exchange traded funds (etfs) - cfa institute · global etf market growth (aum & no. of funds)...
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For Professional Investors Only - Not for Public Distribution
Exchange Traded Funds (ETFs)
Philip PhilippidesiShares Head of UK/IRE Institutional [email protected] (+44 207 668 8942)
Claus HeiniShares Business Development [email protected] (+44 207 668 8458)
1For Professional Investors Only - Not for Public Distribution
Introduction to ETFsI. ETF FundamentalsII. ETF GrowthIII. ETF UsersIV. ETF Primary and Secondary Markets
Strategies using ETFsI. Core/SatelliteII. ETF Overlay on pure Alpha portfolios III. Sector StrategiesIV. Shorting ETFsV. Distilling Alpha in L/S portfolios
Agenda
For Professional Investors Only - Not for Public Distribution
Introduction to ETFs
3For Professional Investors Only - Not for Public Distribution
ETFs Behave Like Any Other Shares on the Exchange…- Can be bought, sold short and/or lent out - Trade intra-day across various exchanges (NYSE, LSE, DB, Euronext)- Have on-exchange and OTC market makers
…But Provide Exposure Like an Index- Constructed to reflect performance of a benchmark- Offer diversification reducing stock-specific risks- Are completely transparent portfolio holdings- Have low expense ratios- Are open-ended with a creation/redemption feature that helps drive liquidity
I. ETFs Are Index Funds Which Are Listed & Traded Like a Stock on Major Stock Exchanges Globally
ETFs are not DerivativesETFs are not Derivatives
4For Professional Investors Only - Not for Public Distribution
I. How Are ETFs Used?
Market Exposure: Implement wide variety of investment strategies using a broad range of market exposures
Directional Views: Establish broad directional market position, use long & short trades to implement market view(s)
Core Satellite: Achieve strategic focus
Rebalancing: Correct drift in a portfolio’s asset allocation or style
Completion: Add uncorrelated instruments and/or asset classes to strategy
Interim Beta : Maintain exposure to given market while searching for specific market opportunity
Cash Management : Able to invest cash rapidly and cost effectively to gain desired market exposures
Derivatives Alternative : Broad opportunity set of Delta 1 exposures with single line cash based settlement
Exposure Management : Easily shift portfolio emphasis by adjusting exposures (e.g. duration, credit)
Thematic : Implement thematic exposures (e.g. dividends, alternatives)
Strategic
Tactical
5For Professional Investors Only - Not for Public Distribution
Transparency
Flexibility
Diversification
Liquidity
Cost Effectiveness
ETFs offer a cost-effective route to diversified market exposure (139 benchmarks)The average total expense ratio (TER) for equity ETFs in Europe is 46 bps versus 100 bps (per annum) for the average equity index tracking fund and 191 bps (per annum) for average active equity fund1
ETF units and underlying assets can be lent out to potentially offset holding costs
ETFs are listed on exchanges and can be traded at any time the market is openPricing is continuous throughout the day
ETFs provide immediate exposure to a basket or group of securities for instant diversificationBroad range of asset classes including equities, bonds, commodities, Investment Themes etc
ETFs offer two sources of liquidity− Traditional liquidity measured by secondary market trading volume − The liquidity of the underlying via the creation and redemption process
Securities Lending
I. Why Are ETFs Used?
Investors know the ETF composition at any given time
1. Lipper Fitzrovia (December 2006)
6For Professional Investors Only - Not for Public Distribution
0
100
200
300
400
500
600
700
800
900
2000 2001 2002 2003 2004 2005 2006 2007
AUM$B
0
100
200
300
400
500
600
700
#ETFs
US AUM Europe AUM Rest of World AUMUS #ETFs European #ETFs Rest of World #ETFs
Global ETF AUM Is Forecast to Reach $2Tr by 2011Global ETF AUM Is Forecast to Reach $2Tr by 2011
Global ETF Market Growth (AUM & No. of Funds)
US CAGR (2000-2007) = 36%
Europe CAGR (2000- 2007) = 113%
Global CAGR (2000-2007) = 37%
Source: Morgan Stanley, Exchange Traded Funds – Industry Snapshot – End of November 2007, 17 December 2007
II. ETF Growth: The Global ETF Market Has Experienced Strong Growth Since 2000
7For Professional Investors Only - Not for Public Distribution
International/EM
14%
Fixed Income 14%
Regional Eurozone
20%
Global3% Country (US)
4% Regional (Europe)
6%
Commodities2%
US Sector>1%
Country (Europe)
24%
European Sector
6%
Style7%
Sector 12%
Growth 7%
Value6%
Fixed Income 6%
Broad Market 4%
Mid-Cap4%
Commodities<1%
Small Cap 4%
Custom<1%
International 29%
Large Cap28%
II. ETFs Today Provide a Broad Range of Potential Exposures
European ETF Assets by Type of Exposure
US ETF Assets by Type of Exposure
Source: Morgan Stanley Investment Strategies, Bloomberg
8For Professional Investors Only - Not for Public Distribution
0
500
1000
1500
2000
2500
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Europe US
Number of Users
Growth of Institutional Users of ETFs
US CAGR = 30%
Europe CAGR = 45%
III. ETF users: More Institutional Users are Using ETFs
Strong year-on-year growth in Institutional users - across both US and Europe
Growth fuelled by:- Increasing familiarity
with ETFs- Increasing availability of
ETFs & Improving liquidity- Continued product
innovation
Strong growth continuing through 2007
Source: Thomson Financial, Morgan Stanley Investment Strategies
9For Professional Investors Only - Not for Public Distribution
0
50
100
150
200
250
300
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Number of Hedge Funds Holding ETFs
Source: Edhec European ET Survey; Morgan Stanley, Exchange Traded Funds – Q3 2007Global Industry Review (November 2007)
Current trends:
- 36% increase in the number of hedge funds using ETFs over the past year
- 66% increase of average daily global ETF shares traded (2007 YTD)
- 131% increase of average daily global ETF value traded (2007 Q1-Q3)
III. Hedge Funds Have Only Started to Use ETFs
10For Professional Investors Only - Not for Public Distribution
IV. ETF Primary and Secondary Markets
Secondary MarketPrimary Market
BGI
iSha
res
ETF
Securities
Exchange
Cash (OTC)ETFMarket
Makers/Broker
Cash
Investor/Client
iShares ETFiShares ETF
11For Professional Investors Only - Not for Public Distribution
IV. Delta 1 Products Comparison
Single dealerExchange / Multiple dealersExchange / Multiple dealersLiquidity provided
DerivativeDerivativeFundLegal structure
NoNoYesAvailable to lend
FixedQuarterlyNoExpiry
Variable on exposure1 contract1 shareMinimum trade size
NoNoYesTracking error
Financing Roll Total Expense RatioHolding cost
None if held to expiry; break fee on notional
CommissionCommissionRound trip execution costs
ETFs Futures Swaps
12For Professional Investors Only - Not for Public Distribution
Client
Lending ETF units
iShares lent out
iShares put in Securities Lending
programme
Lending revenue received
Borrower pays lending fee
Similar to individual securities, demand for borrowing iShares units is subject to market forces. Some iShares units are more attractive to borrow*The net revenue that is paid into the funds depends on the fee split arrangement in place. All iShares investors benefit from Securities Lending returnsinside iShares funds where lending is possible
Lending iShares unitsiShares investors may lend out their
iShares units to generate extra revenue
Lending inside ETF fund
Borrower
Lending agent/custodian
Individual securities lent out
ClientUnderlying shares
deposited with custodian
Lending fee is rebated into iShares Funds*
Borrower pays lending fee
Lending the underlying assetsAll iShares investors benefit from Securities Lending
returns inside iShares funds where possible
Borrower
BGI/iShares custodian
IV. The Double Benefit From Securities Lending
13For Professional Investors Only - Not for Public Distribution
-35
32
27
24
-40
-20
0
20
40
60
80
TER Sec Lending Revenue Excess Return
Lending Units
Lending Inside
iShares DJ EURO STOXX 50
-40
68
28
-60
-40
-20
0
20
40
60
80
100
120
TER Sec Lending Revenue Excess Return
Lending Units
Lending Inside
Lending the assets inside the fund and the iShares units can help offset the TERLending the assets inside the fund and the iShares units can help offset the TER
iShares FTSE 250
IV. Case Study: Double Benefit of Sec Lending
Source (Returns inside the fund): BGI, most recent audited financials (US audited 31/08/07, DJ Euro Stoxx 50 30/09/2006, all other Dublin iShares as of28/02/07). (Units returns): BGI and Performance Explorer, information on www.performanceexplorer.com (10/2007). Figures represent the gross lending yieldpre-split and any applicable fees. The terms of the lending arrangement between the iShares units holder and the lending agent/custodian is at theirdiscretion. The rates represent current market levels and are subject to market forces. Past and current performance is not an indication of the future.
14For Professional Investors Only - Not for Public Distribution
IV. Lending of iShares Units
High lending yield generated for assets in difficult to borrow markets (e.g. MSCI Emerging Markets, MSCI Brazil)
Lending liquidity is higher in the US market (on loan balances)
There is an active lending market for iShares as demonstrated by the high market on-loan balances
iShares units are increasingly becoming a popular shorting alternative
* Source: BGI and Performance Explorer, information on www.performanceexplorer.com, as of 10/2007. ** Total on-loan value of the asset in the market***Lending yield refers the gross returns BGI currently sees in the market expressed in basis points (BPs). AUM data – source:BGI, as of 31/10/2007
0.75%0.21%$45MSCI Emerging Markets
0.35%0.32%$141DJ EURO STOXX 50
0.15%0.17%$254DAX (DE)
0.40%0.27%$247FTSE 100
0.40%0.67%$313FTSE 250
TERCurrent Lending Yield***
Market on-loan balance (US$M)**
European iShares * AUM (US$M)
$1,753.79
$6,101.29
$5,047.01
$3,706.58
$605.19
15For Professional Investors Only - Not for Public Distribution
IV. European ETF Trading Volumes Example
28M
32M
61M
63M
69M
73M
149M
152M
200M
iShares DJ Euro Stoxx 50
iShares DAX (DE)
Lyxor ETF DJ Euro Stoxx 50
Lyxor ETF DAX
iShares FTSE 100
Lyxor ETF CAC 40
iShares DJ Euro Stoxx 50 DE
Lyxor Gold Bullion Securitie
XACT Bear
27MITRIX DJ Euro Stoxx 50
Top 10 Traded ETFs by Volume European ETFs do not break into the top 10 traded equities by volume egtop 3 equities
− ENI SpA (c. 2.1B)− Banco Santander (c. 2.0B)− Telefonica (c 1.9B)
However, top European ETF funds are as tradable as major stocks within the top 100 ranks such as:
− Unilever (206M)− Sainsbury (193M)− Cadbury (192M)
The secondary market volumes are small but increasing
Trading Volume LiquidityAll numbers are in US$Source: Bloomberg, All data as of as of 31 October 2007, average daily trading volume
=
16For Professional Investors Only - Not for Public Distribution
IV. And a Note on Primary Market Liquidity...
None of this flow is traded directly with BGI – majority is traded OTC with sell side dealers
US$61.5BUS$8.1BUS$58.2BiShares PrimaryMarket Activity
Gross Activity 2007
Net Activity2007
Current AUM (Equity + Fixed Income)
For Professional Investors Only - Not for Public Distribution
Investment Strategies using ETFs
18For Professional Investors Only - Not for Public Distribution
1. Lipper Fitzrovia (December 2006)
Portfolio Construction
Strategic Asset Allocations
Portfolio Management
Cash Equitization
Manage inflows, outflows, transitionsObtain a wider exposures than offered by other Delta 1 products
Fill allocations required by investment strategy Improve diversificationGain exposure to size, style, yield, sector, geography
Active risk budgeting Combine ETFs in managing total portfolio volatility or duration adjustments in fixed income portfolios
Establish core holdingsEstablish single country or sector satellites
Implement short-, long- term and/or neutral market views − Hard to access asset classes, themes, sector, country− Tactical Asset Allocations
Exposure Exposures to markets or asset classes where one has no expertise or operational capabilities
Risk Control
ETFs Offer Solutions for a Range of Portfolio Strategies
19For Professional Investors Only - Not for Public Distribution
Investment Strategies Using ETFs
I. Core/Satellite
II. Sector Strategies
III. ETF Overlay on pure Alpha portfolios
IV. Shorting ETFs
V. Distilling Alpha in L/S portfolios
20For Professional Investors Only - Not for Public Distribution
I. Core-Satellite : Optimal Way to Combine Passive and Active Management
The essential part of the portfolio passively replicates benchmark
Meanwhile, high active management fees are paid out on the whole portfolio
Due to restrictive constraints, managers might only allowed to deviate slightly from their benchmark
As a result, only a limited part of portfolio is actively managed
Global Portfolio Return
Passively Managed
Typically made up of pure index product
Less efficient
Actively Managed
Typically invested in lest efficient markets
Requires specialized expertise
ω* Satellite (1- ω)*Coreßα
+
21For Professional Investors Only - Not for Public Distribution
Active Strategy
2
Active Strategy
3
Active Strategy
1
ETF(s)
ETF Satellite
ETF Satellite
ETFSatellite
Portfolio
I. Core-Satellite: ETFs Can be Used in the Core Portfolio, As Well As In the Satellite
ETF(s) in the Core : - A broad market index
(DJ Euro Stoxx 50, MSCI World,iBoxx Government Bond)
- Exposure to diversified baskets - of securities- Optimized Core: sector, style or
country indices
ETF in the Satellite :- Concentrated, focused ETFs:- Sector and style - Individual countries and regions - Alternative asset class
22For Professional Investors Only - Not for Public Distribution
Risk
Return
Core + Satellite Active satellites
I. Core-Satellite: ETFs Can Enhance Risk Adjusted Portfolio Returns
Original Core Portfolio
Optimized Core
SatellitesActive investment decisions (alphas): aim at shifting the efficient frontier Objective: outperform the reference benchmark for a given level of risk
COREOptimal strategic asset allocation decisions (betas): allow investors to achieve optimal trade-off Objective: generate lowest possible risk for given expected return
23For Professional Investors Only - Not for Public Distribution
I. Core-Satellite Portfolio Construction
Core Portfolio
Optimized Core Portfolio
Optimized Core + Satellite Portfolio
Volatility = 10.17Annualized Return = 13.52%
Volatility = 9.89Annualized Return = 13.18%
Volatility = 10.67Annualized Return = 18.19%
North America
North America
Europe ex-UK
UK
Japan
Pac ex Japan
EU ex UK
Oil & Gas
EM
MidCap
Pac ex Japan
UKJapan
Top-Down/Bottom UpPortfolio composition
24For Professional Investors Only - Not for Public Distribution
I. Core-Satellite: ETFs Can Enhance Risk Adjusted Portfolio Returns
0
5
10
15
20
25
30
35
Return
Risk
8.5 9 9.5 10 10.5 11 11.5 12
Mid Cap Satellite
12.5
Oil & Gas Satellite
13
Emerging Markets Satellite
Original PortfolioOptimised Core Portfolio
Optimised Core + Satellite Portfolio
13.5 14
Source: BGI
25For Professional Investors Only - Not for Public Distribution
II. Sector Investing With ETFs
Active portfolio managers tend to have a top down/bottom up approach to the equity market valuations for stock selection
Sectors follow cyclical patterns and managers:- Focus research efforts on favourable sectors from top down valuations to pick stocks- Gain exposure and manage risk vs less favourable sectors by purchasing stocks with
the larger market weights in the sector
Stock picking strategy is not risk free: individual stock portfolio could under or over perform the intended exposure
26For Professional Investors Only - Not for Public Distribution
85
90
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100
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26/0
5/20
06
16/0
6/20
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07/0
7/20
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28/0
7/20
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8/20
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08/0
9/20
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29/0
9/20
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20/1
0/20
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10/1
1/20
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01/1
2/20
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22/1
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12/0
1/20
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02/0
2/20
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23/0
2/20
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16/0
3/20
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06/0
4/20
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27/0
4/20
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18/0
5/20
07
Single Stocks Oil & Gas. Port.
DJ Stoxx 600 Oil & Gas
90
95
100
105
110
115
120
125
26/0
5/20
06
16/0
6/20
06
07/0
7/20
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28/0
7/20
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18/0
8/20
06
08/0
9/20
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29/0
9/20
06
20/1
0/20
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10/1
1/20
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01/1
2/20
06
22/1
2/20
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12/0
1/20
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02/0
2/20
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23/0
2/20
07
16/0
3/20
07
06/0
4/20
07
27/0
4/20
07
18/0
5/20
07
Single Stocks Banking Port.
DJ Stoxx 600 Banks
Single Stocks Banking Port. Port. Wght. Index Wght.HSBC HOLDINGS PLC 48,3% 11,7%UBS AG-REG 26,9% 6,5%ROYAL BANK OF SCOTLAND GROUP 24,8% 6,0%
100,0% 24,2%
ReturnVolatility (ann.)
Single Stocks Banking Port.
4,9%13,1%
DJ Stoxx 600 Banks
18,7%15,1%
Single Stocks Oil & Gas Port. Port. Wght. Index Wght.BP PLC 46,2% 32,2%TOTAL SA 29,1% 20,3%ROYAL DUTCH SHELL PLC-A SHS 24,6% 17,1%
100,0% 69,6%
ReturnVolatility (ann.)
-0,5%
Single Stocks Oil & Gas Port.
DJ Stoxx 600 Oil & Gas4,3%
16,0% 16,0%
II. Sector Strategies: ETFs or Single Securities?
Source: Banca IMI (banca del gruppos Intesa Sanpaolo, May 2007)
27For Professional Investors Only - Not for Public Distribution
90
95
100
105
110
115
120
125
130
26/0
5/20
06
16/0
6/20
06
07/0
7/20
06
28/0
7/20
06
18/0
8/20
06
08/0
9/20
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29/0
9/20
06
20/1
0/20
06
10/1
1/20
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01/1
2/20
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22/1
2/20
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2/20
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23/0
2/20
07
16/0
3/20
07
06/0
4/20
07
27/0
4/20
07
18/0
5/20
07
Single Stocks Telecom Port.
DJ Stoxx 600 Telecom
95
100
105
110
115
120
125
130
26/0
5/20
06
16/0
6/20
06
07/0
7/20
06
28/0
7/20
06
18/0
8/20
06
08/0
9/20
06
29/0
9/20
06
20/1
0/20
06
10/1
1/20
06
01/1
2/20
06
22/1
2/20
06
12/0
1/20
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02/0
2/20
07
23/0
2/20
07
16/0
3/20
07
06/0
4/20
07
27/0
4/20
07
18/0
5/20
07
Single Stocks Food & Bev. Port.
DJ Stoxx 600 Food&Bev.
Port. Wght. Index Wght.VODAFONE GROUP PLC 54,5% 29,2%TELEFONICA SA 28,4% 15,2%DEUTSCHE TELEKOM AG-REG 17,2% 9,2%
100,0% 53,6%
ReturnVolatility (ann.)
Single Stocks Tel. Port. DJ Stoxx 600 Telecom
Single Stocks Tel. Port.
22,7%18,9% 16,1%20,6%
Single Stocks Food & Bev. Port. Port. Wght. Index Wght.NESTLE SA-REG 51,6% 27,3%UNILEVER PLC 28,2% 14,9%DIAGEO PLC 20,3% 10,7%
100,0% 53,0%
ReturnVolatility (ann.)
Single Stocks Food & Bev. Port.
DJ Stoxx 600 Food & Bev.
23,5% 24,8%10,1% 9,4%
Source: Banca IMI (banca del gruppos Intesa Sanpaolo, May 2007)
II. Sector Strategies: ETFs or Single Securities?
28For Professional Investors Only - Not for Public Distribution
II. Sector ETFs: Enhance Risk/Return Profile, Remove Probability of Tracking Error
Single Stocks Banking Portfolio
DJ Stoxx 600 Banks ETF
Single Stocks Oil & Gas Portfolio
DJ Stoxx 600 Oil & Gas ETF
Single Stocks Telecom PortfolioDJ Stoxx 600 Telecom ETFSingle Stocks Food & Bev. Portfolio
DJ Stoxx 600 Food & Bev. ETF
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
8% 10% 12% 14% 16% 18% 20% 22% 24%
Annualized Volatility
Return
Source: Banca IMI (banca del gruppos Intesa Sanpaolo, May 2007)
Exposure to a Whole Sector in a Single TradeExposure to a Whole Sector in a Single Trade
29For Professional Investors Only - Not for Public Distribution
III. ETF Overlay on Pure Alpha Portfolios
Active Portfolio Managers are constantly required to prove theiralpha generating skills with a risk adjusted framework
Emergence of more “unconstrained” mandates with a varying range of wide tracking errors
Some managers have adopted a “pure alpha” investment process
Risk is managed via an overlay fund of ETFs and other Delta1 instruments
30For Professional Investors Only - Not for Public Distribution
Exposures (%) Initial Portfolio
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
Country Size Sector-20.00 Style
Overweight
Underweight
Overweight
Underweight
III. ETF Overlay on Pure Alpha Portfolio
Exposures (%)
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
Country Size Sector-20.00 Style
ETF Overlay
Overweight
Underweight
Overweight
Underweight
Pure Alpha Pure Beta
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
Country Size Sector-20.00 Style
Final PortfolioExposures (%)
For illustration purposes only
31For Professional Investors Only - Not for Public Distribution
IV. ETFs in Long/Short Portfolios (130/30):
Finding Alpha is ChallengingLong only portfolios: typically less than 50% are Alpha bets Short only portfolio: 100% Alpha bets but with potentially unlimited stock specific risk- Adding 30% short position to a long portfolio with 50% Alpha bets increases risk
by 60%
+-30
0
100
50
%
=50% Stock
Specific Long Alpha
30% Stock Specific Short Alpha
80% Portfolio Risk
50% Stock Specific Alpha
50% Stock Beta Return
32For Professional Investors Only - Not for Public Distribution
IV. Long/Short Strategy: Historically Cross-Section Returns Show Persistent “Fat Tails”
MS Research Summary:
There is a higher probability of extreme returns than expected
Outlier returns have a significant impact on excess return
Management and identification of outliers is an integral part of investment process
Active Extension may resemble a core-satellite approach: overweight high conviction stocks, underweight systematic instruments (e.g. sector exposure) via ETF
Morgan Stanley (Summer 2007), Alpha Edge, Beta Hedge – The Long and Short Managing Active Extension Portfolios
Distribution of Monthly Stock Returns (1996 – 2007)
33For Professional Investors Only - Not for Public Distribution
IV. Long/Short Strategy: Limit Risk by Going Short Exposure via ETF
Shorting experience has led to more disciplined portfolio management
Manager differentiation comes from optimal combination of risk management and Alpha generation: - ETFs can provide greater
diversification and risk control on the short side
- ETFs can be used to hedge many portfolio characteristics (e.g. style, size, sector)
-100
0.00
100
Exposure
Long Stock Selection
Alpha
Long Beta
Short Stock Selection
Alpha
Short Beta
Short ETF Basket
Long Stock Selection
Alpha
Long Beta
34For Professional Investors Only - Not for Public Distribution
Global Macro
Market Neutral
Long/Short Equity
Gain directional exposure to implement macro views
Match the long portfolio characteristics (market, sector, etc.) by shorting ETFs in a Market Neutral strategies
Balance Beta/Common Factor exposures without effecting stock selection views
Dynamically adjust portfolio biases
Obtain desired exposure to hard to access markets/asset classes (EM, regions, commodities, etc.)
Where Else Can ETFs Be Incorporated?
35For Professional Investors Only - Not for Public Distribution
Total Hedge Fund Return
Hedge Funds Return Decomposition
Excess ReturnExcess Return
Common Factor Return(Betas)
Common Factor Return(Betas)
Residual Specific Return(Alpha)
Residual Specific Return(Alpha)
Sector Risk(biotech, energy, etc)
Sector Risk(biotech, energy, etc)
Macro Factor Risk(oil, interest rate, etc)Macro Factor Risk
(oil, interest rate, etc)
Micro Factor Risk(size, style, P/E, etc)Micro Factor Risk
(size, style, P/E, etc)
Common Factor Risk represents forces that are not linked to the market risk,but still have a common influence on subgroups of stocks
Common Factor Risk represents forces that are not linked to the market risk,but still have a common influence on subgroups of stocks
Cash ReturnCash Return
36For Professional Investors Only - Not for Public Distribution
V. Case Study: Short ETF Implementation in European Long / Short portfolio
PortfolioContribution
(to Active Risk)
Initial Portfolio Characteristics
For illustrative purposes only
$ 96,727,247Net Portfolio
$ (93,369,906)Short Portfolio
$ 190,097,153 Long Portfolio
17.87%7.42Asset Selection
18.65%N/ACovariance * 2
82.13%15.91Common Factor Risk
100%17.56Total Active Risk
Risk (% Std Dev)
Benchmark Cash
37For Professional Investors Only - Not for Public Distribution
For illustrative purposes only
5.03
-17.44
8.30
68.30
-5.23
0.04 2.21
10.08 8.39
20.31
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
80.00
Con
sum
er
Dis
cret
iona
ry
Con
sum
er
Stap
les
Ener
gy
Fina
ncia
ls
Hea
lth C
are
Indu
stria
ls
Info
rmat
ion
Tech
nolo
gy
Mat
eria
ls
Tele
com
mun
icat
ion
Serv
ices
Util
ities
Exposures (%)
70.00
Main exposure to insurance sector
V. Portfolio Industry Risk Exposures
GICS Sector Exposures
38For Professional Investors Only - Not for Public Distribution
Risk Index ExposuresHighest common factor risks:Look for hedging possibilities
-0.13-0.04
-0.37
0.64
-0.21
0.61
1.45
-0.13
1.04
-1.00
0.00
1.00
2.00
Fore
ign
Expo
sure
Gro
wth
Leve
rage
Mar
ket
Sens
itivi
ty
Mom
entu
m
Size
Valu
e
Varia
bilit
y
Yiel
d R
isk
Inde
x
Exposure
For illustrative purposes only
V. Portfolio Risk Index Exposures
39For Professional Investors Only - Not for Public Distribution
For illustrative purposes only
74.718.229.51-80%
68.818.039.68-70%
58.707.8310.22-60%
48.447.6711.02-50%
39.227.5412.04-40%
31.707.4613.25-30%
25.727.4014.59-20%
21.237.3916.04-10%
17.857.4217.560%
Amount in ETF(as % of Net Portfolio)
ActiveRisk %
Asset SelectionRisk %
Asset Selection Risk(% of Total Risk)
Red
uces
Com
mon
Fac
tor R
isk
Incr
ease
s A
sset
Sel
ectio
n R
isk
V. Hedging with iShares DJ Euro Stoxx 600 Insurance
40For Professional Investors Only - Not for Public Distribution
For illustrative purposes only
79.347.097.96-110%
76.217.088.11-100%
60.847.099.09-80%
43.757.1310.78-60%
31.607.1912.79-40%
20.347.3616.32-20%
17.857.4217.560%
Asset Selection Risk(% of Total Risk)
Red
uces
Com
mon
Fac
tor R
isk
Incr
ease
s A
sset
Sel
ectio
n R
isk
Amount in ETF(as % of Net Portfolio)
Active Risk %
Asset Selection Risk %
V. Hedging with iShares DJ Euro StoxxValue
41For Professional Investors Only - Not for Public Distribution
0
10
20
30
40
50
60
70
80
90
Initial Portfolio Final Portfolio
100
Common Factor
82.13
Asset Selection
17.87
Common Factor 16.07
Asset Selection
83.93
Tracking Error 17.56
Tracking Error 7.83
For illustrative purposes only
V. Impact of ETFs Hedging On Active Risk
42For Professional Investors Only - Not for Public Distribution
Questions?
43For Professional Investors Only - Not for Public Distribution
Conclusion
ETFs are a major global product category and are expected to continue to grow to $2T AUM by 2011*
ETFs provide transparent & liquid exposure to a range of market segments
ETFs can be used for both strategic and tactical purposes
ETFs remain a relatively ‘young’ product category – so their full potential is yet to be developed….
*Source:Morgan Stanley, Exchange Traded Funds – Industry Snapshot – End of November 2007, 17 December 2007
44For Professional Investors Only - Not for Public Distribution
Regulatory InformationBarclays Global Investors Limited ('BGIL'), which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in Ireland and the UK only and no other person should rely upon the information contained within it. iShares plc and iShares II plc (formerly European Exchange-Traded Fund Company ('EETF Co. plc'))(together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator.
For investors in IrelandCertain of these funds are not registered for public offer in Ireland. In respect of these funds, this document is intended for information purposes only and does not constitute a prospectus within the meaning of the Irish Companies Acts 1963 to 2005, investment advice, or an offer to sell or a solicitation of an offer to buy the funds described within and no steps may be taken which would constitute or result in a public offering of the funds in Ireland. This document is strictly confidential and may not be distributed without authorisation from BGIL. With respect to those funds that are registered for public offer in Ireland, important information on the Companies is contained in the relevant Prospectus and other documents, copies of which can be obtained by calling 0845 357 7000, from your broker or financial adviser, by writing to Barclays Global Investors Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH or by writing to the Manager of the Companies: Barclays Global Investors Ireland Limited, New Century House, International Financial Services Center, Mayor Street Lower, Dublin 1, Ireland.
For investors in the UKThis document is directed at 'Professional Clients' only within the meaning of the rules of the FSA. Certain of the funds mentioned in this document are not registered for public distribution in the UK. In respect of these funds, this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the funds described within and no steps may be taken which would constitute or result in a public offering of the funds in the UK. This document is strictly confidential and may not be distributed without authorisation from BGIL. With respect to the funds that are registered for public distribution in the UK, most of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act 2000. Important information is contained in the relevant prospectus, the simplified prospectus and other documents, copies of which can be obtained by calling 0845 357 7000, from your broker or financial adviser, by writing to Barclays Global Investors Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH or by writing to the Manager of the Companies: Barclays Global Investors Ireland Limited, New Century House, International Financial Services Centre, Mayor Street Lower, Dublin 1, Ireland.
Regulatory Information
45For Professional Investors Only - Not for Public Distribution
Regulatory Information
Restricted InvestorsThis document is not, and under no circumstances is to be construed as, an advertisement, or any other step in furtherance of a public offering 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 territory thereof, where the Companies are not authorised or registered for distribution and where no prospectus for the Companies has been filed with any securities commission or regulatory authority. The Companies may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.
Risk WarningsShares in the Companies may or may not be suitable for all investors. Barclays Global Investors Limited does not guarantee the performance of the shares or funds. The price of the investments (which may trade in limited markets) may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. Past performance is not a reliable indicator of future results. The value of the investment involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. Affiliated companies of Barclays Global Investors Limited may make markets in the securities mentioned in this document. Further, Barclays Global Investors Limited and/or its affiliated companies and/or their employees from time to time may hold shares or holdings in the underlying shares of, or options on, any security included in this document and may as principal or agent buy or sell securities.
Index Disclaimerseb.rexx® is a registered trademark of Deutsche Börse AG.'Dow Jones', 'STOXX', 'Dow Jones EURO STOXX Large Cap Value Index' are proprietary and copyrighted material and trade marks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited and have been licensed for use for certain purposes by Barclays Global Investors Limited. iShares DJ Euro STOXX Value is not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representation regarding the advisability of investing in such a fund.'Dow Jones', 'STOXX', 'Dow Jones EURO STOXX 50 Index' are proprietary and copyrighted material and trade marks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited and have been licensed for use for certain purposes by Barclays Global Investors Limited and iShares II plc. iShares DJ Euro STOXX 50 is not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representation regarding the advisability of investing in such a fund.'Dow Jones' and 'STOXX' are trademarks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited and have been licensed for use for certain purposes by Barclays Global Investors (Deutschland) AG. Barclays Global Investors (Deutschland) AG's iShares DJ EURO STOXX 50 (DE) and iShares DJ STOXX 600 Insurance (DE) based on the Dow Jones EURO STOXX 50 and Dow Jones STOXX 600 Insurance are not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representations regarding the advisability of trading in such products.
46For Professional Investors Only - Not for Public Distribution
Regulatory Information
'FTSE®' is a trade mark jointly owned by the London Stock Exchange plc and the Financial Times Limited (the 'FT') and is used by FTSE International Limited ('FTSE') under licence. The FTSE 100 Index and FTSE 250 Index are calculated by or on behalf of FTSE International Limited ('FTSE'). None of the Exchange, the FT nor FTSE sponsors, endorses or promotes iShares FTSE 100 and iShares FTSE 250 nor is in any way connected to the funds or accepts any liability in relation to their issue, operation and trading. All copyright and database rights within the index values and constituent list vest in FTSE. Barclays Global Investors has obtained full licence from FTSE to use such copyright and database rights in the creation of these products.
iShares funds are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or any index on which such funds are based. The Prospectus contains a more detailed description of the limited relationship that MSCI has with Barclays Global Investors and any related funds. 'iShares' is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. © 2008 Barclays Global Investors Limited. Registered Company No. 00796793. All rights reserved.