ETF Basics: An Introduction to iShares


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ETF Basics: An Introduction to iShares

  1. 1. ETF Basics: An Introduction to iShares Exchange Traded Funds ®
  2. 2. Terms of use •Before using iShares Funds presentation materials with your clients, please check to ensure that the materials comply with your firm's guidelines. ETF Basics 0108 5735-iS-0108 2
  3. 3. Agenda •Growth of ETFs and Barclays Global Investors •The engine of ETFs •Unique benefits of ETFs and iShares • Low cost • Tax efficiency • Transparency • Risk management ETF Basics 0108 • Liquidity • Modularity and strategies 5735-iS-0108 3
  4. 4. Consistent Growth of Exchange Traded Funds (ETFs) ETFs experienced rapid growth during bear and bull markets • There are 672 U.S. ETFs – covering global equity and fixed income with AUM of over U.S. $619 billion. 700 U.S. ETF AUM 1,600 600 1,400 1,200 500 1,000 400 800 300 600 200 400 S&P 500 ETF Basics 0108 100 200 iShares 0 0 Others 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 5735-iS-0108 Sources: FRC and Yahoo Finance as of 12/31/07. Universe includes exchange traded grantor trusts. 4
  5. 5. iShares Family of Funds and Mutual Fund Markets In Net New Asset Flows 2006 2007 Fund Family Net Flows ($M) Net Flows ($M) American Funds 70.5 69.6 Vanguard 43.1 68.7 iShares 50.2 46.3 Dodge & Cox 19.1 18.0 State Street Global Advisors 1.3 18.0 T. Rowe Price 11.0 18.0 Dimensional Investment Group 15.1 14.4 Franklin Templeton Investments 6.7 10.3 ETF Basics 0108 Thornburg 6.1 9.3 ProFunds 2.2 7.6 5735-iS-0108 Fund families serve different market segments Source: Strategic Insights as of 11/30/07. Excludes funds of funds and money market funds. Information on American Funds, Vanguard Group, Dodge & Cox, State Street Global Advisors, T. Rowe Price, Dimensional Investment Group, Franklin Templeton Investments, Thronburg and ProFunds is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of securities, other than the iShares Funds, that are described in this presentation. 5
  6. 6. iShares Funds are Brought to you by Barclays Global Investors • Total assets managed: $2 trillion • Total active assets managed: $491.5 billion • 3,002 employees worldwide* serving approximately 3,000 clients in 51 countries • Largest ETF manager with more than $388 billion in assets MONTREAL TORONTO LONDON TOKYO AMSTERDAM SAN FRANCISCO BOSTON ATLANTA HK/SINGAPORE LATIN AMERICA ETF Basics 0108 Full service office Client service/business development SYDNEY 5735-iS-0108 *Excluding contractors. Source: BGI. As of 9/30/07. iShares Funds are distributed by SEI Investments Distribution Co. Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. BGFA is a subsidiary of Barclays Global Investors, N.A., a majority-owned subsidiary of Barclays Bank PLC. 6
  7. 7. WHAT IS AN ETF? 5735-iS-0108
  8. 8. Familiar Ground…Best of Both Worlds •Like a stock • Trading flexibility intraday on the exchange • Long or short* • Options •Like an index fund • Constructed to track benchmark indexes • Low expense ratios ETF Basics 0108 • Low turnover 5735-iS-0108 * With short sales, you risk paying more for a security than you received from its sale. Short sales subject to availability. 8
  9. 9. What Sets an ETF Apart? • The creation/redemption process distinguishes ETFs from mutual funds and closed-end funds • The creation/redemption process enables the unique benefits of ETFs ETF Basics 0108 5735-iS-0108 9
  10. 10. How Traditional Mutual Funds Work Buyers Fund Company Stock Exchange Sellers ETF Basics 0108 5735-iS-0108 10
  11. 11. The Innovative Mechanism of iShares ETFs Intermediaries Intermediaries Financial Buyers Financial Stock Exchange Sellers Market Makers Fund Company ETF Basics 0108 5735-iS-0108 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. 11
  12. 12. The Benefits of iShares ETFs • Low cost • Tax efficiency • Transparency • Risk management • Liquidity • Modularity and strategies ETF Basics 0108 5735-iS-0108 12
  13. 13. COSTS OF INVESTING Internal Fees and Taxes 5735-iS-0108
  14. 14. Internal Expenses Matter • $100,000 investment for 10 years • 8% annualized return 25 bps 50 bps 100 bps $215,892 gross value Internal fees $3,862 $7,625 $14,866 ETF Basics 0108 Foregone earnings $1,475 $2930 $5,778 Net value $210,556 $205,338 $195,249 5735-iS-0108 Does not include commissions or sales charges. 14
  15. 15. iShares Funds’ Low Expense Ratios Fund Category bps iShares ETF Large-cap 9 iShares S&P 500 15 iShares Russell 1000 Small-cap 20 iShares S&P SmallCap 600 20 iShares Russell 2000 Fixed income 15 iShares Lehman Treasury Series 15 iShares iBoxx $ Investment Grade Corporate Bond 20 iShares Lehman Aggregate & TIPS International 52 1, 2 iShares MSCI International Series 34 iShares MSCI EAFE 74 iShares MSCI Emerging Markets Sector 48 iShares Dow Jones Sectors ETF Basics 0108 48 iShares S&P Global Sectors 5735-iS-0108 1. Brazil, South Africa, South Korea, Taiwan: 68 bps. 2. MSCI Pacific ex-Japan, 50bps Transactions in shares of the iShares Funds will result in brokerage commissions. 15
  16. 16. Tax Efficiency of iShares ETFs •Index Funds • Low turnover •Baskets of securities for shares • Creation/redemption process •Cap gain control • Shareholders interact via exchange • Taxed as an equity transaction ETF Basics 0108 5735-iS-0108 ETFs can produce capital gain distributions. For example, during an underlying index reconstitution or corporate actions (especially foreign). 16
  17. 17. RISK MANAGEMENT 5735-iS-0108
  18. 18. iShares ETFs are Transparent •Manage the unknown – know what you own • iShares holdings are published daily on • Pricing of underlying holdings is refreshed continually •No style drift • Each benchmark represents a defined market segment • Benchmark providers publish methodology •Manage risk ETF Basics 0108 • iShares ETFs are designed to closely track a benchmark 5735-iS-0108 18
  19. 19. iShares Funds Track 3-Year Average Annual Expense Ratio iShares Funds Tracking (as of 1/1/08) (as of 12/31/07) S&P 500 -0.08% 0.09% Russell 2000 -0.06% 0.20% Dow Jones U.S. Total Market -0.21% 0.20% Dow Jones U.S. Technology -0.60% 0.48% ETF Basics 0108 MSCI Japan -0.53% 0.52% MSCI EAFE -0.22% 0.34% 5735-iS-0108 Source: BGI. Past tracking performance does not guarantee future performance. 19
  20. 20. LIQUIDITY 5735-iS-0108
  21. 21. iShares ETFs Provide Enhanced Liquidity • Liquidity of underlying securities provides foundation for ETF liquidity “Exchange-traded” attribute provides additional layers of liquidity Market participants compete for client orders leading to tighter spreads Investors receive price improvement by transacting in the ETF whenever they buy/sell the ETF inside the spread cost of the underlying portfolio basket of securities ETF Basics 0108 Trading volume is not indicative of total liquidity in an ETF 5735-iS-0108 21
  22. 22. iShares ETF Liquidity Offers Price Improvement iShares MSCI Emerging Markets (EEM) iShares Russell 2000 (IWM) 1,400 $0.30 12000 $0.05 1,200 $0.25 10000 $0.04 Annual Shares Traded (mlns) Annual Shares Traded (mlns) 1,000 $0.20 8000 800 $0.03 Spread ($) Spread ($) $0.15 6000 600 $0.02 $0.10 4000 400 $0.01 200 $0.05 2000 0 $0.00 0 $0.00 ETF Basics 0108 2003 2004 2005 2006 2003 2004 2005 2006 EEM Trading Volume IWM Trading Volume EEM ETF Spread ($) IWM ETF Spread ($) EEM Underlying Portfolio IWM Underlying Portfolio 5735-iS-0108 Spread ($) Spread ($) Sources: NYSEArca, Stock Facts Pro, 12/06. 22
  23. 23. iSHARES MODULAR FAMILY OF FUNDS A Solutions-Driven Approach 5735-iS-0108
  24. 24. The Benefits of Modularity •Building block format • Enables implementation of strategies •Indexing pre-2000 and post-2000 ETF Basics 0108 5735-iS-0108 Source: FRC as of 2/28/07. Universe includes exchange traded grantor trusts. 24
  25. 25. Modularity and Portfolio Completion S&P 1500 U.S. Equity Portfolio S&P 500 Growth S&P 500 Large-cap S&P 500 Value stocks S&P S&P MidCap 400 Growth MidCap 400 S&P MidCap 400 Value ETF Basics 0108 S&P SmallCap S&P 600 Growth SmallCap S&P SmallCap 600 600 Value 5735-iS-0108 25
  26. 26. Modularity and Core/Satellite Portfolio of Active Russell 3000 Funds or Managers Russell 1000 Russell Growth Large-cap Large-cap 1000 Russell 1000 growth value Value Russell Midcap Russell Growth Midcap Russell Midcap Value ETF Basics 0108 Russell 2000 Small-cap Russell Growth growth 2000 Small-cap Russell 2000 Value value 5735-iS-0108 26
  27. 27. Modularity and Tactical Investing Dow Jones Utilities Consumer U.S. Total Market Services Basic Materials Consumer Services Consumer Goods Energy Financial Healthcare Industrial Technology ETF Basics 0108 Telecom Technology Energy Utilities 5735-iS-0108 27
  28. 28. Modularity and Duration Management Lehman 1–3 Year Treasury Lehman 7–10 Year Treasury Lehman 20+ Year Treasury Yield iBoxx $ Investment Grade Corporate Bond Lehman 1-3 Year Credit Lehman Intermediate Credit iBoxx $ High Yield ETF Basics 0108 Corporate Duration 5735-iS-0108 28
  29. 29. Good for Clients. Good for Business. •Manage costs •Manage risks •Manage taxes •Complementary to your business • Portfolio managers and asset managers • Wealth managers ETF Basics 0108 • Consultants and advisors 5735-iS-0108 29
  30. 30. 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 or by visiting Read the prospectus carefully before investing. ETF Basics 0108 There are risks involved with investing, including possible loss of principal. 5735-iS-0108 30
  31. 31. The iShares Funds are distributed by SEI Investments Distribution Co. (SEI). Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. Barclays Global Investors Services (BGIS) assists in the marketing of the Funds. BGFA and BGIS are subsidiaries of Barclays Global Investors, N.A., which is a majority-owned subsidiary of Barclays Bank PLC, none of which is affiliated with SEI. 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 ETF Basics 0108 funds will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Neither Barclays Global Investors, N.A. and its affiliates nor SEI and its affiliates provide tax 5735-iS-0108 advice. Please note that (i) any discussion of U.S. 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. 31
  32. 32. 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. The iShares Funds are not sponsored, endorsed, or issued by Lehman Brothers, nor are they 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®, KLD Research & Analytics, Inc., MSCI Inc., Morningstar Inc., The NASDAQ Stock Market, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Frank Russell Company, or Standard and Poor’s. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI nor BGI, 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 Index, FTSE NAREIT Residential Index, FTSE NAREIT Retail Index, FTSE NAREIT Mortgage REITs Index or FTSE NAREIT 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 ETF Basics 0108 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. “NAREIT®” is a trademark of NAREIT; “EPRA®” is a trademark of EPRA. 2008 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of 5735-iS-0108 Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. 32 Not FDIC Insured • No Bank Guarantee • May Lose Value
  33. 33. THANK YOU For more information, visit Get Started Track based learning Education Center Watch, Listen, Get Credit Product Information Holdings, price and return information Document Library Client presentations and materials ETF Basics 0108 Tools & Charts Portfolio modeling tools, & reports 1-800-iShares 5735-iS-0108 And over 100 funds to implement your best ideas 33