navigating the etp landscape: current trends, growth...

Navigating the ETP Landscape:

Current Trends, Growth Outlook &

Key Due Diligence Considerations

Dodd Kittsley, Global Head of ETP Research

November 2013

FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

2

Non-Market-Cap Weighted Equity ETPs - US Listed

Agenda

2013 ETP Industry Flow Update

BlackRock’s US ETP Industry Growth Forecast

Due Diligence Questions to Consider


2013 ETP Industry Trends


Universe includes all US Listed exchange traded products.

Sources: BlackRock, Bloomberg, as of 10/31/2013.

US ETF Market Growth and Number of Products

4

US ETP Assets & Number of ETPs by Year

71 88 106 157 237 314

433 621 542

794 1,012 1,062

1,350

1,641

95 118 130 134 169

221

381

673

844 925

1,099

1,370 1,445

1,524

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oct-13

# of ETPs Assets ($bn)

The Diverse US ETF Landscape

5

AUM Market Share AUM by Asset Class

39%

20%

22%

2%

6%

1% 2%

8%

iShares

Vanguard

State Street

ProShares

PowerShares

Van Eck

WisdomTree

Others

81% of the ETF Share Held by the Three Largest

Providers, with iShares® Holding 39% of ETF Assets

ETFs have Enabled Many Asset Classes to

Become Instantly Relevant to a Broader Investor Base

55%

15%

10%

15%

5%

Domestic Equity

Developed International Equity

EM Equity

Fixed Income

Commodity / Other

Universe includes all US-Listed exchange traded products.

Sources: BlackRock, Bloomberg, as of 10/31/2013.

6


Equity ETPs Cumulative 2013 YTD Flows: $201.3bn


Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.

US Equity

Japan Equity

Pan European Equity

Other Developed

EM Equity

7


Fixed Income ETPs Cumulative 2013 YTD Flows: $24.8bn



8


Commodity & Others ETPs Cumulative 2013 YTD Flows: -$31.9bn



Others

9

Non-Market-Cap Weighted Equity ETPs - Listed Globally

Non-Market-Cap VS. Market Cap Weighted Equity ETPs

Current Assets (US$bn)

Market Cap Weighted

Non-Market-Cap Weighted

Jan-Oct 2013 Flows (US$bn)

Market Cap Weighted

Non-Market-Cap Weighted

$1,513bn

85%

$277bn

15%

$142.8bn

71% $58.5bn

29%



Dividend Income Equity ETPs Listed Globally

10

Dividend Income Equity ETP Monthly Flows (US$bn)



Selected Exposures with Recent Momentum

FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 11

% ASSET GROWTH IN SELECTED EXPOSURES: SEP-OCT 2013

0%

10%

20%

30%

40%

PanEuropean

Equity

UK Equity EM Equity JapanEquity

US Equity FloatingRate Bond

High YieldBond

All Others

Market Move Contribution Flows Contribution

$0.9 $7.3 $5.2 $30.7 $2.0 $4.9 $3.0 $13.2

30%

18%

15% 14% 11%

20%

16%

4.1%

Sep-Oct Net

Flows(US$bn)


Global Equity Flows by Exposure


YTD Flows in 2013: $201.3bn (up 72% from $117.0bn YTD 2012)

GLOBAL ETP YTD EQUITY FLOWS BY EXPOSURE

2013 2012


Listing Region View


ASSET GROWTH RATES AND # OF ETPs

(# ETPs)

$1,641

$413 $59

$11

$165

-30

-10

10

30

50

70

90

110

-10% -5% 0% 5% 10% 15% 20% 25% 30%

2013 G

row

th in #

ET

Ps

2013 AUM Growth

US

Europe Canada

Asia Pacific

Latin

America

Bubble

size =

Assets

($bn)


14

US ETF Trading Volume as a Percentage of Equity Market Volume

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

Nov-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

Nov-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

Nov-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

Nov-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-

12

Se

p-1

2

Nov-1

2

Jan

-13

Ma

r-1

3

Ma

y-1

3

Jul-

13

Se

p-1

3

ETF Volume as % of US Equity Volume

ETF Monthly Trading Volume (US$trillion)

US ETF Trading Volume ETF Volume as % of US Equity Market Volume

Global

Financial

Crisis

Greek Debt

Crisis

US Rating

Downgrade

QE3 to

possibly end



ETF vs. underlying market liquidity (Equity)

15

The dollar Average Daily Volume (ADV) of the underlying basket of the top 5 equity iShares ETFs (by AUM) is much

greater than the ETFs, as shown in the upper panel, However, in each case, the bid-ask spread for the ETFs are

significantly lower than the average spreads of the underlying securities.

Source: Blackrock and Bloomberg as of June 17, 2013. Bid-ask spread is the time-weighted intraday spread. Both spreads and ADV are

averaged over the previous 20 days.


16

ETF vs. underlying market liquidity (Fixed Income)

The dollar Average Daily Volume (ADV) of the underlying basket of the top 5 corporate iShares ETFs (by AUM) is much

greater than the ETFs, as shown in the upper panel, However, in each case, the bid-ask spread for the ETFs are

significantly lower than the average spreads of the underlying securities.

Source: Blackrock, TRACE, Bloomberg as of May 30, 2013. Bid-ask spread is the time-weighted intraday spread. Both spreads and ADV are

averaged over the previous 20 days


US ETP Industry Growth Forecast


U.S. ETF growth: The future is incredibly bright

Assets more than doubled over the past 5 years, from 2007 to 2012, in spite of the financial crisis

Momentum has continued in 2013, with year to date flows up 12% year over year and assets growing at an annualized

rate of 20%1

Over the next 5 years, assets could more than double again to $3.5 trillion by 2017

U.S. ETF Assets

As of May 31, 2013. Source: BlackRock and Bloomberg.

(1) As of June 11, 2013.

18

71 88 106 157 237 314 433 621 542

794 1,012 1,062

1,350 1,636

to 3,000

3,500

0

1,000

2,000

3,000

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oct2013

2014 2015 2016 2017Est.

1971

BGI invents

indexing

$ b

illio

ns

1993

State Street

launches 1st ETF

1995

ETF assets

reach 1st $1B

Launch of

1st iShares

ETF

Launch of 1st

Vanguard ETF

Invesco buys

PowerShares

1st commodity

(gold) ETP

launches

Barclays Bank

launches 1st

ETNs

In U.S, 1st year

ETFs inflows

outpace MF

flows

BlackRock buys

BGI & iShares

Launch of 1st

bond ETF by

iShares

Launch of 1st

Schwab ETF &

commission-

free trading

WisdomTree becomes 1st ETF-only

asset manager to trade public

PIMCO launches total

return active ETF

Over 2x growth

in 5 yrs

…and again

over 2x growth

in 5 yrs


Compared to the market sizes of other investment vehicles, ETFs have a lot of room for growth

There is still huge runway for growth

We’ve only seen the first generation of ETFs

19

1.5

10.2

26.9

57.9

0

10

20

30

40

50

60

70

U.S. ETFs U.S. MutualFunds

Net CreditDerivativesOutstanding

Total U.S.Equity &

DebtSecurites

$ t

rillio

ns

Sources: SimFund, Bank for International Settlements, Bloomberg, SIFMA.

(3) Global OTC CDS notional amounts outstanding.

ETFs as of May 31, 2013. Mutual Funds (excluding money market funds) as of April 30, 2013. Net Credit Derivatives outstanding as of December 31, 2012. Total US Equity and Debt

Securities as of March 31, 2013.

ETFs compete against four types of assets

ETFs Active

Mutual

Funds

Index funds /

separate accounts

Single

security

holdings

Derivatives

Institutional

Retail 3


Six key drivers of U.S. ETF market growth

20

Reta

il

Ins

titu

tio

na

l In

no

va

tio

n

Growth of the advised market

Increased institutional usage

Fixed Income

Growth of the self-directed market

New products & new segments

Core

exposures

1

2

3

5

6

4

Source: BlackRock.


Fixed income market penetration is still very low

21

While equity ETFs are ~6% of total equities… fixed income ETFs are 0.6% of the total market

As of March 31, 2013. Source: BlackRock and Bloomberg.

32.7%

5.8%

U.S. Equity

ETFs

U.S. Equity

Mutual Funds

8.4%

0.6%

U.S. Fixed

Income

ETFs

U.S. Fixed

Income

Mutual Funds

Total equity market = $18.6T Total fixed income market = $39.3T

The U.S. fixed income market is more than twice the size of the equity market

However, fixed income ETF penetration is only one-tenth of the level of equity ETF penetration


Due Diligence Questions to Consider


Key Criteria for Selecting the Right ETF

23

Manager

Exposure

Structure

Liquidity

Costs

How well do you know your ETF manager?

What’s inside your ETF?

What are the implications of structure?

Can you trade when you need to?

What does it really cost?


1. Manager How well do you know your ETF Manager?

24

Expertise in the ETF market

Track record, experience, commitment.

It takes size, skill and expertise to realize ETFs’ benefits for investors.

A business model aligned with your needs

What insights and tools are available to help you navigate ETFs, build portfolios and execute strategies?

• Established in 1988 and public since 1999 ( NYSE: BLK)

• $3.9 trillion assets under management 1

• $2.6 trillion (65%) indexed or iShares 1

• Nearly 10,000 employees; Over 1,600 investment professionals

• Fiduciary model/culture - no proprietary trading

• BlackRock Solutions® oversees $12 trillion in assets

• Financial Markets Advisory Group advises public and private financial institutions

BlackRock facts

Timeline

1971

Index

pioneer

and

innovator

2000

iShares

Exchange

Traded

Funds

2002 2007 2011

Fixed

income

ETFs

iShares iBoxx $

Investment Grade

iShares Barclays Treasury

iShares

iBoxx $

High

Yield

iShares MSCI

Minimum

Volatility

Index Funds

Source: Blackrock, 1BlackRock 4/16/13


2. Exposure What’s inside your ETF?

Targeted exposure

Broad or narrow? Depth of coverage?

Overlap or gaps with other index products or active funds?

Index name recognition

Trackable, complete and representative of the investment opportunity?

Industry-standard indexes you want as benchmarks?

Frequency of disclosure and level of transparency

Infrequent disclosure of holdings may expose investors to risk.

25

Index Methodology Impacts Underlying Economic Exposure


Managing Index Exposure

26

Putting Indexes Together

For illustrative purposes only – market cap spectrum not to scale.

S&P

1500

S&P

Midcap

400

S&P

Small

Cap 600

S&P

500

Russell

1000

Russell

2000

Russell

3000

Russell

Midcap

Russell

Microcap

Russell

200

MSCI

Mid Cap

450

MSCI

Small Cap

1750

MSCI

Large

Cap 300

MSCI

Prime

Cap 750

MSCI

Broad

Market

Index


Minimum Volatility Exposure

Holdings are subject to change.

Source: Factset as of December 31, 2012.

-2.9% 4.9%

-4.9% -1.2%

5.2% -4.2%

-5.0% -0.7%

3.7% 5.0%

Relative exposure vs. S&P 500

USMV vs. S&P 500

-8.6% 16.7%

-9.2% -5.3%

-0.8% -3.7%

-15.5% -1.1%

-0.1% 27.5%

-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

SPLV vs. S&P 500

Utilities Telecommunications Materials Information technology Industrials

Healthcare Financials Energy Consumer staples Consumer discretionary


3. Structure What are the implications of ETF Structure?

Complete and transparent benefits to shareholders

Balancing exposure with cost and tax efficiency and liquidity.

Stand-alone, dedicated ETF structure

Insulation from the activities of other shareholders only happens with this structure.

28

Past performance does not guarantee future results.


Structure Impacts Risks, Taxes and Tracking Error

29

Open-end

Fund

Unit Investment

Trust

1940 Act 1933 Act

Grantor

Trust

Limited

Partnership

Exchange

Traded Notes

Other Listed

Vehicles

Closed-end

Fund


4. Liquidity Can You Trade when You Need to?

Liquidity is like oxygen: You don’t notice it until it’s gone

Credit crisis of 2008 placed a premium on liquid investments and liquid investment vehicles.

Provider support for liquidity

Tight bid / ask spreads in conjunction with deep, liquid markets are ideal for all investors.

30

Bid / ask spread, is the difference between bid / ask prices, which reflect the most current value at which an investor can buy or sell shares of an ETF during market trading hours.


ETFs offer access to less liquid markets at low cost

Buying and selling shares of iShares Funds will result in brokerage commissions.

Source: Blackrock and Bloomberg as of June 2013. The values in the chart are yearly averages (except for 2013), while the spread and average daily volume

calculations in the table are 20-day averages as of June 17, 2013.

ETF Spread

(bps)

Basket Spread (bps)

ETF Average Daily Volume ($M)

Underlying Basket ADV ($M)

2.4 33 $3,482 $18,733

31 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Explicit costs are predetermined based on the ETF’s fees and brokerage firm’s commission schedule. Implicit costs may vary based on market events and trading volume.

Implicit costs may change continuously based on current market conditions.

5. Costs What does it Really Cost?

32

Trading costs

Performance vs. benchmark

(tracking difference)

Taxes on distributions

Expense ratio

Brokerage commission

Implicit Costs Explicit Costs Total Costs

When faced with a choice

among ETFs in a category,

consider all explicit and

implicit costs

+ =


iShares ETFs and Mutual Funds: Key Differences

33

1. Both vehicles are obliged to distribute capital gains to all shareholders.

Criteria iShares ETFs Active Mutual Funds

Performance goal Track a benchmark Outperform a benchmark

Management Passive Active

Performance risks

Performance may differ from benchmark.

Holdings not altered during rising /

falling markets.

May not meet performance goal.

May underperform due to manager’s

holdings selection.

Buying / selling shares Intraday on exchanges. Once per day via fund company.

Price to buy / sell Current market price, which may differ from NAV. End-of-day NAV, less fees.

Fees Expense ratio + transaction / brokerage costs. Expense ratio + any sales loads / redemption fees.

Tax impact1 of

buyers / sellers Shareholders only impacted by their own action.

Shareholders may be impacted by all other

shareholders’ actions.

Holdings disclosure Daily Typically quarterly


Every investor is unique.

That’s why there’s iShares.

Visit iShares.com and Find Out Why 9 of 10 Large Professional Investors Choose iShares for their ETFs1

Professional

Quality

iShares delivers

quality products

that can help you

navigate today’s

volatile markets.

i Individual

Choice

As your partner,

iShares helps you

execute investment

ideas with insights

and support.

i Responsible

Innovation

iShares is an industry

leader in making

investing clear, fair,

and efficient for you.

i

1. 90% of all institutional investors (pensions, foundations and endowments; asset managers; insurance companies and investment advisors) surveyed in 2013 U.S. Exchange Traded

Funds Study by Greenwich Associates used iShares ETFs. Survey included 176 institutional investors already using ETFs, interviewed 2/2013-4/2013.


Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses

before investing. This and other information can be found in the Funds’ prospectuses, which may be

obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the

prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Bonds and bond funds will decrease in

value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt

issuers may not be able to make principal and interest payments or may have their debt downgraded

by ratings agencies. High yield securities may be more volatile, be subject to greater levels of credit

or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to

value than higher-rated securities of similar maturity.

In addition to the normal risks associated with investing, international investments may involve risk of capital

loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting

principles or from economic or political instability in other nations. Emerging markets involve heightened

risks related to the same factors as well as increased volatility and lower trading volume. There can be no

assurance that an active trading market for shares of an ETF will develop or be maintained. There is no

guarantee that dividends will be paid.

Investment comparisons are for illustrative purposes only. To better understand the similarities and

differences between investments, including investment objectives, risks, fees and expenses, it is important

to read the products’ prospectuses.


The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been

presented for educational purposes only.

Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal.

Investment in the Fund is subject to the risks of the underlying funds. There is no guarantee that the Fund will generate high

income.

Shares of iShares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be

generated due to index rebalancing or to meet diversification requirements. Trading shares of the iShares Funds will also

generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund

investments, like iShares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of

iShares Funds may be substantially less than those of most mutual funds. Buying and selling shares of iShares Funds will

result in brokerage commissions, but the savings from lower annual fees can help offset these costs.

Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance

returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest

directly in an index. Past performance does not guarantee future results.

BlackRock does not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication

cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion

or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an

independent tax advisor.


The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc.,

European Public Real Estate Association (“EPRA®”), FTSE International Limited (“FTSE”), JPMorgan Chase & Co.,

MSCI, Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate

Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group, S&P Dow Jones Indices LLC or

Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital, Inc. None of these companies make any

representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

©2013 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other

marks are the property of their respective owners. iS-10604-0913

37

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