Presenters: Need to Know in MATT HOUGAN...ETF Assets Are Soaring Source: FactSet as of 12/31/2015...

MATT HOUGANManaging DirectorInside ETFs

Presenters:

ETFs 101:

Everything You Need to Know in 60 Minutes or Less

ETFs Are to Mutual Funds…

… As iPhones Are to Rotary Phones

$61,216 $1,209,508

Funds ETFs

Flows Since Financial CrisisMillions Source: Morningstar, ETF.com

ETF Assets Are Soaring

Source: FactSet as of 12/31/2015

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total AUM ($, B)

Why Are ETFs Gaining Share?

Lower Costs

Tax Efficiency

Intraday Trading

Transparency

Access To Anything

An ETF Is …

… like a mutual fund.

It’s structured

It’s managed

It’s regulated

A Mutual Fund With A Twist

Listed on an (like a stock)

Intraday (like a stock)

Exchange

Traded

$10,000

$10,000 $10,000

$10,000

How A Mutual Fund Works

100 @ $100

100 @ $100

100 @ $100

100 @ $100

$40,000

$10,000

$10,000 $10,000

$10,000


$40,000$80,000

100 @ $200

100 @ $200 100 @ $200

100 @ $200100 @ $100

100 @ $100 100 @ $100

100 @ $100


$20,000

$80,000

100 @ $200

100 @ $200 100 @ $200

100 @ $200

$60,000


$60,000

100 @ $200 100 @ $200

100 @ $200$20,000

50 @ $200

$10,000 $70,000


$10,000 of XYZAB Please!

How It Really Works


Broker

How It Really Works

$10,000

702 @ $14.23

Broker


Assets: $120,358,025.58Shares: 8,458,025.58Net Asset Value: $14.23

How It Really Works

100 @ $97.23

$9,723

Broker

100 shares of SPY Please!

How An ETF Works

ETFs, Inc.

?

How An ETF Works

CSCOAAPLCATMSFTIBM

$2.5 million

100K @ $25ETFs, Inc.

AuthorizedParticipant

ETF Anatomy: Creation/Redemption

100K @ $25

IBM

MSFT

AAPL

CAT

CSCO

ETFs, Inc.



50K @ $25


IBMMSFTAAPLCATCSCOETFs, Inc.


Why Be An AP?


$25.00

Fair Value$25.00

$25.00

Fair Value$25.00


$25.00

$25.10

Why Be An AP?

Fair Value$25.00


$25.00

$25.10

Sell!100K @ $25.10

Why Be An AP?

Fair Value$25.00

$25.00

$25.10

Buy Holdings!

IBM

MSFT

AAPL

CAT

CSCO


Why Be An AP?

Selling Pressure

BuyingPressure


Fair Value$25.01

$25.01$25.01

Why Be An AP?

Selling Pressure

BuyingPressure


Fair Value$25.01

$25.01$25.01

Bought: $25.00Sold: $25.10Margin: $.10

Why Be An AP?


$24.90

Buy!100K @ $24.90

Fair Value$25.00

$25.00

Why Be An AP?


IBM

MSFT

AAPL

CAT

CSCO

Sell Holdings!

Fair Value$25.00

$24.90

$25.00

Why Be An AP?


BuyingPressure

SellingPressure

Fair Value$24.99

Bought: $24.90Sold: $25.00Margin: $.10

$24.99

Why Be An AP?

The Benefits and Risks of ETFsAre Not Accidental

Creation/Redemption Keeps ETF Prices “Fair”

Why Do ETFs Represent 25% Of All Trading Volume, When CEFs Represent Less Than 1%?

Benefit 1: Intraday Trading

Source: Bloomberg as of 03/14/2012

The Beauty of ETFs

Large Cap Equity Mutual Funds: 1.37% Average

Large Cap Equity ETFs: 0.44% Average

ETFs cost fund companies less.So ETFs cost investors less.

Benefit 2: Lower Costs

Source: Morningstar

Active MF Passive MF ETF

Large Cap Blend 1.92% 0.16% 0.00%

Large Cap Value 2.01% 0.08% 0.00%

Large Cap Growth

1.65% 0.04% 0.00%

Mid Cap Blend 4.26% 1.25% 0.00%

Small Cap Blend 3.54% 1.31% 0.00%

Foreign Large Blend

2.50% 0.32% 0.00%

Emerging Market 6.46% 0.02% 0.01%

Benefit 3: Tax Efficiency

Benefit 4: Transparency

Daily Disclosurevs.

“Whenever we want”

1000+ in Registration

1,800+ ETFs285 new in 2015

Benefit 5: Access

Source: Factset of 12/31//2015

Issues With ETFs

Issue: Flash Crash

Rydex S&P 500 Equal-Weight ETF(NYSEArca: RSP)

Issue: Commissions

Every transaction has a cost, no matter how low*

*Note new zero-cost commission ETF programs

Issue: Spreads

Liquid Funds = Penny Spreads

Illiquid Funds = > 4% Spreads

Issue: Fair Value

Most ETFs trade close to NAV

But all funds can get out of balance

Product Category Long-Term

Max Rate

Equities 20%

Bonds 20%

Commodity ETFs (Futures) 28%*

Commodity ETNs 20%

Commodity ETFs (Bullion-based) 28%

Currency ETFs 38.6%

Currency ETNs 38.6%

Certain WisdomTree Currency ETFs 20%

Issue: Tax Treatment

Evaluating ETFs

There is No Easy Button

(Can I trust it?)

(Can I trade it?)

(Can I do better?)

Efficiency

Tradability

Fit

Expense Ratios Aren’t Everything

Ticker ERMedian

Tracking Diff.Max

UpsideMax

Downside

IEMG 0.18% -0.07% +0.06% -0.29%

VWO 0.15% -0.14% +0.10% -0.48%

GMM 0.59% -0.67% +1.83% -0.50%

EWEM 0.70% -0.76% +0.46% -2.19%

Expense Ratios Aren’t Everything

Source: FactSet, as of 5/8/2015

Tradability

Over 200 ETFs trade at spreads

of less than 0.05%

Liquidity


Commission Free Trading

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

REZ FNIO FTY RTL IYR ICF RWR VNQ

REIT Expense Ratio

Expense Ratio

What’s The True Cost?

Source: Prospectuses, IndexUniverse as of 06/30/2012

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%


ER & Tracking Difference & Spreads

Expense Ratio Annual Tracking Difference Spread




0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%


Total Cost For Annual Round Trip

Total Cost Expense Ratio


The Worst Gold Miner ETF

The Best Gold Miner ETF

All Gold Miner ETFs

Not All ETFs Are Created Equal

7 general Utilities ETFs, over 1 year

8% difference in return

Complex ETFs

ETF Issue: Complex ETFs

How Leveraged/Inverse Funds Really Work

Day 1: Index Level: 100-200% ETF Level: 100

Day 2: Index up 10%Index Level: 110-200% ETF Level: 80

Day 3: Index down 10%Index Level: 99-200% ETF Level: 96

-110%

-90%

-70%

-50%

-30%

-10%

10%

30%

1/29/2009 1/29/2010 1/29/2011 1/29/2012 1/28/2013 1/28/2014 1/28/2015

VIX Index VXX

ETF Issue: Toxic ETFsNet Inflows: >$7 BillionAUM: <$700 Million

Source: Bloomberg, FactSet, AS OF 5/8/2015

Conclusion

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,0001

99

3

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

Bil

lio

ns

Hougan/Nadig Forecast of ETF Growth

Source: Blackrock & FactSet, as of 12/31/2015

Asset Class Weight Fund Ticker ER

U.S. Equity 40% iShares Core S&P Total U.S. Market ITOT 0.03%

Developed Equity

30% Schwab International Equity SCHF 0.08%

Emerging Markets Equity

5% Schwab Emerging Markets Equity SCHE 0.14%

Fixed Income 15% Schwab U.S. Aggregate Bond SCHZ 0.05%

REITs 5% Schwab U.S. REIT SCHH 0.07%

Commodities 5%UBS E-TRACS DJ-UBS Commodity

ETNDJCI 0.50%

All-In Costs 0.08%

Why? Mostly, Because You Can Do This

Any Questions?

Special Topics

Currency Hedging

What Does This Headline Mean To You?

“

“

If you’re a U.S. Investor, your returns are:

A) Up 9%

B) Up More Than 9%

C) Up Less than 9%

D) There’s No Way To Know

“

“

If the pound is up 5% that year against the dollar, your returns are:

A) Up 9%

B) Up 14%

C) Up 4%

D) There’s No Way To Know

Japan Hedged

-15

-10

-5

0

5

10

15

20

11/14/2013 11/14/2014

Pe

rce

nt

Re

turn

EWJ DBJP

-8

-6

-4

-2

0

2

4

6

8

10

11/14/2013 11/14/2014

Pe

rce

nt

Re

turn

DBEF EFA

EAFE Hedged

-25

-20

-15

-10

-5

0

5

10

15

20

11/14/2013 11/14/2014

Pe

rce

nt

Re

turn

DBBR EWZ

Brazil Hedged

Smart Beta?

Occasional Strong Performance

-5

0

5

10

15

20

25

11/14/2013 11/13/2014

Pe

rce

nt

Ret

urn

CSM MSCI Large Cap

-5

0

5

10

15

20

1/2/2012 12/31/2012

Pe

rce

nt

Ret

urn

CSM MSCI Large Cap

Occasional Strong Performance

-500

-400

-300

-200

-100

0

100

200

300

400

500

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

5/5/2011 10/6/2014

Net

Flo

ws

($,M

)

Tota

l Ret

urn

SPLV Flows SPY SPLV

The Bigger Problem

Source: FactSet

Commodities

Basics of Contango

$40

$60

$80

$100

$120

$140

$160

Co

ntr

act

Pri

ce

Contract in amarket inContango

Contract in amarket inBackwardation

Here’s The Problem With Futures

Source: Bloomberg

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

3/31/2011 3/31/2014

Tota

l Ret

urn

Natural Gas Spot UNG

Presenters: Need to Know in MATT HOUGAN...ETF Assets Are Soaring Source: FactSet as of 12/31/2015...

Documents

Transcript of Presenters: Need to Know in MATT HOUGAN...ETF Assets Are Soaring Source: FactSet as of 12/31/2015...