A Brief History of ETFs: From TIPS to Levered Inverse Replication

Barry Gordon

President and CEO September 10, 2014

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Agenda

1. Evolution of the ETF Market

2. Intellectual Underpinnings

3. Fixed Income

4. Recent Developments

5. Where to From Here?

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Evolution of the ETF Marketplace

Current State of the ETF Market

ETFs are available that track investments in all liquid asset classes – equities, fixed income, commodities and currencies.

TIPs very first ETF

Variations to achieve either long or short exposure to the underlying, including on a levered basis.

Active and Passive variants

Structural advantages to users− Price Maker vs. Price Taker− Bulk order capabilities

Size of Market− Total Global Capitalization of over $2.25 Trillion as at December 31, 2013− Canadian ETF Market of over $63 billion− Total Value Traded of over $15.7 Trillion in 2013

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The Global ETF Industry

Growth of ETFs Globally (AUM in millions)

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The Canadian ETF Industry

Growth of ETFs in Canada (AUM in millions)

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Perspective – Relative Size of Markets

Global equity market = $53T

EquityMutual Funds

Global fixed income market = $100T

Fixed IncomeMutual Funds

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Intellectual Underpinnings

Equity ETF Evolution mirrors MPT Debate Beta = Broad capitalization weighted indexation Product extension into Sectors, Sub-Sector, Industry Macro Consistent Low cost

Persistent Flaws in CAPM – Challenge to Orthodoxy Existence of Value, Momentum, Size anomalous returns Different Weighting Methodologies

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Fixed Income

Evolved Similarly to Equity Broad Benchmark Developed Market Indices weighted on basis of face value Expanded beyond Investment Grade Credit Strategy ETFs

− Ladder

− Bullet

− Barbell

Challenges Emerge Opaque Markets

− OTC Markets anathema to a structure that thrives on transparency

Illiquid Assets?− Bank Loans

− Viatical Settlements

Hedging Proxies

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Recent Developments

Derivatives - Tools to Facilitate/Enhance Replication Synthetic exposure Derivative Overlays Leveraged and Short Exposure

Boon or Bane? Will ETF’s suffer from Over-Engineering? In rapid growth markets like ETFs, we often observe the “build it and they will

come” phenomenon. There have been and will continue to be ETFs which never reach their desired

potential

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Where to From Here?

Evolving demand from retail, advisors and institutions Tools versus solutions

Active Versus Passive Can Active add Alpha when costs are neutral?