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  1. 1. Citywire NMA Conference 2011 iShares Masterclass: How to access and implement ETFs FOR PROFESSIONAL INVESTORS ONLY
  2. 2. Agenda • How can advisers access ETFs? Direct / Platform Key Considerations • How can advisers implement ETFs? Implementation options Investment strategies • Due Diligence Questions to ask 2
  3. 3. How can advisers access ETFs?
  4. 4. Basic model for access Through a broker Private Adviser Client iShares ETF On a platform ETFs cannot be purchased directly from iShares - they are traded between brokers on the secondary market. 4
  5. 5. Which method of access is best for me? Trading precision - Real Flexibility – Both aggregated time dealing with additional and intraday dealing options trading options available available on some platforms Complete access – Administrative ease – Entire range Consolidated of ETFs Broker Platform reporting and bulk available trading Cost - Competitive pricing but Limited availability – typically for large Not currently available trade sizes through Fund Additional admin Cost - Can have Supermarkets, only burden – Limited client relatively high wrap platforms reporting functionality dealing costs 5
  6. 6. Accessing ETFs through a broker What should an adviser consider? Brokers can implement different trading strategies for ETF execution Trading & How does the broker determine best execution? Execution What types of trading options are available (i.e. limit order, etc.) Limit order – this means a trade will not execute until the set limit price is reached. This would avoid execution at a temporarily large discount or premium to NAV. Costs of trading through a broker Cost Commission charges Account set-up costs Product Brokers authorised to trade securities can also trade ETFs Availability Full product range is available iShares Capital Markets team works alongside brokers A dedicated team that supports the entire ETF execution process Support Pre/post trade analysis, optimal trading strategy 6
  7. 7. Accessing ETFs through a wrap platform What should an adviser consider? Does the platform offer real time or aggregated trading? Trading & Does the platform use a broker or offer in-house trading? execution How does the platform determine best execution? What is the ongoing platform fee? Cost What are the transaction costs for trading ETFs? Which cost component is most important given my business model? Which ETF products are offered through the platform? Product availability Are there packaged products of ETFs available through the platform if I wish to outsource investment management? Can the platform support staff answer my questions? Support Do they offer research tools? 7
  8. 8. What costs are most important given my business model? When investing in ETFs, ensure low platform charges are not mitigated by high trading costs Annual Initial Rebalancing Annual Costs – Platform costs Trading costs Costs based on annual rebalance Platform A Annual charge 0.5% £2500 £100 £200 Trading costs = £10/trade + + = £2800 Platform B Annual charge 0.35% £1750 Trading costs = £25/trade + £250 + £500 = £2500 Initial Rebalancing Annual Costs – Annual Trading costs Costs based on Platform costs quarterly rebalance Platform A Annual charge 0.5% £2500 £100 + + £800 = £3400 Trading costs = £10/trade Platform B Annual charge 0.35% £1750 + £250 £2000 Trading costs = £25/trade + = £4000 Example based on initial investment of £500k and a portfolio of 10 ETFs For illustrative purposes only 8
  9. 9. Examples of wrap platforms offering ETFs 9
  10. 10. iShares growth on wrap platforms Uptake of ETFs by fee-based advisers has grown exponentially in the past 12 months iShares Platform Asset Growth £600 120% iShares platform £500 100% annual growth rate (2009 - 2010) = 106% £400 80% Millions £300 60% £200 40% £100 20% £0 0% Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Source: Novia, Nucleus, Ascentric, Standard Life Wrap, Raymond James, and Transact Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg. As at July 2010 10
  11. 11. Implementation Build in-house portfolios or outsource investment management?
  12. 12. Implementing ETFs: In-House Portfolio Management ABC Financial Advisers Sample allocation of Tax Planning time spent per service offering Investment Management Fund manager Mortgages research Retirement Insurance Planning For some advisors, keeping the investment decisions in-house is integral to their business: Adviser value proposition focused on internal investment research and expertise Create a personal investment management track record – client retention Opportunity to construct more bespoke client portfolios 12
  13. 13. Implementing ETFs: strategy examples Construct portfolio with broad-based, low-cost core holding Core / combined with narrowly-focused satellite exposure. Satellite ETFs can be either core or satellite. Cash Use ETFs to gain instant exposure to a specific index to stay Equitisation invested in the market whilst looking for a new fund manager. Tactical Opportunity to add excess return by taking short-term bets on Asset specific investment areas. Can be based on economic data, Allocation earnings forecasts, technical indicators, etc. See the new iShares Market Perspectives for our 2011 outlook 13
  14. 14. Implementing ETFs: Outsourcing CBA Financial Planning Sample allocation of Investment time spent per service offering Comprehensive Management Financial Planning Tax Planning Insurance Retirement Planning Mortgages For other advisers, outsourcing investment decisions may be the best option for their business model. There are various reasons to outsource investment management: Outsourcing asset allocation decisions – reduced internal compliance requirements Ability to focus time and resources on area of expertise (i.e. tax, financial planning, etc.) Business scalability 14
  15. 15. Implementing ETFs: Outsourcing options Which outsourcing option is best for me? Model portfolios provided by Direct to discretionary Packaged product (OEIC) discretionary managers manager • Potential tax advantage – • Administrative ease when • Administrative ease capital gains for each ETF offered through wrap position realised within fund platforms • Outsourcing of trading and • Retain control of client implementation functions as • Can be a good solution for relationship well as portfolio asset small accounts due to scaled • Only paying DFM for asset allocation transaction costs allocation 15
  16. 16. ETF Due Diligence
  17. 17. Due Diligence – What should I be thinking about? ETF Knowledge Expertise / Data Support Transparency Provider of the market Track Record Publication Structure Risk Performance Portfolio Liquidity Income Management Rebalancing Securities Cost Trading Average TER Costs / Lending Cost Spread Revenues Revenue 17
  18. 18. How can we help? Index Guides • Equities, Fixed Income, Emerging Markets Educational brochures • E.g. “Overview of ETF Structures”, “Trading European Exchange Traded Products” Tax information • E.g. “Tax Implications of iShares”, “Tax Update – UK Reporting Funds Regime” Implementing asset class themes using ETFs • E.g. “Equity Income – investment and strategies with iShares ETFs”, “Investing in Clean Energy through iShares ETFs” Facilitating due diligence • Holdings, Fund fact sheets, Trading data 18
  19. 19. Contact details Pollyanna Rhodes Kelly Farder Vice President Vice President IFA Sales IFA Sales Tel: +44 020 7668 8585 Tel: +44 020 7668 8113 Email: Email: 19
  20. 20. Appendix I Quick refresher: Introduction to ETFs
  21. 21. What are ETFs? Fund + Stock/Share Exchange Traded Fund / iShares Type of index tracking fund Managed to mirror the performance of an index (e.g. FTSE 100) Aim to provide investors with the same return as the underlying market 21
  22. 22. Product structures Exchange Traded Exchange Traded Funds Products (ETFs) (ETPs) Exchange Traded Exchange Traded Cash / Physical Swap / Synthetic Notes Commodities / Direct / Indirect (ETNs) (ETCs) Are they: •UCITS Compliant • What is the risk •Tracking Futures / Physical • What is the structure •Collateralised 22
  23. 23. iShares - Each physical based iShares ETF represents a partial ownership in the relevant sub-fund HSBC BP Vodafone iShares Portfolio GlaxoSmithKline Managers Exchange purchase stocks to Rio Tinto Traded represent the Fund index Tesco BT Group British Airways ETC 23
  24. 24. ETF benefits The main reasons for the success of ETFs Transparency • Investors know the ETF holdings, price and costs • ETFs offer two sources of liquidity: Liquidity • Traditional liquidity measured by secondary market trading volume • Multi dealer model boosts the liquidity of iShares ETFs • ETFs provide immediate exposure to a basket or group of securities for instant diversification Diversification • Broad range of asset classes including equities, bonds, commodities, investment themes, etc • ETFs are listed on exchanges and can be traded at any time the market is open Flexibility • Pricing is continuous throughout the day ETFs offer a cost-effective route to diversified market exposure Cost effectiveness The average Total Expense Ratio (TER) for Equity ETFs in Europe is 40 bps versus 91 bps (per annum) for the average index tracking fund and 180 bps (per annum) for the average active fund¹ Source: Morningstar, Global ETF Research and Implementation Strategy Team, BlackRock. As at end February 2010. Note: the TER numbers are calculated as simple averages 24 ETF benefits_Overview of ETF benefits_SNUIA_1208_EN_730148
  25. 25. Disclaimer Regulatory Information BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in the UK only and no other person should rely upon the information contained within it. iShares plc, iShares II plc, iShares III plc, iShares IV plc and iShares V 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. The German domiciled funds are "undertakings for collective investment in conformity with the directives" within the meaning of the German Law on the investments. These funds are managed by BlackRock Asset Management Deutschland AG which is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. For investors in the UK This 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 BlackRock Advisors (UK) Limited. 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 BlackRock Advisors (UK) Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH. Restricted Investors This 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 Warnings iShares may not be suitable for all investors. BlackRock Advisors (UK) 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 BlackRock Advisors (UK) Limited may make markets in the securities mentioned in this document. Further, BlackRock Advisors (UK) 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. In addition, investing in emerging markets involves certain risks and special considerations not typically associated with investing in other markets. 25