Cannon Street, London EC4N 6EU, authorised and regulated by the Financial Conduct Authority.

Price Point Neil Cowell, Head of UK Retail Sales at Vanguard Asset Management

Exchange traded funds (ETFs) can be a highly costeffective way for long-term investors to gain access to markets, making them an increasingly popular choice with forward thinking advisers.

But because they have a different charging structure to OEICs, it’s worth spending some time looking beyond just the ongoing charge figure (OCF) to consider the total cost of ownership (TCO) when choosing ETFs for your clients.

While an ETF investor’s total return will be net of explicit charges like the OCF and trading costs, the ability of an index manager to track an index precisely will also impact total return. Other factors, such as securities lending, can provide additional returns, but it’s important to understand how that revenue is generated.

Style matters Some components of the TCO are recurring, such as the OCF, while others, like the bid/offer spread and stockbroker commissions, are one-off charges. As a result, an investor’s holding period and frequency of trading will affect the relative importance of each component.

For example, investors who trade regularly may find that stockbroker commissions quickly become a significant factor. For them, finding a broker with competitive fees will be paramount. On the other hand, for buy-and-hold investors, the up-front stockbroker commission fee will be insignificant and the recurring OCF will be a bigger consideration.

Ongoing charges Advisers accustomed to using OEICs will be drawn to the OCF when assessing costs.

OCFs are typically lower for ETFs than they are for OEICs, because ETFs are cheaper for fund managers to run.

Nevertheless, when comparing OCFs you need to make sure that the headline rate being advertised is more than just a short-term marketing strategy and that it’s available on the share class you’ll be using.

Stockbroker fees Because ETF shares trade on a stock market, you will pay a stockbroker commission when you invest. Choosing the most cost-effective stockbroker for ETF purposes can be a confusing business. You need to make sure that today’s top deal is still going to be available tomorrow and that there are no unexpected recurring charges lurking in the small print.

18 October 2015

Bid/offer spread ETFs also have a bid/offer spread, which is the difference between the prices at which shares are bought and sold.

While the liquidity of the underlying holdings is a key factor affecting the spread of the ETF, spreads can vary between ETFs tracking the same liquid indices. As the chart below shows, the spread can be equal to, and in some cases significantly more than, the OCF. As such, it’s a crucial component of the total cost of ownership and advisers will normally look for an ETF with a low and stable spread.

Another key differentiator between OEICs and ETFs is the role that market makers play in providing a secondary market in ETF shares. As a rule, the more market makers

FTSE 250 TCO Comparison

TER

As a rule, the more market makers an ETF has, the better the ETF’s liquidity will be. an ETF has, the better the ETF’s liquidity will be. The advantage to investors is that an ETF with a strong network of market makers should be able to trade more shares at a more competitive price – both key considerations for any investor.

Q2 Spread 50

100

50

100

Vanguard FTSE 250 UCITS ETF

FUND B

FUND C

FUND D

FUND E

FUND F

FUND G

0

October 2015 · www.etf-magazine.com 19

A moving target Indices are dynamic entities, with securities entering and departing on a regular basis as a result of new issues, mergers and bond redemptions. To track the index efficiently, the manager needs to adjust the portfolio to reflect these changes quickly and cost-effectively.

Some managers aim to complete all the necessary trades on the day that the index change takes place; others look for opportunities to trade around the change date. The latter approach can give access to better pricing or liquidity, but it can also increase risk and tracking error.

Dividends represent another set of decisions for index portfolios. For example, does the fund use futures to bridge the gap between underlying shares going ex-dividend and the dividends being paid? And what about overseas dividends – does the manager reclaim all the withholding tax due to the portfolio? The amounts concerned are typically small but, in pursuit of tight tracking, every little helps.

ETFs: a cost-effective solution for many

In summary, ETFs represent a costeffective way of establishing broad market access for many investors.

However, advisers and their clients need to understand all the potential costs of ETF ownership and weigh them against potential managers’ tracking credentials before making an informed decision.ETF

Securities lending: check the details Finally, securities lending can help to mitigate some of the costs in an ETF, but it’s important to understand the risks and pin down the figures.

For example, how much of the underlying portfolio is out on loan? How much collateral is the fund receiving, and what type? And how is the collateral being invested?

PRICE POINT

20 October 2015 · etfmagazine

Compatibility: Requires IOS 6.0 or later. Compatible with iPhone, iPad, and iPod touch. This app is optimized for iPhone 5. Available on Android.

Twenty Four Seven IFA Magazine, Britain’s premier online portal and print publication for financial advisers, has launched its ver y own app designed to help you stay up to date with all the latest financial and economic news as it happens.

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ROBO ADVISERS ARE THEY A REALISTIC THREAT?

22 October 2015 路 etfmagazine

TALKING POINT

ETF Securities Howie Li, Co-Head of CANVAS, ETF Securities

Although the image of robots programmed as financial advisers travelling up and down the country to meet clients would be an amusing sight, ‘roboadvisers’ is just a catch-all term for automated investment services.

In the past year, there has been a lot of attention on automated investment services and how they may one day displace the role of financial advisers but is this a realistic threat?

In the short-term, robo-advisers are only likely to cause minimal disruption to the traditional business model of advisers but in the long-term these investment services are likely to have a significant impact on how the wealth management industry operates in the UK. As part of this revolution, the accessibility of passive investment products, including ETPs, has increased with more investors adopting them as building blocks for asset allocation.

As with many recent advances across different business sectors, it is automation and the innovative use of ‘big data’ that is driving the growth of robo-advisers in the wealth management space. At the heart of robo-advisory are lower costs for the end client and the flexible use of ETPs for efficient portfolio allocation, including ETFs and ETCs. The fact that the automation of investment services is a highly-scalable business model for the mass-market means the service fees for clients are likely to be much lower. Although financial advisers are only just learning about how best to use ETFs in their clients’ portfolios, robo-advisers have already embraced the use of ETFs across asset classes.

strive to understand the client’s personal life so that ‘soft’ considerations can be taken into account, such as their financial priorities and how that affects their family and ongoing generations. For advisers already using third-party risk profiling tools it will already be obvious that the due diligence part of advice can be fully automated. However, while it is possible to risk profile an investment product, it remains unanswered as to whether the recommendation would be too simplistic if it does not take into account the softer considerations.

There is also the question of whether a robo-adviser can be developed with enough sophistication to do a sufficiently thorough review to fulfil the Financial Conduct Authority (FCA) suitability criteria.

There are retail investors who already take direct control of their investments through an online execution-only platform but these investors are confident in their own ability to manage money. It is the investors that build relationships with advisers and rely on them to manage their wealth that robo-advisers are targeting.

The nature of the wealth management industry is one that values relationships, which are built on a firm foundation of trust. There are likely to be investors out there who prefer to trust their investments with a specific individual or institution rather than exclusively facing an online portal.

In the past year, there has been a lot of attention on automated investment services and how they may one day displace the role of financial advisers

It’s early days and there are issues to address Can computers and algorithms fully understand a client’s investment objectives? Is automated advice a viable substitute for a face-to-face advisory process? There are a few key hurdles that, for the time being, stop the response from being a resounding ‘yes’. These include issues around sophistication, trust and adoption rates.

The best advisers understand their clients’ needs and objectives beyond the data that is provided to them. They

Ongoing development will continue The hurdles faced by automated investment services will be addressed over the medium term. As robo-advisers become more astute to the questions they need to ask and acquire more qualitative data about their clients, their capabilities to provide a more sophisticated service will increase. They will manage to codify the softer considerations into increasingly advanced algorithms.

Furthermore, it is unlikely that these algorithms will be static - they’ll continue to evolve and develop over time to meet the needs of the investor and the regulator’s expectations in finding suitable investment solutions.

October 2015 · www.etf-magazine.com 23

As big data and analytics improve, so will the development and innovation drive that will broaden the realms of service capabilities of robo-advisers to potentially include other aspects of financial planning.

With a shifting demographic that increasingly embraces social media, online shopping and web-based services, the trust and adoption rate of robo-advisers is likely to improve as well.

Over the past ten years, we have seen the public adopt online banking over in-branch services and buying financial products using price comparison tools over traditional brokers. There is no doubt that there will always remain a portion of society that will prefer human interaction around wealth management, just as they prefer to buy consumer goods from high street stores and sit with a bank manager to go through their financial options but as a proportion of the

The strong relationships that advisers build should not be underestimated population, this will only dwindle.

In the meantime, the generation born into an internetfocused world will continue to build their wealth and they will have little issue with dealing with an online interface to manage their money via their smartphone.

24

What changes can be made now?

It will take some time for automated investment services to become established in the UK. However, the wealth management industry should take note of the disruption and likelihood of success from the deep pockets of the roboadvisory businesses.

In preparation for the long-run, advisers need to minimise the competitive advantages that robo-advisers have - namely, lower cost investment solutions and the convenience of a digital interface through automation.

Using ETPs to build client portfolios is an area the wealth management industry can take action on now, if they haven’t done so already. The options available to strategically construct a portfolio range from low-fee, passive index ETPs, to discretionary active ETPs, to ‘smart beta’ ETPs that sit in between. From an efficient asset allocation approach, the key focus is for advisers to find the lowest cost product possible that gives the desired exposure to that asset class.

The use of automated risk assessment tools is already widespread but this needs to be extended to match the riskprofile with a suitable multi-asset portfolio.

Advisers can wait for risk-profiling companies to expand their offerings or build this capability internally or acquire it externally.

Access to automated tools frees up advisers’ time to develop their relationships with clients and provide a digital interface that allows investors to log on at any time, which will help clients feel that the proposition is not outdated and in line with technological developments.

Advisers should look to embrace a hybrid model, incorporating the benefits of the robo-advisers as much as possible, but improve on that by offering the human touch.

While technology can easily be replicated and improved upon, the strong relationships that advisers build should not be underestimated – after all relationships are the first line of defence against an army of robo-advisers. ETF

ETF Platforms

For Those International Investors in Equities or Bonds, Currency Matters.

Roger Bootz, Deutsche Bank Asset & Wealth Management, Head of Public Distribution of Passive Investment Products The idea that taking into consideration only the price of an overseas security could be too narrow a view was particularly evident in the first few months of 2015.

In January, the Swiss National Bank decided the franc would no longer be pegged to the euro, while in March the European Central Bank announced a significant bond purchase program. These two actions meant that the Swiss franc and the euro, as well as other currencies, became more volatile compared with their historic norms, impacting the performance of investments for investors in overseas assets.

Analysing the currency impact over a longer time frame, it is evident that currency repeatedly has a significant impact.

Between December 2012 and July 2013 the Japanese yen fell 33% against the euro, which meant the same level of loss for euro investors in yen assets. Meanwhile, US dollar investors that held euro-denominated assets between March 2014 and March 2015 suffered losses of 22% due to currency impacts. Looking at the performance of the MSCI World global equity index, in seven of the last 13 years euro investors faced currency fluctuations that were greater than share price swings. The results are even more marked in the fixed income market. As an example, a euro investor in the Barclays Global Aggregate Bond Index has more exposure to currency risk than to bond prices.

October 2015 路 www.etf-magazine.com 25

CURRENCY IS THE LARGEST, MOST LIQUID ASSET CLASS IN THE WORLD

Bank for International Settlements (BIS) in Basel calculates

$5.3 TRILLION in currency trading takes place on a daily basis, yet it ‘only’ comes to...

$220 BILLION EQUITIES

Currency: the biggest market Currency is the largest, most liquid asset class in the world. The Bank for International Settlements (BIS) in Basel calculates that $5.3 trillion in currency trading takes place on a daily basis, yet for equities and bonds it comes to ‘only’ $220 billion and $90 billion respectively.

Despite this immense trading volume, many investors do not regard currencies as a discrete investment class. Of course, securities are always listed in a particular currency, whether that is euro, US dollar, Swiss franc, sterling or another currency. That much is known. But in terms of the performance of an investment, many investors consider only the equity or bond performance, and not the relevant currency, even though it can have a considerable influence on the overall yield of an investment.

Currency hedging makes sense for private investors The question therefore is how private investors can take account of currency fluctuations for overseas investment exposures. One way is to overlay an equity or bond investment with currency hedging so as to significantly reduce volatility and even avoid potential losses if the currency of the investment devalues against the investor’s domestic currency. Currency-hedged investments are already commonplace with major investors such as pension funds and insurance companies. They tend to view reducing any currency risk as a key element of overall risk

26 October 2015 · etfmagazine

$90 BILLION BONDS

management. This allows the market risk of an equity or bond investment to be separated from the currency risk.

There are many good reasons why private investors should also become better informed about currency hedging. Many sensibly spread their investments widely in geographical terms. As such, economic developments in individual countries and regions do not have such a great impact on the portfolio as a whole, for example: If an investor implements this diversification using, for instance, an ETF investment on the MSCI World Index, he or she will be exposed to 14 different currencies. From a eurodenominated investor’s perspective, only 12% of the MSCI World Index is composed of euro-denominated equities.

Consequently, 88% of the index portfolio is dominated by international currencies, primarily the US dollar, Japanese yen and sterling. Long-term research shows that since 1999 euro investors have suffered losses in these named currencies of between 15% and 19% within a single year.

This means that, in some circumstances, even a broadly diversified index portfolio can be significantly influenced by currency fluctuations. However, investors should be aware that the flipside of currency hedging is that if their investment currency appreciates against their domestic currency then they will not benefit from that uplift.

Hedging strategies compared: futures, options, ETFs Investors can choose a variety of routes to reduce their portfolio currency risk. In general, professional investors favour currency futures and options. This is rarely appropriate for private investors as it requires in-depth technical knowledge as well as stock exchange licenses in some cases.

Experienced private investors can utilise so-called leverage products such as warrants. Nonetheless, this demands precise expertise in the workings and risks of the relevant leverage product.

A more simple solution may be to invest in an ETF that has built-in currency hedging. Typically, currency-hedged ETFs deploy a hedging instrument once each month using suitable currency derivatives to the value of the relevant fund volume.

A more simple solution may be to invest in an ETF that has built-in currency hedging As a result, currency fluctuation is significantly reduced for ETF investors without having to pro-actively implement a strategy for themselves. Over recent years the range of currency-hedged ETFs for euro and sterling investors has grown dramatically. Relevant ETFs are now available on key equity indices like the MSCI World, S&P 500 and MSCI Japan.

In the fixed income area, the scope of currency-hedged ETFs includes the Barclays Aggregate Global Bond Index, as well as indices on international sovereign bonds and inflation bonds.

There are also many currency-hedged versions of commodity ETFs. Private investors should view currencies as a separate element of a portfolio. History proves that the currency impact can often be greater than fluctuations in the share or bond price. Investing in a currency-hedged ETF offers liquid and transparent exposure to a target market while simultaneously reducing the currency risk. ETF

October 2015 路 www.etf-magazine.com 27

ETF Masterclass for Advisors

Opportunity for advisers to get face-to-face access to some of the leading tax efficient investment managers, operating in a variety of different tax efficient structures (VCT, EIS, SEIS, BPR). CPD accredited

London. The Capital Club Thursday 5th November 2015 10.00am - 1.30pm

Income Masterclass for Advisors

Opportunity for advisers to get face-to-face access to some of the leading investment managers and get the latest thinging on strategies to generate income for clients. CPD accredited

London. The Capital Club Wednesday 25th November 2015 10.00am - 1.30pm

Registration is free - Full details at www.ifa-events.com

Why Socrates would have loved etf-based portfolio construction

By Mike Mount, director of intermediary solutions at JM Finn & Co

With Greece regularly in the news I have found myself recalling some of the philosophical musings of the Ancient Greeks, particularly those of one of the forefathers of stoicism; Socrates.

The inscription over the ancient Oracle’s temple at Delphi (forerunner to today’s research departments) was ‘know yourself.’ Good advice for any age, and when Socrates visited the Oracle he was told that he was the wisest man in Athens - this surprised him as he was adamant he knew very little about the world and life generally and he had come to accept that there is very little in our lives that we actually control.

He mused over the Oracle’s praise for a while and then understood the message: the first step to wisdom is the simple acceptance that we know very little.

His focus from that day was on what he could control, such as his character, attitude and reaction to events.

the first step to wisdom is the simple acceptance that we know very little.

October 2015 · www.etf-magazine.com 29

So what has this got to do with portfolio construction using ETFs? We have observed an increasing trend in the investment mandates we are asked to build for advisers, with more becoming ETF-based, either pure passive or what we refer to as ‘core-satellite’ portfolio construction.

Here ‘core’ holdings account for the main part of the portfolio and take the form of physically backed ETFs – these are the anchor of the portfolio and deliver lowcost, diversified exposure to a range of asset classes. The ‘satellites’ are more specialised, actively managed funds which aim to deliver additional returns to their respective benchmark.

30 October 2015 · etfmagazine

The increase in demand for a ‘core-satellite’ approach is linked inextricably to the exponential increase in the use of ETFs over the last decade. What is behind this? For me something more fundamental than just the oft-quoted drivers of reduced cost and more trading flexibility is at work here - like Socrates’ awakening, I think the financial services community has reached an acceptance that we cannot control or predict much of what goes on in the markets, so let’s instead focus on the things we can.

There are so many examples of how it is fiercely difficult to predict the future with any consistency. Academic evidence has also led to a realisation that the performance of many active fund managers trying to outperform markets by predicting which stocks, sectors or regions might do best in any given year has, unfortunately, been inconsistent over various time frames, though there are, and always will be, some notable exceptions.

It was much the same in the ancient world when soothsayers tried to divine the likely outcome of a harvest or battle by reading entrails or watching the flight patterns of birds - law of numbers says that one or two of these predictions might be correct but don’t mistake that mathematical law for omniscience, skill or divine favour.

ETF-based portfolio construction is, quite simply, an approach that reflects this Socratic realisation. ETFs do not try to outperform via prediction, they simply give us exposure to a particular market or asset class. Crucially, they give us this exposure by addressing one of the only factors we can indeed control: cost. A long-term asset allocation strategy can now be constructed at around a quarter of the cost of 10 years ago. Does that matter? Over time, you bet it does - as Jack Bogle, the founder of Vanguard said: “You get what you don’t pay for”.

our world is unpredictable and continually reminds us that there is quite enough ‘market risk’ out there.

Furthermore, taking some risk off the table might also be beneficial over the longer term. As Socrates realised, our world is unpredictable and continually reminds us that there is quite enough ‘market risk’ out there without adding to it with more subjective ‘manager risk’.

An etf gives me that market, quickly, efficiently and cheaply.

Holders of an ETF do not have the added worry of wondering whether the fund manager’s tactical stance is the right one for the current market cycle, or whether the fund manager will still be running the fund in three years time.

Mankind has traded since time immemorial - much of our historical progress has come about through the benefits of trade and the markets reflect this integral part of our nature and showcase the best of mankind’s ingenuity. Yes, new industries come and go (please read ‘The Second Machine Age’ if you have kids and want them to get a job) and those that make it will become part of the market. As an investor I want exposure to that ingenuity, risk-taking and creativity because over time the market will allow me to share in those companies’ success via dividends and capital growth. An ETF gives me that market, quickly, efficiently and cheaply.

Someone at a seminar I recently attended referred to ETFs as ‘democratising’ investment management. I think Socrates would have liked that. ETF

October 2015 · www.etf-magazine.com 31

Featured ETFs We Pick a Selection of ETFs From Around the World to Highlight Some Available Funds

32 October 2015 路 etfmagazine

Cyber security has become a crucial issue in the 21st century. Cyber attacks threaten governments, companies and individuals with financial, reputational and societal damages every minute of every day. Cyber threat vulnerability is only increasing as more data, systems and people connect digitally. Since 2009 cyber attacks have increased at an annual compounded growth rate of over 66% and it is estimated that the cost of cyber crime to the global economy each year is as high as $400 billion. The increasing demand for cyber security technology has prompted a number of high profile mergers and acquisitions, further driving the stock price performance. Negative cyber attack headlines have been bullish for cyber security stock price in the short term and business growth in the long term.

Fund Summary Data

The ETF provides convenient access to a globally diversified basket of cyber security focused companies.

GO UCITS ETF Solutions plc

Issuer

Fund Top 10 Holdings

Inception Date

28/09/2015

Legal Structure

UCITS

FFRI INC

4.8%

Check Point Software Tech

4.16%

Juniper Networks Inc

4.73%

Imperva Inc

4.15%

Expense Ratio

0.75%

Trend Micro Inc

4.43%

Proofpoint Inc

4.1%

Fortinet Inc

4.37%

Palo Alto Networks Inc

4.07%

Assets Under Management

$1 M

Cisco Systems Inc

4.25%

Sophos Group Plc

4.03%

Average Spread (%)

1.03%

T: +44 (0) 207 448 4373 | E: intermediary@etfsecurities.com

UBS ETF EURO STOXX 50 UCITS ETF (EUR)

Country: United Kingdom www.ubs.com

The UBS ETF – EURO STOXX 50 UCITS ETF sub-fund is an exchange traded fund incorporated in Luxembourg. The objective of the fund is to deliver the performance of the EURO STOXX 50® Net Return and allow intraday trading.

Fund description • The fund generally invests in all equities included in the EURO STOXX 50® Index. The relative weightings of the companies correspond to their weightings in the index.

• The investment objective is to replicate the price and return performance of the EURO STOXX 50® Index net of fees. The stock exchange price may differ from the net asset value.

Fund Top 10 Holdings Total S.A.

6.2% Bayer AG

3.4%

Sanofi

5.5% Eni

3.3%

Siemens AG

4.6% Anheuser-Busch InBev

3.3%

BASF AG

4.2% Unilever N.V. CVA

3.2%

SAP AG

3.5% Banco Santander S.A.

3.2%

Fund Summary Data Inception Date

29/10/2001

Legal Structure

UCITS

Expense Ratio

0.15%

Assets Under Management

$160.3 M

T: +44 (0) 0207 567 8000 October 2015 · www.etf-magazine.com 33

*This product was recently launched on 28 September 2015.

Country: United Kingdom Sector: Technology www.etfsecurities.com

ETFS ISE Cyber Security GO UCITS ETF

Vanguard ETFs FTSE 100 UCITS ETF Income This Fund seeks to track the performance of the Index, a widely recognised UK benchmark of the UK market’s most highly capitalised blue chip companies.

Investment approach • This fund seeks to track the performance of the index, a widely recognised UK benchmark of the 100 most highly capitalised blue chip companies, representing approximately 83% of the UK market.

• The fund employs a “passive management” or indexing investment approach, through physical acquisition of securities, designed to track the performance of the index, a free-float-adjusted market-capitalisation-weighted index.

• In tracking the performance of the index, the fund attempts to replicate the index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Country: United Kingdom www.vanguard.co.uk

Fund Summary Data Inception Date

22/05/2012

Legal Structure

UCITS

Assets Under Management

£1775.6 M

Fund Top 10 Holdings HSBC Holdings PLC (UK Reg)

6.3% Vodafone Group

3.7%

Royal Dutch Shell A

4.1% AstraZeneca

3.2%

BP

4.1% Lloyds Banking Group

2.8%

GlaxoSmithKline

4.0% Barclays

2.7%

British American Tobacco

4.0% Diageo

2.7%

T: +44 (0) 800 917 5508 Country: United Kingdom Sector: Commodities www.etfsecurities.com

ETFS Longer Dated All Commodities GO UCITS ETF (COMF) Commodities are increasingly becoming a core asset class for many investors. A low correlation with other major asset classes, strong long-term fundamentals, inflation hedge properties and the development of financial instruments that ease market access have been key factors behind the rise in commodity investing.

For investors, owning physical commodities outright, however, is impractical, costly

and generally involves complicated transportation or insurance arrangements.

Some commodities can also be difficult or even impossible to store for long periods of time.

A way to access broad commodity exposure globally is through ETFS Longer Dated All Commodities GO UCITS ETF (COMF) which tracks the performance of Bloomberg Commodity Index 3 Month Forward Total Return, one of the most established commodity benchmarks.

Fund Top 10 Holdings Gold

12.22% Copper (COMEX)

6.95%

Fund Summary Data Issuer Inception Date

10/03/2015

Legal Structure

UCITS 0.30%

Natural Gas

9.69% Soybeans

5.17%

Expense Ratio

WTI Crude Oil

8.62% Aluminium

4.56%

Corn

7.92% Silver

4.23%

Assets Under Management

Brent Crude

7.89% Unleaded Gasoline

4.19%

T: +44 (0) 207 448 4373 | E: intermediary@etfsecurities.com 34 October 2015 · etfmagazine

GO UCITS ETF Solutions plc

Average Daily $ Volume Average Spread (%)

$160.3 M $11,514,919 0.3992%

Country: United Kingdom Sector: Technology www.etfsecurities.com

ROBO Global® Robotics and Automation GO UCITS ETF The age of robotics and automation is upon us. The last 30 years is called the age of computer, internet and mobile. The next 30 years will be marked as the age of robotics and automation.

Today’s robots are equipped with advanced sensing, processing and performance capabilities that will continue to reshape every aspect of our business landscape and domestic lives. Robots inspect tunnels, bridges and oil platforms. They assist surgeons, farmers and our military. They build and drive cars, explore space, package food, automate warehouses, entertain our children and perform rescue missions. Robots are ready for work and are going to work. Robots no longer just perform the repetitive dull, dangerous and dirty tasks of welding, painting and cleaning within the automobile factories. Robots are now autonomous, multipurpose and mobile with applications that cross a myriad of industry verticals and geographic regions that are truly mesmerizing.

The ETF provides convenient access to a globally diversified basket of robotic and automation technology companies.

Fund Top 10 Holdings

Fund Summary Data GO UCITS ETF Solutions plc

Issuer Inception Date

27/10/2014

Legal Structure

UCITS 0.95%

Oceaneering Intl Inc

2.05% Yaskawa Electric Corp Ord

2.03%

Fanuc Corp

2.03% Yushin Precision Equipment

2.03%

Expense Ratio

Nabtesco Corp Ord

2.03% Keyence Corp Ord

2.03%

Cyberdyne Inc

2.03% Rockwell Automation Inc

2.02%

Assets Under Management

Omron Corp Ord

2.03% Accuray Inc

2.01%

T: +44 (0) 207 448 4373 | E: intermediary@etfsecurities.com

Average Daily $ Volume Average Spread (%)

PIMCO Fixed Income Source

Inception Date

15/06/2011

Legal Structure

UCITS Open ended fund

Italy Government

4.1% Land Nordrhein-Westfalen

1.9%

SNCF Reseau

2.5% UK GILT

1.9%

Expense Ratio

UK GILT

2.3% Lloyds Bank

1.9%

Nedar Waterschapsbank

2.2% Dexia Credit

1.8%

Assets Under Management

Japan Treasury

1.9% Landerskreditbank

1.8%

T: 020 3370 1144 | E: UKinfo@SourceETF.com

0.8666%

Fund Summary Data Issuer

Fund Top 10 Holdings

$104,683

Country: United Kingdom Sector: Cash Alternative www.sourceETF.com

PIMCO Sterling Short Maturity Source UCITS ETF PIMCO and Source have teamed up to deliver the PIMCO Sterling Short Maturity Source UCITS ETF, which seeks to maximise current income consistent with the preservation of capital and a high degree of liquidity. As such, it may appeal to investors who are looking for the potential to enhance returns for their cash holdings. The ETF invests primarily in short-term investment grade debt denominated in GBP. The majority of these holdings are in investment grade corporate and government bonds, but may also include certain other types of fixed income, such as mortgage-backed securities, which are intended to capture additional yield without compromising the ETF’s safety, liquidity and volatility.

The ETF is actively managed by PIMCO, one of the world’s largest fixed income investment houses. The portfolio manager is Mike Amey.

$36.6 M

Average Daily $ Volume Average Spread (%)

0.35% £84.98 M US $91,918 0.04%

October 2015 · www.etf-magazine.com 35

Source Goldman Sachs Equity Factor Index World UCITS ETF This ETF should appeal to investors wanting a core holding in global equities, as it offers broad diversification covering 22 developed market countries. The fund aims to outperform traditional benchmarks on both an absolute and a riskadjusted basis, while seeking to control country and regional risk compared to relevant market cap weighted indices. The fund emphasises five well-known and academically supported factors: low beta, size, quality, value and momentum.

Research shows that each factor has delivered outperformance versus the market cap weighted indices over the long term. Unlike other multi-factor funds on the market, this fund weights the five factors so that each factor contributes an equal amount of risk, taking into account the correlation between them. The objective is a portfolio that is more diversified and more efficient than one that simply aggregates individual factor strategies.

Source Goldman Sachs Equity Factor Index Europe UCITS ETF is also available.

Fund Top 10 Holdings

Country: United Kingdom Sector: Global Equities www.sourceETF.com

Fund Summary Data Issuer

Source Markets plc

Inception Date

08/01/2014

Legal Structure

UCITS Open ended fund

Reynolds American

0.48% Johnson & Johnson

0.45%

Estee Lauder

0.46% Foot Locker

0.45%

Expense Ratio

Nestle

0.46% Swiss Re

0.45%

Ultra Salon Cosmetics

0.45% PNC Financial Services

0.45%

Assets Under Management

Goodyear Tire & Rubber

0.45% National Oilwell Varco

0.44%

Average Daily $ Volume

0.65% $587.27 M $670,000

Average Spread (%)

T: 020 3370 1144 | E: UKinfo@SourceETF.com

iShares Emerging Markets Local Government Bond UCITS ETF Income

0.21%

Country: United Kingdom www.ishares.co.uk

The Fund aims to achieve a return on your investment, through a combination of capital growth and income on the Fund’s assets, which reflects the return of the Barclays Emerging Markets Local Currency Core Government Bond Index, the Fund’s benchmark index (Index).

Shares are exchange traded funds (ETFs) managed by Blackrock and are listed on the London Stock Exchange. That means you can buy an iShare through a broker as you would buy any ordinary share. ETFs are a simple and cost-effective way to gain exposure to the market you need. Using ETFs as building blocks, you can spread the risk of individual companies, entire sectors or even whole countries suffering losses. However, they will not mitigate all market risk, and you can still lose some, or all of your investment should the value of the underlying shares decrease.

Fund Top 10 Holdings BRAZIL (FEDERATIVE REPUBLIC OF) 2.5% THAILAND (KINGDOM OF)

1.7%

BRAZIL (FEDERATIVE REPUBLIC OF)

2.1% THAILAND (KINGDOM OF)

1.5%

THAILAND (KINGDOM OF)

2.1% THAILAND (KINGDOM OF)

1.5%

BRAZIL (FEDERATIVE REPUBLIC OF)

1.9% BRAZIL (FEDERATIVE REPUBLIC OF) 1.3%

SOUTH AFRICA (REPUBLIC OF)

1.8% HUNGARY (REPUBLIC OF)

Fund Summary Data Inception Date

20/06/2011

Legal Structure

UCITS

Expense Ratio

0.50%

Assets Under Management

$1922.6 M

1.1%

T: +44 (0) 845 357 7000 | E: info@ishares.co.uk Information correct at time of press, as provided on Funds Library

October 2015 · www.etf-magazine.com 37

ETF Doctor Dr Christopher Mellor, CFA - Equity Product Specialist at Source

In a recent poll of more than 100 IFAs in the UK, we found that almost two-thirds of those currently recommending ETFs are using simple index trackers, otherwise known as market beta. Such ETFs provide low cost exposure to major benchmarks like the FTSE 100, S&P 500 or various MSCI indices. Only around 11% of the IFAs surveyed are currently using smart beta ETFs, but we believe their use could be set to rise.

Pick up any investment publication and you are likely to find something about smart beta. The popularity of smart beta funds has resulted in nearly $500 billion being invested globally in smart beta ETFs. However, there is still plenty of debate, even about the name, with at least a dozen different terms being used today. What is most important, in our opinion, isn’t what to call it, but how to use these funds. To do this, we must first understand what they are designed to do.

The smart beta universe is quite broad and diverse, but we believe it can be split into two categories: strategies and tools.

Strategies may be able to replace traditional market cap weighted indices.

Examples include funds that provide similar exposures to a particular market, but filter and/or weight components by characteristics other than just market capitalisation. A fund may filter by any number of factors, such as dividends, quality, value and/or momentum. It may then weight the components by the contribution they each make to the portfolio’s risk or even something as simple as giving them an equal weight.

The aim of these strategies will be to deliver better returns than a market-cap weighted index, either on an absolute or a risk-adjusted basis. As such, these smart beta funds may fit into portfolios as long-term strategic holdings.

Tools offer something different. They are much more specialised, targeting a specific theme or segment of the market.

Only around 11% of the IFAs surveyed are currently using smart beta ETFs An example would be a fund that includes only those companies within an index that are primarily exporters, that is they derive a certain percentage of their revenues from abroad. An investor would expect this sort of company to perform well in certain environments, but not so well in others. Because of the nature of their returns, these funds may fit into portfolios as shorter-term tactical holdings, enabling investors to express particular views in the right conditions.

One way to determine whether a fund is a strategy or tool is to ask, “does it aim to outperform on its own, or does it enable an investor to fine tune their portfolio to achieve overall outperformance?” Both types of smart beta funds can fit easily into a portfolio, with strategies being core holdings and tools being used as and when needed.

We believe that smart beta funds can be used not only to improve the risk-adjusted performance of a portfolio, but being that they are passive investments, they should be able to do so with lower costs than actively managed funds. ETF Source: Morningstar, using Strategic Beta classification, to the end of June 2015.

38 October 2015 · etfmagazine

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We look forward to welcoming you to London Capital Club T: 0207 717 0088 E: enquiries@londoncapitalclub.com A: 15 Abchurch Lane, London EC4N 7BW W: www.londoncapitalclub.com Find Us:

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ubs.com/etf For marketing and information purposes by UBS. For Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances. This document has been issued by UBS AG, a company registered under the Laws of Switzerland. Issued in the UK by UBS Global Asset Management (UK) Ltd, authorised and regulated by the Financial Conduct Authority. This document is for distribution only under such circumstances as may be permitted by applicable law. The products or securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Source for all data and charts (if not indicated otherwise): UBS Global Asset Management. Š UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. E8