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Exchange-Traded Funds:
The Basics
Hector McNeil, Co-CEO WisdomTree Europe

FOR PROFESSIONAL CLIENTS AND SOPHISTICATED INVESTORS ONLY

Disclaimer
This document is issued by WisdomTree Europe Ltd (WTE) an appointed representative of Mirabella Financial Services LLP, which is authorised
and regulated by the United Kingdom Financial Conduct Authority (FCA). The products discussed in this document are issued by WisdomTree
Issuer PLC (Issuer), an umbrella investment company with variable capital having segregated liability between its funds organised under the laws
of Ireland as a public limited company and authorised by the Central Bank of Ireland (CBI). The Issuer is organised as an Undertaking for
Collective Investment in Transferable Securities (UCITS) under the laws of Ireland and shall issue a separate class of shares ("Shares)
representing each fund. Investors should read the prospectus of the Issuer ( Prospectus) before investing and should refer to the section of the
Prospectus entitled Risk Factors for further details of risks associated with an investment in the Shares. Any decision to invest should be based on
the information contained in the Prospectus. This product may not be available or suitable for you. This document does not constitute investment
advice nor an offer for sale nor a solicitation of an offer to buy Shares. This document should not be used as the basis for any investment decision.
The price of any Shares may go up or down and an investor may not get back the amount invested. Past performance is not a reliable indicator of
future performance. Any historical performance included in this document may be based on back testing. Back testing is the process of evaluating
an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested
performance is purely hypothetical and is provided in this document solely for informational purposes. Back tested data does not represent actual
performance and should not be interpreted as an indication of actual or future performance. The value of the Shares may be affected by exchange
rate movements.

For United Kingdom Investors: The Fund is a recognised scheme under section 264 of the Financial Services and Markets Act 2000 and so the
Prospectus may be distributed to investors in the United Kingdom. Copies of all documents are available in the United Kingdom from
www.wisdomtree.com. Within the United Kingdom, this document is only made available to professional clients and eligible counterparties as
defined by the FCA. Under no circumstances should this document be forwarded to anyone in the United Kingdom who is not a professional client
or eligible counterparty as defined by the FCA.
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 any province or territory thereof, where none of the Issuer or the Shares are authorised or registered for distribution
and where no prospectus of the Issuer has been filed with any securities commission or regulatory authority. Neither this document nor any copy
hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. Neither the Issuer nor any securities issued by it
have been or will be registered under the United States Securities Act of 1933 or the Investment Company Act of 1940 or qualified under any
applicable state securities statutes.

FOR PROFESSIONAL CLIENTS AND SOPHISTICATED INVESTORS ONLY

3

WisdomTree at-a-Glance
WisdomTree is a global exchange-traded fund provider and asset manager with approximately
$63.4 billion in assets under management as of 26 June 2015
WisdomTree is the 6th largest Global ETF issuer and the world's largest issuer of currencyhedged ETFs
WisdomTree Europe was founded in April 2014 after the acquisition of Boost ETP

$604 million in assets under management as of 26 June 2015

WisdomTree focuses on creating innovative and thoughtful ETFs for investors. Its
differentiated approach employs a distinct index-based methodology that delivers better riskadjusted returns over the long term
WisdomTree is the only publicly traded asset manager exclusively focused on the ETF industry

Source : Assets under management and rank as global ETF issuer all measured as of 15/06/2015.

WisdomTree Europe at-a-Glance

WisdomTree Europe was founded in April 2014 after the acquisition of Boost ETP

$604 million in assets under management as of 26 June 2015

300% growth since the start of the year ($180m to $600m)

61 strategies tracked by ETPs and ETFs

Boost ETP introduced Europes first platform of 3x short & leveraged ETPs

Includes equities, commodities, bonds and FX

Now offer short, leveraged and unleveraged ETPs

7 oil ETPs with AUM of $96 million, approx. as of 26 June 2015

Launched first smart-beta dividend-weighted UCITS ETF strategies in October 2014

6 ETFs listed in the UK, Italy, Germany and Switzerland

First European provider of a platform of dividend weighted smart beta ETFs

Owner of Intellectual Property behind the indices

Launched first currency-hedged ETFs in May 2015

Exposure to Japan (DXJ), Europe (HEDJ) and Germany (DXGP). The indices include an export tilt to companies likely to
benefit from a weak home currency

Acquired Europes only Irish equity ETF in April 2015

Global AUM in ETPs and # ETPs

AUM of global ETFs have grown 29% p.a. on average since 2000
Growth driven initially by low-cost alternative to mutual funds, later by product
innovation
Equities comprise $2.4 trillion of the $2.9 trillion ETF industry
Source: BlackRock, ETP Landscape, Industry Highlights, April
2015

AUM growth and top 10 providers in US and

Europe

Source: BlackRock, ETP Landscape, Industry Highlights, April

2015

What are ETFs?

Exchange-traded products (ETPs) is an umbrella term which encompasses Exchange Traded
Funds (ETFs), Exchange Traded Notes (ETNs) and Exchange Traded Commodities (ETCs).
An ETF is similar to a mutual fund, but trades real time on a recognised investment exchange.
Key features are:

ETFs are open ended fund that creates and redeems to demand

ETFs trade on a stock exchange and settle the same as an equity

ETFs have a daily NAV (Net Asset Value)

ETFs usually have multiplemarket makerswho compete for flows through tight pricing

ETFs are arbitrageable, so pricing on the stock exchange should be efficient

ETFs are usually low cost relative to other similar investment products

ETFs are tax efficient usually subject to CGT and stamp duty on Exchange trading

ETFs cover the following asset classes: Equities, Fixed income, Commodities, Currency & Alternatives

What is the difference between ETFs, ETCs and ETNs?

ETFs, ETCs, and ETNs are very similar. However, the primary difference is that ETFs provide exposure to
indices in a fund structure and are typically UCITS compliant. ETCs are collateralised debt instruments
providing exposure to commodities. ETNs provide exposure to multiple asset classes as either
collateralised or uncollateralised debt instruments.

Key Advantages of using ETFs

Mutual funds have long been the staple in investor portfolios but this is starting to change
with the rise in popularity of ETFs.
The table below summarises the key advantages of why investors choose ETFs over mutual
funds:
Exchange-Traded Funds

Mutual Funds (passive & active)

Transparent with holdings often disclosed

Holdings rarely disclosed

Strategy is systematically applied

Strategy can deviate and is prone to market

sentiment

Selective market exposure which aims to

match index returns after fees and expenses

Seek to outperform market indices

Cost efficient with generally lower TER than

mutual funds

Higher TER

Highly liquid as they are priced throughout

the day and traded on exchange

Priced at the end of the day after markets

close

Tax efficient due to low portfolio turnover

Less tax-efficient because of higher portfolio

turnover

6 Myths about ETFs

Myth 1: All ETFs are the same
False - Differences exist based on many different factors such as methodology (screening selection weighting),
underlying asset class being tracked and replication method.

Myth 2: All ETFs are market-cap weighted

False Alongside market-cap weighted ETFs are a whole range of ETFs that are weighted based on fundamentals
(Smart Beta)

Myth 3: All ETFs are passive

False Whilst the majority of ETFs are passive, a growing number of ETF issuers are now offering actively-managed
ETFs.

Myth 4: ETFs are more risky than mutual funds

False Risk is mitigated through a broader basket of securities, through transparency and full disclosure, and
through liquid primary and secondary markets.

Myth 5: Performance of stocks and mutual funds is superior to ETFs

False After fee performance of most mutual funds is worse than the after fee performance of ETFs.

Myth 6: ETFs are more expensive than mutual funds

False Whilst it is true that frequent trading of ETFs will incur commission and trading costs, ETFs generally have a
significantly lower TER than mutual funds.

10

Synthetic vs. Physical

ETFs can track and achieve the return of an underlying index in two different ways physically
or synthetically.
Physically replicating ETFs are growing in popularity and track their underlying index by
buying and owning most, if not all, of the underlying securities or assets in that index. For
example, a physical ETF tracking the FTSE 100 will hold the same 100 stocks which make up
the FTSE 100. NB. Some issuers of physical ETFs engage in securities lending in order to
generate addition revenue.
Instead of holding the underlying securities, synthetic ETFs are designed to replicate the
return of a selected index through the use of financial derivatives such as swaps. As an ETF
provider does not have to buy all the underlying securities in an index, synthetic replication is
ideal for providing exposure to exotic or illiquid markets or where you cannot use physical rep.
The use of derivatives will involve a counterparty, usually an investment bank.
Summary

Physical ETFs

Synthetic ETFs

Underlying Holdings

Securities that make up the

underlying index

Swaps and collateral

Costs

Transaction Costs
Management Fee

Swap Fees
Management Fees

Transparency

Highly transparent

Non-transparent

Counterparty risk

Low (but can change due to

securities lending)

Can be higher than physical

ETFs

Tracking Error

Larger than synthetic ETFs

Low

11

Pricing and Trading

ETFs can be bought and sold on the secondary market, stock exchange and settle in Crest.
Shares will be created and redeemed based on supply and demand by authorised participants
(APs).
ETFs have a Net Asset Value (NAV) which represents the value of the underlying securities and
is calculated at the end of each trading day.
During the trading day, there will be a bid and offer on the stock exchange where investors
can buy and sell the ETF instantaneously.
The market price will move based on movements in the underlying markets during the ETF
trading day. If the underlying markets are closed then the ETF will act as a price discovery
vehicle for the underlying portfolio.
ETFs can be and usually are listed in multiple currencies across multiple exchanges (cross
listings).

12

Liquidity
ETFs are a wrapper for underlying securities.
The true liquidity of an ETF is based on the
costs and liquidity of the underlying
securities, the cost and accessibility to hedge
and any taxes in the underlying markets.
ETF Implied Liquidity looks through the ETF at
the underlying securities and tells you how
many shares of that ETF you can potentially
trade in a given day.
9.6m shares per day multiplied by 13.79 (best
offer) = 132,384,000 notional
This number being published by various data
providers is helping clients globally
understand the true untapped liquidity of an
ETF

13

Key Considerations when using ETFs

Just like any other investments, ETFs can carry some risks. Make sure you understand them
(not specific to ETFs)
Market Risk (Beta) The value of an ETF will rise and fall just like the underlying indices that
they track (not specific to ETFs)
Smart beta are strategies that attempt to provide a better risk-adjusted return than a pure
beta product (not specific to ETFs)
Exotic Exposure Innovation within the ETF industry has created some complex ETFs which
can be difficult to understand for non-sophisticated investors. As an investor know your
product (not specific to ETFs)
Tracking Error ETFs and other exchange-traded products do not always track their underlying
index perfectly. Often, the ETF will underperform the index, for whatever reason, and this
tracking error puts the investors capital at risk (not specific to ETFs)
Total cost of ownership = TER + Bid offer spread + tracking error + custody/commissions
(specific to ETFs/ETPs)
Physical v synthetic replication. Stock lending, collateral etc. (not specific to ETFs)
Liquidity on screen liquidity is not a measure of liquidity. Underlying liquidity is more
important! (specific to ETFs/ETPs)
Understand the asset you are tracking. For example, US markets better to trade later in the
LSE trading day (specific to ETFs/ETPs)

14

Key Considerations when using ETFs on

Platforms
Most platforms used by IFAs can facilitate ETFs. However IFAs should conduct due diligence to
ensure efficient execution and low costs
IFAs and other platform users should consider the following:

Many platforms have historically been set up to support mutual fund trading and not securities trading

Can your platform facilitate real time dealing. Some cant and can only do end of day at best

Can the platform facilitate split orders. This is important to allow client orders to be batched and
reduce costs

What currencies can the platform support. If GBP only then check the costs of the FX. Many ETFs have
a GBP line or are currency hedged

What universe of ETFs does the platform offer. Some dont offer all the choices

Often better to go to a platform that has historically offered access to the LSE

15

Conclusions
ETFs:

ETFs are the fastest growing segment in asset management. Recently overtook hedge
funds in AUM terms

ETFs are highly liquid and transparent with a robust structure. These standards are forcing
mutual funds to adopt some of these characteristics

ETFs are usually low fee and tax efficient

ETFs offer investors an easy & efficient way to build a self directed or advice led portfolio

ETFs offer most asset classes an investor would need to create an investment portfolio

ETFs come in all varieties and innovation will bring even more choice:
Beta - mature
Smart Beta - growing
Active - nascent

16

Appendix

17

WisdomTree is Founded on Strong Leadership

(1)
Michael Steinhardt, Chairman of WisdomTree Investments
Recognized by the Wall Street Journal as one of the greatest investors of all time, Michael Steinhardt is a legend in
the hedge fund industry. It was his penchant for beating benchmarksoften by taking a contrarian approachthat
led him to embrace the WisdomTree fundamentally-weighted indexing methodology.

Jeremy J. Siegel, Senior Investment Strategy Advisor of WisdomTree Investments

Jeremy J. Siegel is the Russell E. Palmer Professor of Finance at The Wharton School of the University of
Pennsylvania. He has long championed the benefits of indexing, but after the tech bubble in the late 90s, he
became disenchanted with cap-weighted indexes. When I examined WisdomTrees research, I discovered a sound
methodology combined with real-world market wisdom that, I believe, represents a better way to invest.

Jonathan Steinberg, CEO of WisdomTree Investments

Along with Luciano Siracusano III, Jonathan Steinberg is the co-creator of WisdomTrees patented Indexing
methodology. Prior to establishing WisdomTree, Jonathan founded, and served as Chairman and CEO of Individual
Investor Group, Inc.

Luciano Siracusano III, Chief Investment Strategist of WisdomTree Investments

Luciano Siracusano is WisdomTrees Chief Investment Strategist. He is the co-creator with, CEO Jonathan Steinberg,
of WisdomTrees patented Indexing methodology and has led the firms sales force since 2008. Prior to joining
WisdomTree, Luciano was an equity analyst at Value Line, Inc.

Bruce Lavine, Vice Chairman of WisdomTree Investments

Bruce Lavine joined WisdomTree in May 2006 as President and COO and presently serves as the Vice-Chairman.
Prior to that, he spent 10 years with Barclays Global Investors (BGI), and held various leadership positions including,
CFO and Director of New Product Development for Barclays iShares. Most recently, Bruce served as Head of
iShares Europe based in London.
18

WisdomTree is Founded on Strong Leadership

(2)
Hector McNeil, Co-CEO of WisdomTree Europe
Hector McNeil is a leading specialist in Exchange Traded Products (ETPs) with over 12 years experience in the
sector. Hector worked at ETF Securities as a joint managing partner where he headed up Sales and Marketing, and
he was a key ingredient in the companys growth from 4 members of staff and $50 mn in AUM, to 70 employees
globally and $22 bn in AUM. He co-founded Boost ETP with Nik Bienkowski in late 2011.

Nik Bienkowski, Co-CEO of WisdomTree Europe

Nik Bienkowski is a leading specialist in Exchange Traded Products (ETPs) with over 12 years experience in the
sector. Nik helped Graham Tuckwell found ETF Securities Limited, where he was responsible for the research and
product development teams. He helped manage the business from incorporation to over 70 people and $22 bn in
AUM. He co-founded Boost ETP with Hector McNeil in late 2011.

19

WisdomTrees 10 UCITS ETFs

* Dividend Yields as at 31/03/2015, Bloomberg

20

Boost ETPs

21

Top 10 global ETP providers

WisdomTree
is the 6th
largest ETF
sponsor
globally

Source: BlackRock, ETP Landscape, Industry Highlights, April

2015

22

Disclaimer
This document is issued by WisdomTree Europe Ltd (WTE) an appointed representative of Mirabella Financial Services LLP, which is authorised
and regulated by the United Kingdom Financial Conduct Authority (FCA). The products discussed in this document are issued by WisdomTree
Issuer PLC (Issuer), an umbrella investment company with variable capital having segregated liability between its funds organised under the laws
of Ireland as a public limited company and authorised by the Central Bank of Ireland (CBI). The Issuer is organised as an Undertaking for
Collective Investment in Transferable Securities (UCITS) under the laws of Ireland and shall issue a separate class of shares ("Shares)
representing each fund. Investors should read the prospectus of the Issuer ( Prospectus) before investing and should refer to the section of the
Prospectus entitled Risk Factors for further details of risks associated with an investment in the Shares. Any decision to invest should be based on
the information contained in the Prospectus. This product may not be available or suitable for you. This document does not constitute investment
advice nor an offer for sale nor a solicitation of an offer to buy Shares. This document should not be used as the basis for any investment decision.
The price of any Shares may go up or down and an investor may not get back the amount invested. Past performance is not a reliable indicator of
future performance. Any historical performance included in this document may be based on back testing. Back testing is the process of evaluating
an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested
performance is purely hypothetical and is provided in this document solely for informational purposes. Back tested data does not represent actual
performance and should not be interpreted as an indication of actual or future performance. The value of the Shares may be affected by exchange
rate movements.

For United Kingdom Investors: The Fund is a recognised scheme under section 264 of the Financial Services and Markets Act 2000 and so the
Prospectus may be distributed to investors in the United Kingdom. Copies of all documents are available in the United Kingdom from
www.wisdomtree.com. Within the United Kingdom, this document is only made available to professional clients and eligible counterparties as
defined by the FCA. Under no circumstances should this document be forwarded to anyone in the United Kingdom who is not a professional client
or eligible counterparty as defined by the FCA.
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 any province or territory thereof, where none of the Issuer or the Shares are authorised or registered for distribution
and where no prospectus of the Issuer has been filed with any securities commission or regulatory authority. Neither this document nor any copy
hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. Neither the Issuer nor any securities issued by it
have been or will be registered under the United States Securities Act of 1933 or the Investment Company Act of 1940 or qualified under any
applicable state securities statutes.

FOR PROFESSIONAL CLIENTS AND SOPHISTICATED INVESTORS ONLY

23

Defining and using Smart Beta

June 2015

Delivering through innovation

For professional investors only

Defining and using

smart beta
1. Defining smart beta
2. Using smart beta in a portfolio
3. Examples of Source products

Back to basics: what is beta?

Buying the market
Passive, long-only exposure to a particular market segment
Market cap weighted indices
Some examples:

FTSE 100, S&P 500, MSCI World, MSCI Emerging Markets, FTSE China A50

Pros and cons:

Market cap weighted indices are good at measuring market performance

Used to benchmark

But market cap weighted indices may overweight overpriced stocks and underweight
undervalued stocks when markets are extended (e.g. AOL in the 2000s)

27

Smart beta can no longer be

ignored
Terrible name, interesting trend
The Economist, July 2013

Is smart beta the latest magic money tree?

Financial Times, April 2014

Smart beta offerings too confusing

FT Adviser, October 2014

28

The terminology could probably

be clearer

Smart beta

Factor-based indices

Strategic beta

Alternative beta

Enhanced beta

Non-traditional indices

Smart passive
Non-market-cap indices
Advanced beta
Beta plus
Enhanced indices

Alternative beta
Alternatively-weighted indices
Engineered beta
Second generation indices

29

Definitions of smart beta are

inconsistent
Between alpha and beta (Towers Watson)
The middle of the passive-to-active spectrum (Morningstar)
Investment strategies based on one or more of the five equity factors (SSgA)
Indices that are not weighted by market capitalisation (Russell)

30

However you define it, smart

beta assets are growing
Morningstar data suggests

Assets in global strategic beta ETPs

US$ 418 bn in strategic

beta ETPs globally (16%
of ETP assets)

500

Deutsche Bank estimates

400

US$ 410 bn in enhanced

beta ETFs (25% of equity
ETFs)

But still only around 1.3%

of global fund assets

Morningstar data from Morningstar

database as at Dec 2014. Deutsche Bank
data from Deutsche Bank ETF Annual
Review & Outlook Reports, Dec 2014.
Share of global fund assets is Morningstar
strategic beta assets as at Dec 2014,
as percentage of total global fund assets
from ICI as at Q3 2014.

300

200

100billions
US$

0
2010

2011

2012

2013

2014

Data: Morningstar database, Feb 2015

31

Dividend and style exposure

dominate
Morningstar Strategic Beta by sub-category

Data: Morningstar database, Feb 2015

Deutsche Bank Enhanced Beta assets

Dividend

Style

Growth

Dividend

Value

Equal-weight

Other

Semi-active

Data: Deutsche Bank ETF Annual Review & Outlook Reports, Dec 2014

32

Does terminology matter?

Like it or not, the term smart beta now has a following
Arguing over terminology distracts from more important questions

How should investors use smart beta?

Can it replace traditional beta exposure, or is it something different?

Do all smart beta products have similar objectives?

Lets accept smart beta but try and be clearer about what it means

33

Finding a practical definition

What is the universe of products that, in practice, investors / providers call smart beta?
What features / characteristics do they share?
How do they differ from traditional beta, and active, investments?
Can this universe be usefully split into different categories?

34

A spectrum of complexity
Beta
Simple filtering to
ensure
investability
Market cap
weighting
e.g.
S&P 500
Euro STOXX
50

e.g.
Sectors
Small/mid cap
indices

Smart beta

Active / quantitative

More complex
filtering

Alternative
weighting

e.g.
factors
fundamentals

e.g.
factors
fundamentals
risk

e.g.
JPX-Nikkei 400
MSCI Europe
Value

e.g.
FTSE RAFI
Goldman Sachs
Equity Factor
Indices
MSCI Minimum
Volatility

Human
Market timing /
discretion /
signals
sophisticated
quant
process
e.g.
Morgan
Stanley
MEMO Plus
JP Morgan
Macro Hedge

e.g.
Man GLG
Europe Plus
PIMCO
Source Short
Maturity ETFs

Increasing complexity

35

Smart beta in a portfolio

What does smart beta mean for

investors?
More choice of market-type exposure

Existing exposure can be sliced and diced in more precise ways

More control over risk and reward

Portfolios can be tweaked to express different views e.g. lower risk, value

But also more opportunity to underperform

Understanding how to select and combine products is key

37

Products are typically tools or

strategies
Tools

Allow investors to isolate a particular factor /

risk premium

Often single factor products

Dont specifically target outperformance
May be used short-term / tactically
More likely to be satellite products
Examples include STOXX International
Exposure indices and MSCI Europe Value

Can I use it to generate

outperformance in my portfolio?

Strategies

Designed to replace traditional beta exposure

Typically broad and diversified
Often multi-factor or multi-asset (i.e. complex)
May specifically target outperformance or
better risk-adjusted returns

Likely to be core products

Examples include fundamental indices and
multi-factor strategies (GS EFI)

Does it outperform?

38

Using smart beta tools

Which of the many factor(s) do I choose?
How do I define and calculate my chosen factors?

For example, there are many different ways to define quality

What kind of exposure do I want?

Just a tilt, or more targeted exposure?

Factor weighting or market cap weighting? Long only or long/short? Any diversification constraints?

Which index / ETF best meets my requirements?

How do I monitor my exposure?
When in the market cycle should I increase/decrease exposure?
How do I combine with my existing portfolio?

You need to be smart!

39

Using smart beta strategies

What is my goal?

Outperformance or lower risk?

How much risk do I want to take versus traditional benchmarks?

Which provider(s) do I trust to decide on the key parameters?
How will I monitor performance?

Versus traditional market cap benchmarks or active managers, or both?

How do I combine with my existing portfolio?

The strategy needs to be smart!

40

Conclusion
There is no single, accepted definition of smart beta
In practice, the term is used for a wide range of passive products with alternative filtering
and/or weighting schemes

The key question is where each product fits in a portfolio

A tool to isolate specific market characteristics?

A broader investment strategy designed to replace beta benchmarks ?

Source is a pioneer in smart beta ETFs

Long track record

Carefully selected range of products

Expert partners

41

Examples of Source products

42

Goldman Sachs Equity Factor

Indices (GS EFI)

Aim to outperform traditional benchmarks, on an absolute and risk-adjusted basis

Broad, long-only exposure
Focused on five well-known factors (low beta,
size, value, momentum, quality)

Each factor contributes equal risk, taking

volatility and correlations into account

Subject to country and sector constraints versus

market cap-weighted benchmarks

Based on extensive research by Goldman

Sachs

In simulations, GS EFI World has outperformed

MSCI World by 2.8% per annum
300

200
Index performance (%)
100

Available for global and European equities

0
GS EFI World Net TR

MSCI World Daily Net TR Index

Data: Bloomberg, as at 20 January 2015. Performance prior to 21 October 2013 has been simulated by Goldman Sachs International, using the index rules but at times
using different data sources and a slightly different methodology. Past performance (actual or simulated) is not a reliable indicator of future performance. Performance does
not include fund costs.

43

JPX-Nikkei 400 Index

Developed in specific response to the Japanese governments Third Arrow
Focuses on companies with the ability to

Index construction

generate shareholder value

Selects stocks using ROE and corporate

governance measures as well as size

Is rapidly gaining acceptance

Selected as a passive benchmark by the

Japanese Government Pension Investment
Fund

Quantitative ranking

Qualitative factors

Return on Equity

40%

External directors

Operating Profit

40%

Market capitalisation 20%

Over JPY 590 billion in ETFs / investment

trusts1

Adoption of IFRS
Earnings disclosure in
English

Top 400 companies

Weighted by free-float market capitalisation

As at end of February 2015

44

PIMCO EM Advantage Local Bond

Index
GDP-weighted exposure to emerging market government debt
Weights countries by GDP rather than debt

Exposure by country

issuance

Avoids over-allocation to highly indebted

countries

Includes India and China (excluded from other

China, 15.1%
India, 15.1%
Brazil, 14.6%
Mexico, 10.0%
Russia, 8.7%
Indonesia, 7.5%
Turkey, 6.9%
Poland, 4.2%
South Africa, 3.4%
Thailand, 3.2%
Other, 11.3%

major benchmarks)

Uses currency forwards where local bond

markets are inaccessible

Data: PIMCO, as at 30 January 2015

45

Key risks of Source smart beta

ETFs
No capital protection: you may not get back the amount you invest
No guarantee that smart beta indices will outperform traditional market capitalisation weighted indices

46

Important information
Investors in Source products should note that the price of your investment may go down as well as up. As a result you may not get back the amount of capital
you invest.
This presentation contains information that is for discussion purposes only, and is intended for institutional investors (professional clients) pursuant to Directive 2004/39/EC
(MIFID) Annex II Section I. This presentation is not for distribution to, or for the attention of, US or Canadian persons.
Without limitation, this presentation does not constitute an offer or a recommendation to enter into any transaction. When making an investment decision, you should rely
solely on the final documentation and any prospectus relating to the transaction and not this summary. Investment strategies involve numerous risks. Any calculations and
charts set out herein are indicative only, make certain assumptions and no guarantee is given that future performance or results will reflect the information herein.
Investors should consult their own business, tax, legal and accounting advisors with respect to this proposed transaction and they should refrain from entering into a
transaction unless they have fully understood the associated risks and have independently determined that the transaction is appropriate for them. In no way should Source
UK Services Limited (Source) be deemed to be holding itself out as a financial adviser or a fiduciary of the recipient hereof.
The prospectus, supplements and KIIDs for the Source ETFs are available at www.source.info. German investors may obtain the offering documents in paper or electronic
form free of charge from the German information agent (Marcard, Stein & Co AG, Ballindamm 36, 20095 Hamburg, Germany).
The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The
prospectus, the key investor information documents (KIIDs), the articles of incorporation as well as the annual and semi-annual reports may be obtained free of charge from
the representative in Switzerland. Both the place of performance and the place of jurisdiction for shares in the sub-funds of the above umbrella funds offered or distributed in
or from Switzerland shall be the seat of the Swiss representative.
This presentation has been communicated by Source UK Services Limited, 110 Cannon Street, London, EC4N 6EU, authorised and regulated by the Financial Conduct
Authority.
2015 Source UK Services Limited. All rights reserved.

47

Source UK Services Limited

110 Cannon Street, London
EC4N 6EU
T +44 (0)20 3370 1100
F +44 (0)20 3370 1101
www.source.info
Authorised and regulated by the Financial Conduct Authority

Income opportunities

June 2015

Delivering through innovation

For professional investors only

Contents
p.3

Overview of interest rates

p.4

Map of fixed income themes

Income opportunities:

p.7

US Short-term HY

p.13

QUID as a cash alternative

Interest rates in perspective

20
Forecast
16

US

Euro

UK

Source Forecasts

12

Source: Global Financial Data, Datastream and Source Research. Past performance is not a reliable indicator of future returns.

52

Bank of England Base Lending Rate

since 1694

18
16
14
12
10
8
6
4
2
0

Source: Global Financial Data, Datastream and Source Research. Past performance is not a reliable indicator of future returns.

53

Map of fixed income themes

7.0%

6.5%

7.0%
6.1%

6.0%

6.0%
5.8%

5.0%

5.0%
4.0%

4.0%

3.3%

3.3%

Effective 3.0%
yield

3.0%

2.0%
1.9%

2.0%

1.0%

1.0%
0.0%

Sterling yield curve

4

0.0%
6

10

12

14

16

-1.0%

Duration / maturity

Source: Bloomberg and Bank of America Merrill Lynch as of 15/06/2015

54

Two opportunities

7.0%

7.0%

6.4%

6.0%

6.0%

5.0%

5.0% yield
Effective

4.0%

4.0%

3.0%
3.0%

2.0%

2.0%
1.2%

1.0%

1.0%
0.0%

0.0%
2

10

12

14

16

-1.0%

Duration / maturity
Source: Source, Bloomberg and Bank of America Merrill Lynch as of 15/06/2015

55

Income opportunities: US Shortterm HY

US fundamentals
US auto sales and housing starts (annualised)

25

2500

20

2000

15

1500

10

1000

500
US Auto Sales (m)

US Housing Starts (th, RHS)

Source: Datastream and Source Research

57

US HY valuations
US High yield excess spread over credit losses

1,200
1,000Spread over Next-12-month Defaults, bps
Excess
800
600
400
200
0
-200
-400
Excess Spread over Credit Losses

Median (270bp)

Apr '15 (311bps)

Source: BofAML , using G0BC Index, data as of end of May 2015. Past performance is not be a reliable indicator of future returns.

58

Why short end of the HY curve?

HY yield curve: long duration does not compensate investors

8%
7%
6%
Effective yield
5%
4%
3%
2%
1-2 Year

2-3 Year

3-4 Year

4-5 Year

5-6 Year

6-7 Year

7-8 Year

8-9 Year

9-10 Year 10-15 Year 15-20 Year 20-25 Year 25+ Year

Source: BofAML, using H0A0 Index, data as of end of May 2015

59

The short-term HY index versus

other US HY mutual funds & ETFs
Historical risk-return profile
14.0%
12.0%

6 years

Annualised
10.0%
return
8.0%
6.0%

3 years
4.0%
2.0%
2.0%

3.0%
Annualised volatility

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Data: as of end of March 2015. US HY Short Duration: HUCD Index. Peer group includes US HY mutual funds and ETFs as provided using Morningstar. Past performance
is not an indicator of future returns.

60

A risk factor-based approach to

replication
Estimate portfolio by
high yield desk,
leverage PIMCOs
bond trading expertise

Decompose index into

risk factors (Duration,
spread duration, etc.)

Adjust portfolio based

on market intelligence
from speciality desk

Optimise a sub-set of
bonds to match risk
factors.

Fundamental credit analysis: leveraging PIMCOs internal traffic light system

Criteria

Rating system

Green light
Risk relative to rating is stable to improving. Operational or event risk is unlikely to lead to a significant credit deterioration.
Yellow light
Presence of operating or event risk that could lead to a significantly weaker credit profile
Red light
Viability of the issuer as a going concern is in serious question

61

Income opportunities: QUID as a

cash alternative

Cash tiering framework: Better

matching cash outflows

Traditional
cash-liquid
money market

TIER I
Primary objective:
Principal preservation, liquidity

Enhanced cash
short term

TIER II
Primary objective:
Enhance returns to cash, liquidity

Return driver
core fixed income

TIER II+
Primary objective:
Grow cash balance over long-term

Source: PIMCO

63

Sterling MINT: Composition and

performance
Sector diversification

Maturity breakdown
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

59.0%

15.0%

0-3 MO

Relative performance
PIMCOSterling MINT ETF
LIBID GBP 3 Month index
Excess return

3-6 MO

13.0%

6-9 MO

6.0%

7.0%

9-12 MO

1-3 Yrs

0.0%
3+
Yrs

Key metrics

Since inception (06/2011)

12M

6M

3M

3.08%
2.16%
0.92%

0.64%
0.50%
0.14%

0.27%
0.25%
0.02%

0.14%
0.12%
0.02%

Effective duration (yrs):

0.36

YTM:

1.05%

Distribution yield:

0.49%

Current yield:

1.69%

Data: Bloomberg, PIMCO as of 31 May 2015. Figures include reinvestment of dividends and are net of fees. Past performance is not a reliable indicator of future returns

64

Historical performance
Performance comparison with money market funds
Annualised performance versus peer group
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%

YTD*

2013
PIMCO Sterling MINT

2014
Peer group

Performance comparison
2013

2014

YTD*

PIMCO Sterling Short Maturity Source UCITS ETF

0.53%

0.70%

0.65%

Peer group1

0.30%

0.28%

0.32%

Peer group: A custom universe of the EAA OE GBP Money Markets Morningstar peer group with a select group of money market funds above 100 million in AUM and a
track record above three years, equally weighted. Source: PIMCO, Morningstar Direct data as of end of May 2015 net of fees. *YTD performance is annualised. Past
performance is not indicative of future returns.
1

65

Appendix

Source fixed income product

offering
Smart Passive

Cash Management

Covered Bonds

Euro Short Maturity ETF

Ticker: PJS1

Covered Bond UCITS

ETF
Ticker: COVR

US Dollar Short Maturity

ETF Ticker: MINT
Sterling Short Maturity
ETF Ticker: QUID

Ashmore
Source

PIMCO
Source

Active

Low risk

Corporate Bonds
Low Duration Euro
Corporates UCITS ETF
Ticker: LDCE
Low Duration US
Corporates UCITS ETF
Ticker: LDCU

High Yield
Short-Term High Yield
Corporate Bond Index
UCITS ETF
Tickers:
STHY (USD)
SSHY (GBP)
STHE (EUR-hedged)

Emerging Market Debt

EM Advantage Local
Bond Index UCITS ETF
Tickers:
EMLB (USD)
EMLP (GBP)
EMLI (distributing)

EM Corporate
Debt ETF
Ticker: ACDF
EM Total Return ETF
Ticker: ATRF

Higher risk

67

Comparing features of main

investment vehicles
ETFs combine the advantages of direct investments, segregated accounts and mutual funds
Initially the vehicle of choice for passive benchmark exposure, ETFs are a compelling way to provide
access to market leading strategies

ETFs combine advantages of direct investments, seg. accounts and mutual funds

Min investment size

TER

Transaction cost

Execution

Direct investment

Segregated accounts

Traditional fund

ETFs

Variable

High

Low

Very low

None

Low

Very wide range

Generally low

Upfront (bid/ask)

Variable

Generally no upfront fee Transaction cost

embedded in performance

Upfront (bid/ask)

Market price

Variable

Future NAV

Market price or
future NAV

Data: Morningstar as of 30 September 2014. YTD numbers have been annualised for the calculation of the growth rate
Transparency

Full

Full

Low

Full

68

Important information and risks

Investors in Source products should note that the price of your investment may go down as well as up. As a result you may not get back the amount of capital you invest.
This presentation contains information that is for discussion purposes only, and is intended for institutional investors (professional clients) pursuant to Directive 2004/39/EC (MIFID) Annex II Section I. This presentation is not for distribution to,
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Without limitation, this presentation does not constitute an offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the final documentation and any prospectus relating to the
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69

Important information and risks

This presentation contains the current opinions of the manager and such opinions are subject to change without notice. This email has been distributed for informational purposes only and should not be considered as investment advice or a
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RISK: Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Covered bonds are generally affected
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This presentation has been communicated by Source UK Services Limited, 110 Cannon Street, London, EC4N 6EU, authorised and regulated by the Financial Conduct Authority.
2015 Source UK Services Limited. All rights reserved.

70

Source UK Services Limited

110 Cannon Street, London
EC4N 6EU
T +44 (0)20 3370 1100
F +44 (0)20 3370 1101
www.source.info
Authorised and regulated by the Financial Conduct Authority

Trading ETFs
And their role in portfolio construction
David Hazelton/ Jason Cherriman
Business Development

Trading ETFs
Agenda
ETFs role in portfolio construction
Benefits of ETFs
Trends at Raymond James
Trading considerations
Platform considerations
Market timing advisory vs. discretionary

ETFs role in portfolio construction

What is your Investment
Philosophy?
What is your Investment
Management and
Investment Advice
process?
How will you use this to
meet your clients
objectives?

Core Beliefs
Growth/Valu
e

Market/Abso
lute return

Diversificati
on

Asset
classes

Passive,
active or
combination

Internationa
l exposure?

Market
timing

Tax Planning

Costs/Charg
es

ETFs potential benefits

Low Cost
Access to the market,
intra day pricing
Trading flexibility
Diversification
exposure to range of
asset classes,

ETFs need to consider

Multiple layers
Liquidity
Bid/Offer Spreads
Trading when primary market is closed
Tracking error
Research

ETFs Trends at Raymond James

Growin
g
market
for
ETFs
Avera
ge
Trade
30k

Active/
Blendin
g
Strategi
es

ETFs exposure
to many
markets
and asset
types

Data as at 25 June 2015

Source: Raymond James

70% of
our
practic
es hold
ETFs
1147+
ETFs
currentl
y on the
platfor
m
6%
of
RJs
AUM

Use of
Currency
ETFs to
hedge
FX
moveme
nts
Special
ist
Broker
s for
larger
trades

ETF Sector Breakdown

7% 2% 5%

33%

53%

Data as at 25 June 2015

Source: Raymond James

Commodity
Equity
Fixed Income
Property
Other

Inflows and Outflows

Inflows
ETFs / ETCs

Outflows

Estimated Net

ETFs / ETCs

Inflows ()

Estimated Net
Outflows ()

ISHARES GBP CORP BND

1-5YR UCITS GB

5,784,455

SSGA SPDR ETFS E I S&P

UK DIVIDEND
ARISTOCRATS

4,882,338

FIRST TRUST GLOBAL UK

KINGDOM ALPHADEX R
UCITS

3,572,885

ISHARES CORE CORP

BOND UCITSETF GB

4,051,746

ISHARES ISHARES CORE

FTSE 100 UCITS

3,136,701

HSBC ETFS PLC FTSE 100

UCITS ETF

3,158,307

Data from: 1 March to 24 June 2015

Source: Raymond James

Trading Considerations
Listed equity different to OEIC/UT
Liquidity multiple layers
Spread can vary
LSE membership
Trading with Authorised Participants
Electronic trading for immediate execution
Best execution
Trading in bulk

Practical Tips when trading ETFs

Dont:
Place orders near the open and close
Ignore transaction costs
Be tempted to trade simply because you can
Do
Be cautious during volatile markets
Be patient
Use Limit Orders to limit impact
Consider ETFs with good liquidity
Look at the number of market makers market makers help to
add liquidity
Trade when the underlying market is open

Access via a platform

One of the benefits of ETFs is that

they offer immediate access to
the market, up to the minute
pricing and trading flexibility.
Does your platform offer you the
same?

Platforms and ETFs

Company

Hold ETFs?

Trade ETFs?

Cofunds
Cofunds
FundsNetwork

No
No
Yes

No

Old
Mutual Wealth
FundsNetwork

Yes

External?

AJ Bell
Old Mutual Wealth
James Hay

Yes
Yes
Yes

Yes?

Standard
Life
AJ Bell

Yes

External

Transact
James Hay
Seven IM

Yes
Yes
Yes

External

Ascentric
Standard Life
Elevate
Transact
Nucleus

Yes
Yes
Yes
Yes (limited range)

Yes?

Raymond
Seven IM James
Alliance Trust
Ascentric
Novia

Yes
Yes
Yes
Yes
Yes

Yes

Aviva
Elevate
James Brearley
Nucleus
Praemium

Yes
Yes
Yes
Yes (limited range)
Yes

External?

Parmenion
Raymond James
Avalon
Alliance
Zurich Trust

No
Yes
Yes
Yes
Yes

No

Novia

Yes

Aviva

Yes

External

External?

Yes
External?
External
Yes?
External
External
External?
External?
External

Platform Due Diligence

Does your platform offer access to ETFs? If so, HOW?

Questions should include:

Q: Will your platform buy ETFs in multiple currencies? Can you buy them in other
currencies?
Q: What is their best execution policy? Do they offer immediate execution or is
there a time delay if via a third party broker?
Q: Does your platform allow you to place limit orders?
Q: Does your platform have direct market access, or do they use a third party
firm?
Q: Does your platform have access to Authorised Participants?
Q: Can you buy and sell on the same day? Or wait until the sale has settled?
Q: Can you bulk together trades?
Q: Does your platforms trading system allow you to see a live price, allowing you
to decide whether to accept or reject the deal?
Q: Does your platform provide a contract note showing time of deal and exact
price achieved?
Q: How are ETPs reported in the clients valuation report and online?

Discretionary Investment
Management
Control of the investment process
Opportunity to differentiate
Capture more of the value chain
Deeper relationships with clients increased retention
Scalability
Enhanced administration and efficiency for you and your
clients
Potential for increased value of your business
Increase referrals from professionals
Remove clients from the emotion
HNW clients in particular tend to delegate

Summary
ETFs can enhance risk adjusted returns and
lower costs
There are pros and cons
Platform choice is crucial
Discretionary investment aids efficiencies

Thank you for your time!

www.RJIS.co.uk

ETFs and Platforms

ETF Securities
26 June 2015

Understand Costs.

Administration and Custody Fees for listed securities:

Same as funds?

Different structure?

None at all?

Discount for bulk or regular trading i.e. rebalance or cross account

transactions?

6/29/15

Understand Logistics.

Trading capabilities

Intra-day or once-a-day aggregated

In-house dealing desk, large trade pricing

Position handling, management

Executing automatic rebalance, re-allocation trades

On platform product data quality

6/29/15

Understand Availability.

Limited appetite for product on-boarding

Limited to GBP lines

Limited to physically backed products

Limited to a specific set of issuers

6/29/15

Thank you.

ETF Masterclass
IFA Magazine Seminar
A low cost index fund is the most sensible equity investment for
the great majority of investors. My mentor, Ben Graham, took
this position many years ago, and everything I have seen since
convinces me of its truth.
Warren Buffett

An eye for investment

Todays agenda
How ETFs are being used in portfolio construction a DFMs perspective

Using an ETF overlay to implement tactical asset allocation

ETF asset allocation strategies: what is driving demand?

Blending ETFs and Active funds: Core-Satellite portfolio construction

Controlling costs through the integration of ETFs

Migrating assets to an ETF based proposition

An eye for investment

Using an ETF overlay for tactical calls

The trading flexibility of ETFs makes them an excellent tool for implementing
tactical asset allocation decisions

Exposure to an asset class is achieved mainly via a

range of active funds / managers
An ETF overlay is added to the asset class exposure

ETF

Short-term tactical asset allocation calls can then be

implemented by selling / buying the overlay

Active Fund
Exposure to
Asset Class
ETF

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Advantage 1: ETFs can be traded at any time of day

thus improving speed of reaction to a market event

ETF

Advantage 2: By using the neutral overlay the active

management strategies are not disrupted

ETF asset allocation strategies

Over the last decade there has been a huge rise in demand for asset allocation
strategies delivered entirely via a diversified portfolio of ETFs why?

Platform
Availability

RDR /
Independence

Lifestyle
Financial
Planning

Transparency
of Costs

Client
Experience

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ETF asset allocation strategies

Over the last decade there has been a huge rise in demand for asset allocation
strategies delivered entirely via a diversified portfolio of ETFs why?

Platform
Availability

RDR /
Independence

Lifestyle
Financial
Planning

Transparency
of Costs

Client
Experience

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Core-Satellite portfolio construction

Funds are selected across the passive and active universes, blending them
using an institutional Core-Satellite approach to portfolio construction

Core holdings of ETFs account for

around 70% of the portfolio
These deliver low cost, diversified
exposure to various asset classes
Satellite holdings are specialised
actively managed investment funds
Combines the merits of potential active
returns with market returns

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Determining the ETF / active split

Factors to consider
Nature of the asset class
Is the asset class deemed efficient?
Availability of active and ETF options
Performance of active funds vs.
benchmark
Where are we in the business cycle?
Costs of the active and ETF options
Tracking difference of the ETFs

Other considerations
Product provider diversification
Maximum weighting to a fund
Size of the fund & liquidity
Availability on wrap platforms

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Using ETFs to control overall costs

Costs are one of the only factors that you can control...

Advisory Portfolio
(Active)

DFM Portfolio
(Active)

DFM Portfolio
(Blended)

Adviser Fee

0.75%

0.75%

0.75%

Platform Fee

0.25%

0.25%

0.25%

DFM Fee

0.35%

0.35%

OCF

0.75% - 1.0%

0.75% - 1.0%

0.25% - 0.35%

TER

1.75% - 2.0%

2.10% - 2.35%

1.60% - 1.70%

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You get what you dont pay for...!

Compound interest has an evil twin...compound costs!

Impact of Fees
700,000

Market Return

600,000

OCF 0.75%
500,000
OCF 0.25%
400,000

Case Example

300,000

150k SIPP

200,000

Year

6% annualised growth
25 years

100,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

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Reducing OCF by 0.5%

saves 65k over 25 years

Migrating assets to an ETF-based proposition

Build a range of ETF-based portfolios via wrap platform to sit alongside your
current proposition. Legacy business can be transferred over time and new
business invested immediately.

ETFBased
Portfolio
s
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Contact us

Mike Mount, Director Intermediary Solutions

T 02920 558 803
M 07587 773 800
E mike.mount@jmfinn.com

OUR OFFICES
London
4 Coleman St.
London
EC2R 5TA
T 020 7600 1660
F 020 7600 1661

Bristol
31 Great George St.
Bristol
BS1 5QD
T 0117 921 0550
F 0117 921 0475

Leeds
33 Park Place
Leeds
LS1 2RY
T 0113 220 6240
F 0113 220 6262

Bury St Edmunds
60 Abbeygate St.
Bury St Edmunds
Suffolk
IP33 1LB
T 01284 770700
F 01284 763241

Ipswich
Knapton Court
Turret Lane
Off Lower Brook St.
Ipswich
IP4 1DL
T 01473 228100
F 01473 228150

Cardiff
14 St Andrews Crescent
Cardiff
CF10 3DD
T 02920 558800
F 02920 228989

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Appendix

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JM Finn & Co: Key facts

With regional offices across the UK, we manage assets on behalf of private
clients, trusts and charities. We do not offer financial planning but work
closely with intermediaries who do.
7.8bn of funds under management and
administration (FUMA)

Regional Coverage

67% of FUMA in discretionary accounts

Over 23,000 client accounts
312 staff, of which 90 are investment
managers
We hold Tier 1 capital at 2:1 times the
FCA suggested level
We do not have any debt
JM Finn & Co is a profitable business
As a specialist investment manager, we
do not offer financial planning

Data as at 31st December 2014

Source: JM Finn & Co

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Important information

This document is for professional advisers only. It is not to be given to retail clients.
Investment involves risk. The investments discussed in this document may not be suitable for
all investors. The value of investments and the income from them can go down as well as up
and investors may not get back the amount originally invested.
Where investment is made in currencies other than the investors base currency, the value of
those investments, and any income from them, will be affected by movements in exchange
rates. This effect may be unfavourable as well as favourable.
The description of the investment management services and processes in this document is a
general one and detailed terms and conditions are available separately.
This document should not be copied or otherwise reproduced.
This document is issued by JM Finn & Co which is the trading name of J.M. Finn & Co Ltd,
authorised and regulated by the Financial Conduct Authority, member of the London Stock
Exchange and the WMA.

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