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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
NAVIGATING THE ETF LANDSCAPE
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
The exchange traded landscape
Source: BlackRock, as of 12/31/09.*Does not include Target Date and Alternative funds. There are a total of 912 Exchange Traded Products (ETPs) as of 12/31/09.
The exchange traded marketplace will look significantly different in five years.
Currency
Commodity
Fixed Income
Int’l/Global Equity
Domestic Equity
3
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Key criteria for selecting the right ETF
Know what you own
Total costs matter
Liquidity
Structure
Provider
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
What you should know about indexes
Market coverage offered
Definition of value/growth, small cap, mid cap and large cap
Index transparency
“Resets” after adds and deletes
Modularity of index families and degree of constituent overlap
Rebalance frequency
Do the characteristics of the index align with client objectives?
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Indexes represent the market
-4
-3
-2
-1
0
1
2
3
4
5
6
Russell 1000 Growth minus S&P 500 Growth
Russell 1000 Valueminus S&P 500 Value
Russell 1000 minus S&P 500®
An
nu
al R
etu
rn (
%)
2004
2005
2006
2007
Which one is right? Both.
Sources: BlackRock, Russell, S&P, as of 12/31/09.Index returns are for illustrative purposes only and do not represent actual iShares ETF 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. For actual iShares ETF performance, please visit www.iShares.com or request a prospectus by calling 1-800-iShares (1-800-474-2737).
2008
2009
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Style index comparison: Value, growth and core
Russell 1000Two factors: P/B and forecasted earnings growth
P/E: 19.6
P/E: 17.0
Morningstar Large CapFive Growth factorsFive Value factors
P/E: 23.6
P/E: 14.8
P/E: 14.2
74 8978
Value GrowthCore
S&P 500®/CitigroupThree Growth factorsThree Value factors
P/E: 20.4
P/E: 16.7
306347
679 623
Sources: BlackRock, FactSet, as of 12/09.
Growth
Growth
Value
Value
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Mid cap index comparison:Distribution of market capitalization
Russell Midcap800 smallest companies in Russell 1000 Index
$15.5B
$3.2B
$74.6M
S&P MidCap 400Names picked by committee
$258.6M $8.3B
$2.1B Median market cap
Morningstar Mid Cap70th to 90th percentile of US market cap
$10.1B
$3.6B
$486.0M
Source: BlackRock investment analysis, as of 12/09.
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Alternative weighting schemes
Fundamental-weighted: Stocks are ranked and weighted by fundamental measures
Equal-weighted: All stocks receive the same weighting
Key considerations
Turnover
Transaction costs
Unintended bias within the index
Transparency
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Dimensions of total cost
Explicit costs
Expense ratio
Commission
Implicit costs
Trading spreads
Rebalancing
Tracking error
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Total cost
Source: BlackRock.
Trading costs are defined as one-way costs that include estimated average spread and market impact costs, as of 12/31/09.Tracking error is a one-year annualized estimate ending 12/31/09.
Expense Ratio
0.20%
0.13%
ETF 1
ETF 2
Commission
0.01%
0.01%
TradingCosts
0.03%
0.16%
Rebalancing
0.01%
0.03%
TrackingError
0.51%
0.58%
Implicit Costs
0.76%
0.91%
Total CostExplicit Costs
COMPARISON
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Total cost
Full replication
Fund holds all index names at benchmark weight
Optimization
Fund holds a representative sample of index names
BENCHMARK TRACKING
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
iShares ETF liquidity offers price improvement
Sources: NYSE Arca, Bloomberg, as of 12/31/09.
iShares MSCI Emerging Markets (EEM)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2004 2005 2006 2007 2008 2009
An
nu
al S
har
es T
rad
ed (
mil
lio
ns)
$0.00
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
$0.16
$0.18
Sp
read
($)
0
5,000
10,000
15,000
20,000
25,000
30,000
2004 2005 2006 2007 2008 2009
An
nu
al S
har
es T
rad
ed (
mil
lio
ns)
$0.00
$0.01
$0.02
$0.03
$0.04
$0.05
Sp
read
($)
EEM Volume
ETF Spread ($)
Current bid/ask spread in underlying = 7.5 cents.
Current bid/ask spread in underlying = 6.0 cents.
iShares Russell 2000 (IWM)
IWM Volume
ETF Spread ($)
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Product structure
What is the principal source of risk?
What is the potential for tracking error?
What are the tax implications of the structure?
Open-End Fund
Unit Investment Trust
1940 Act 1933 Act
GrantorTrust
Exchange Traded Notes
Limited Partnership
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Attributes of ETFs and ETNs
Exchange Traded Notes
ExchangeTraded Funds
Liquidity Daily on exchange Daily on exchange
Registration Investment Company Act of 19401
Securities Act of 1933
Recourse Portfolio of securities Issuer credit
Principal Risk Market risk Market and issuer risk
Institutional-Size Redemption
Daily via custodian Daily to the issuer
Short Sales Yes,on an uptick or a downtick
Yes,on an uptick or a downtick
1 ETFs may be structured as 1933 Act Grantor Trusts.
Investment comparisons are for illustrative purposes only and are not meant to be all-inclusive. There may be significant differences between the investments that are not discussed here.
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Evaluating a provider
Size and scale
History
Expertise
Commitment to the industry
Resources
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
iShares.com: Essential resources for financial professionals Live and on-demand e-learning
Client materials
Research – white papers
Fund data
Portfolio construction tools
Trading strategy report
®
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FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
iShares resources Index Comparison Tool
Compare how over 170 indexes differ by market capitalization, return, risk, holdings, sector and correlation
Sample screenshots from the iShares.com website are for illustrative purposes only.
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 prospectuses carefully before investing.
Investing involves risk, including possible loss of principal.
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.
Shares of iShares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund.
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.
Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates 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.
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.
Not FDIC Insured • No Bank Guarantee • May Lose Value
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., European Public Real Estate Association (“EPRA®”), FTSE International Limited (“FTSE”), FTSE/Xinhua Index Limited (“FXI”), iBoxx®, J.P. Morgan Securities Inc., MSCI Inc., Morningstar Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group or Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.
FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in the FTSE/Xinhua Index vest in FXI. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50/Residential/Retail/Mortgage REITs or Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Global Real Estate ex-US/North America/Europe/Asia Index; all rights vest in FTSE, NAREIT and EPRA. All rights in the FTSE Developed Small Cap ex-North America Index vest in FTSE. “FTSE” is a trade- and servicemark of London Stock Exchange and The Financial Times Limited; “Xinhua” is a trade- and servicemark of Xinhua Financial Network Limited.
The iShares Funds are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A., neither of which is affiliated with SEI.
©2010 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. iS-2266-0310 2183-BR07-3/10
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