Q ETP Strategic Beta Tracker

Transcription

1 Q3 ETP Strategic Beta Tracker

2 Strategic Beta Highlights from Q3 Strategic Beta Product Evolution Launches: 14 Closures: 5 Value & Growth Top Flows Value and Growth ETPs captured over half of all strategic beta net inflows in Q3 Invesco Acquires Guggenheim ETFs The combined entity will have the most strategic beta ETPs with over 120 strategies Nationwide ETP Launches Nationwide debuted its ETP lineup with 2 strategic beta strategies PIMCO Dynamic Multi-Factor Launches PIMCO launched 3 dynamic multi-factor ETPs with shifting factor weightings Goldman Launches GSEW Goldman Sachs launched its equal-weighted U.S. large-cap ETP at 9 bps AQR Exemptive Relief Filing Active quant fund manager AQR filed for exemptive relief to offer index and active ETPs See Appendix for a list of launches, closures and Morningstar Strategic Beta taxonomy and attributes definitions. Please see the final slide for definitions of ETP and Strategic Beta Charles Schwab Investment Management, Inc. For Institutional Use Only 1

3 Q3 Strategic Beta Assets and Flows Q3 Total Strategic Beta AUM AUM: $652.6 Billion Q3 Total Strategic Beta ETP Flows Flows: $8.9 Billion Assets ($B) $660.0 $640.0 $620.0 $600.0 $580.0 $560.0 $540.0 $520.0 $500.0 $509.8 October 2016 $539.3 November 2016 $558.9 December 2016 $569.7 January $596.6 $599.5 February March $608.9 April $617.2 $621.9 May June $632.6 $633.6 July August $652.6 September Flows ($B) $12.0 $10.0 $10.4 $9.1 $8.9 $8.0 $6.0 $4.0 $2.0 $1.5 $4.6 $4.2 $4.0 $3.3 $1.8 $2.9 $1.9 $4.1 $0.0 October 2016 November 2016 December 2016 January February March April May June July August September Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Note: Data only includes assets and flows for existing ETPs, as of September 30, Charles Schwab Investment Management, Inc. For Institutional Use Only 2

4 Q3 Strategic Beta League Table Vanguard, BlackRock and Schwab ETFs led strategic beta inflows, capturing over $9.1 billion in net inflows, combined US Commodity Funds saw the largest strategic beta outflows, largely from its flagship oil ETP, USO ALPS and JPMorgan both jumped up one notch on the strategic beta issuer leaderboard Q3 Products Q3 Net Flows YTD Net Flows Rank in Rank Sponsor AUM % of Total # of Strategic Beta ETPs Q3 Flows Flows (% of Total) YTD Flows Flows (% of Total) 1 - BlackRock 252, % 72 3, % 8, % 2 - Vanguard 151, % 22 4, % 12, % 3 - PowerShares 47, % % % 4 - WisdomTree 42, % % % 5 - State Street Global Advisors 35, % % % 6 - First Trust 31, % % % 7 - Schwab ETFs 26, % 9 1, % 5, % 8 - Guggenheim Investments 22, % % % 9 - Flexshares 9, % % 1, % 10 - Goldman Sachs 5, % % 1, % 11 - ProFunds 4, % % % ALPS 3, % % % 13-1 US Commodity Funds 2, % 5-1, % % 14 - Oppenheimer 2, % % % 15 - Global X 1, % % % JPMorgan 1, % % % 17-1 Victory Capital 1, % % % 18 - Exchange Traded Concepts 1, % % % 19 - Van Eck 1, % % % 20 - Columbia Threadneedle % % % Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 3

5 Q3 Strategic Beta Attributes by Assets and Flows Value ETPs experienced a reversal from Q2 outflows, posting the most inflows of any attribute in Q3, despite another strong quarter of inflows for Growth ETPs Equal-weighted and Non-Traditional Commodity ETPs saw the largest outflows in Q3 Momentum strategies jumped pass Non-Traditional Fixed Income products in total assets in Q3 Q3 Products Q3 Net Flows YTD Net Flows Attribute AUM % of Total # of ETPs Q3 % of Total YTD % of Total Value 157, % 43 2, % 9, % Dividends 155, % % 4, % Growth 149, % 34 2, % 6, % Multi-Factor 50, % 221 1, % 5, % Low-Volatility 40, % % 1, % Equal-Weighted 32, % % % Fundamental 20, % 12 1, % 4, % Momentum 11, % % % Non-Traditional Fixed Income 10, % % 1, % Non-Traditional Commodity 7, % 48-1, % -1, % Quality 6, % % % Earnings Weighted 3, % % % Revenue Weighted 1, % % % Multi-Asset 1, % % % Buyback/Shareholder Yield 1, % % % Risk-Weighted 1, % % % Low/High Beta % % % Expected Returns % % % Total: 652, % 662 8, % 35, % Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 4

6 Q3 Strategic Beta ETP Net Flows Value and Growth ETPs accounted for 7 of the top 10 net inflows list, with 3 of those products targeting mid-caps Dividend ETPs led the top 10 net outflows list, though DXJ and HEDJ outflows were likely due to their currency-hedged attribute rather than their dividend weighting schemes Top 10 Net Inflows Ticker Name Sponsor Attribute Q3 AUM Q3 Flows VTV Vanguard Value Index ETF Vanguard Value 33, ,160.0 VUG Vanguard Growth Index ETF Vanguard Growth 29, ,023.7 MTUM ishares Edge MSCI USA Momentum Factor ETF BlackRock Momentum 4, IWS ishares Russell Mid Cap Value ETF BlackRock Value 10, VYM Vanguard High Dividend Yield Index ETF Vanguard Dividends 19, EFV ishares MSCI EAFE Value ETF BlackRock Value 5, IVW ishares S&P 500 Growth ETF BlackRock Growth 19, MDYG SPDR S&P 400 Mid Cap Gr ETF State Street Growth 1, MDYV SPDR S&P 400 Mid Cap Vl ETF State Street Value EFAV ishares Edge MSCI MinVol EAFE ETF BlackRock Low Volatility 7, Top 10 Net Outflows Ticker Name Sponsor Attribute Q3 AUM Q3 Flows USO US Oil US Commodity Funds Non-Traditional Commodity 2, ,263.5 HEDJ WisdomTree Europe Hedged Equity WisdomTree Dividends 9, KRE SPDR S&P Regional Banking ETF State Street Equal Weighted 3, DXJ WisdomTree Japan Hedged Equity WisdomTree Dividends 8, DVY ishares Select Dividend ETF BlackRock Dividends 17, SDY SPDR S&P Dividend ETF State Street Dividends 15, RSP Guggenheim S&P 500 Equal Weight ETF Guggenheim Investments Equal Weighted 13, SLYG SPDR S&P 600 Sam Cap Growth ETF State Street Growth 1, IWP ishares Russell Mid Cap Growth ETF BlackRock Growth 7, SPHD PowerShares S&P 500 High Dividend Low Vol PowerShares Multi-Factor 2, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 5

7 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Value Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows IWD ishares Russell 1000 Value ETF BlackRock 37, VTV Vanguard Value Index ETF Vanguard 33, , ,229.3 IVE ishares S&P 500 Value ETF BlackRock 13, VBR Vanguard Small Cap Value Index ETF Vanguard 11, ,116.8 IWS ishares Russell Mid Cap Value ETF BlackRock 10, IWN ishares Russell 2000 Value ETF BlackRock 8, VOE Vanguard Mid Cap Val Index ETF Vanguard 7, EFV ishares MSCI EAFE Value ETF BlackRock 5, IJJ ishares S&P Mid Cap 400 Value ETF BlackRock 5, IJS ishares S&P Small Cap 600 Value ETF BlackRock 4, Dividends Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows VIG Vanguard Dividend Appreciation Index ETF Vanguard 25, VYM Vanguard High Dividend Yield Index ETF Vanguard 19, DVY ishares Select Dividend ETF BlackRock 17, SDY SPDR S&P Dividend ETF State Street 15, HEDJ WisdomTree Europe Hedged Equity WisdomTree 9, ,295.3 DXJ WisdomTree Japan Hedged Equity WisdomTree 8, HDV ishares Core High Dividend ETF BlackRock 6, SCHD Schwab US Dividend Equity ETF Schwab ETFs 6, IDV ishares International Select Dividend ETF BlackRock 4, FVD First Trust Value Line Dividend Index First Trust 3, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 6

8 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Growth Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows IWF ishares Russell 1000 Growth ETF BlackRock 37, ,337.0 VUG Vanguard Growth Index-ETF Vanguard 29, , ,753.9 IVW ishares S&P 500 Growth ETF BlackRock 19, ,629.0 IWO ishares Russell 2000 Growth ETF BlackRock 8, IWP ishares Russell MdCp Growth ETF BlackRock 7, IJK ishares S&P MdCp 400 Growth ETF BlackRock 6, VBK Vanguard Small Cap Gro Idx-ETF Vanguard 6, VOT Vanguard Mid Cap Gro Idx-ETF Vanguard 4, IJT ishares S&P SmCp 600 Growth ETF BlackRock 4, SCHG Schwab US Large Cap Growth ETF Schwab ETFs 4, Multi-Factor Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows SPHD PowerShares S&P 500 High Dividend Low Vol PowerShares 2, GSLC GS ActiveBeta US Large Cap Equity ETF Goldman Sachs 2, QDF FlexShares Quality Dividend Index FlexShares 1, DGRW WisdomTree US Quality Dividend Growth WisdomTree 1, GEM GS ActiveBeta Emerging Markets Equity ETF Goldman Sachs 1, FEX First Trust NASDAQ AlphaDEX Large Cap Core Index First Trust 1, FXR First Trust Industrials/Producer Durables AlphaDEX First Trust 1, FXU First Trust Utilities AlphaDEX First Trust 1, FXO First Trust Financial AlphaDEX First Trust 1, TILT FlexShares MSTAR US Market Factor Tilt FlexShares 1, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 7

9 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Low-Volatility Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows USMV ishares Edge MSCI MinVol USA ETF BlackRock 13, EFAV ishares Edge MSCI MinVol EAFE ETF BlackRock 7, SPLV PowerShares S&P 500 Low Volatility PowerShares 7, EEMV ishares Edge MSCI MinVol EM ETF BlackRock 4, ACWV ishares Edge MSCI MinVol Global ETF BlackRock 3, XMLV PowerShares S&P Mid Cap Low Volatility PowerShares 1, XSLV PowerShares S&P Small Cap Low Volatility PowerShares 1, IDLV PowerShares S&P Intl Developed Low Volatility PowerShares EELV PowerShares S&P EM Markets Low Volatility PowerShares SMLV SPDR SSGA US Small Cap Low Vol Index ETF State Street Equal-Weighted Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows RSP Guggenheim S&P 500 Equal Weight ETF Guggenheim Investments 13, KRE SPDR S&P Regional Banking ETF State Street 3, QTEC First Trust NASDAQ 100 Tech Index First Trust 2, RYT Guggenheim S&P 500 EW Technology ETF Guggenheim Investments 1, XT ishares Exponential Technologies ETF BlackRock 1, XHB SPDR S&P Homebuilders ETF State Street XAR SPDR S&P Aerospace & Defense ETF State Street KIE SPDR S&P Insurance ETF State Street XME SPDR S&P Metals & Mining ETF State Street RYH Guggenheim S&P 500 EW Healthcare ETF Guggenheim Investments Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 8

10 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Fundamental Top 10 Ticker Name Sponsor Q3 AUM Q3 Flows YTD Flows PRF PowerShares FTSE RAFI US 1000 PowerShares 4, FNDX Schwab Fundamental US Large Co Index ETF Schwab 3, ,116.6 FNDF Schwab Fundamental Intl Large Co Index ETF Schwab 3, ,034.5 FNDA Schwab Fundamental US Small Co Index ETF Schwab 2, PRFZ PowerShares FTSE RAFI US 1500 Small Mid PowerShares 1, FNDE Schwab Fundamental Emerging Markets Large Co Index ETF Schwab 1, FNDC Schwab Fundamental International Small Co Index ETF Schwab 1, PXF PowerShares FTSE RAFI Developed Markets ex US PowerShares 1, PXH PowerShares FTSE RAFI Emerging Markets PowerShares PRF PowerShares FTSE RAFI US 1000 PowerShares 4, Momentum Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows MTUM ishares Edge MSCI USA Momentum Factor ETF BlackRock 4, ,564.0 FV First Trust Dorsey Wright Focus 5 First Trust 2, PDP PowerShares DWA Momentum PowerShares 1, ONEO SPDR Russell 1000 Momentum Focus ETF State Street EEMO PowerShares S&P Emerging Markets Momentum PowerShares FVC FirstTr Dorsey Wright Dynamic Focus 5 First Trust DWAS PowerShares DWA Small Cap Momentum PowerShares PIZ PowerShares DWA Developed Markets Momentum PowerShares PIE PowerShares DWA Emerging Markets Momentum PowerShares PTH PowerShares DWA Healthcare Momentum PowerShares Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 9

11 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Non-Traditional Fixed Income Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows PCY PowerShares Emerging Markets Sovereign Debt PowerShares 4, TDTT FlexShares iboxx 3Yr Target Duration TIPS FlexShares 2, PHB PowerShares Fundamental High Yield Corp Bond PowerShares 1, TDTF FlexShares iboxx 5Yr Target Duration TIPS FlexShares VBND Vident Core US Bond Strategy ETF Exchange Traded Concepts AGGP IQ Enhanced Core Plus Bond US ETF IndexIQ PGHY PowerShares Global Short Term High Yield Bond PowerShares GIGB GS Access Investment Grade Corp Bond ETF Goldman Sachs AGGY WisdomTree Barclays Yield Enhanced US Aggregate Bond WisdomTree HYLV IQ S&P High Yield Low Vol Corporate Bond ETF IndexIQ Non-Traditional Commodity Ticker Name Sponsor Top 10 Q3 AUM Q3 Flows YTD Flows USO US Oil US Commodity Funds 2, , DBC PowerShares DB Commodity Index Track PowerShares 1, DBA PowerShares DB Agriculture PowerShares USCI US Commodity Index US Commodity Funds DBO PowerShares DB Oil PowerShares DBB PowerShares DB Base Metals PowerShares DGL PowerShares DB Gold PowerShares DBP PowerShares DB Precious Metals PowerShares GCC WisdomTree Continuous Commodity Index WisdomTree DBE PowerShares DB Energy PowerShares Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of September 30,. Charles Schwab Investment Management, Inc. For Institutional Use Only 10

12 Disclosures Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by visiting or calling Please read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility, so that an investor s shares, when redeemed or sold, may be worth more or less than their original cost. Some specialized exchanged-traded funds can be subject to additional market risks. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. ETF Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV). ETPs mentioned are for informational purposes and not an offer to buy or sell a particular security. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Schwab ETFs are distributed by SEI Investments Distribution Co (SIDCO). SIDCO is not affiliated with Charles Schwab Investment Management, Inc., or any of its affiliates. Charles Schwab Investment Management, Inc. All rights reserved W6E EML Charles Schwab Investment Management, Inc. For Institutional Use Only 11

13 Appendix Q3

14 Q3 Strategic Beta Launches and Closures A total of 14 new Strategic Beta ETPs launched in Q3, with Multi-Factor strategies leading launches again with 5 new products PIMCO launched the first dynamic multi-factor ETPs industrywide, with shifting factor weightings Goldman Sachs launched GSEW, their U.S. large-cap equal-weighted ETP, with an OER of 9 bps, undercutting the $14 billion Guggenheim S&P 500 Equal Weight ETF (RSP) by 11 bps Launches Ticker Name Sponsor Attribute OER Inception REEM Oppenheimer Emerging Market Revenue ETF OppenheimerFunds Revenue Weighted 0.46% 7/11/ REFA Oppenheimer International Revenue ETF OppenheimerFunds Revenue Weighted 0.42% 7/11/ RGLB Oppenheimer Global Revenue ETF OppenheimerFunds Revenue Weighted 0.43% 7/11/ USEQ PowerShares Russell 1000 Enhanced Equal Weight PowerShares Multi-Factor 0.29% 7/11/ IGEB ishares Edge Investment Grade Enhanced Bond ETF BlackRock Non-Traditional Fixed Income 0.18% 7/11/ SPMV PowerShares S&P 500 Minimum Variance PowerShares Low Volatility 0.13% 7/11/ SQLV Legg Mason Small Cap Quality Value ETF Legg Mason Multi-Factor 0.60% 7/12/ EDOW First Trust Dow 30 Equal Weight ETF First Trust Equal Weighted 0.50% 8/9/ MFUS PIMCO RAFI Dynamic Multi-Factor US Equity ETF PIMCO Multi-Factor 0.29% 8/31/ MFDX PIMCO RAFI Dynamic Multi-Factor International Equity ETF PIMCO Multi-Factor 0.39% 8/31/ MFEM PIMCO RAFI Dynamic Multi-Factor EM Equity ETF PIMCO Multi-Factor 0.49% 8/31/ Sources: NYSE Arca, BATS, NASDAQ, Strategic Insight, FUSE, ETF.com, Morgan Stanley Smith Barney, Ignites, ETFTrends and Company websites. Strategic beta classification based on Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 13

15 Q3 Strategic Beta Launches and Closures Launches (Cont d) Ticker Name Sponsor Attribute OER Inception GSEW GS Equal Weight US Large Cap Equity ETF Goldman Sachs Equal Weighted 0.09% 9/12/ RBIN Nationwide Risk-Based International Equity ETF Nationwide Funds Risk-Weighted 0.42% 9/15/ RBUS Nationwide Risk-Based US Equity ETF Nationwide Funds Risk-Weighted 0.30% 9/15/ Closures Ticker Name Sponsor Attribute Closure Date EMCR Columbia Emerging Markets Core ETF Columbia Threadneedle Equal Weighted 7/21/17 QESP SPDR MSCI Spain StrategicFactors ETF State Street Global Advisors Multi-Factor 7/24/17 QAUS SPDR MSCI Australia StrategicFactors ETF State Street Global Advisors Multi-Factor 7/24/17 HDWX SPDR S&P International Dividend Currency Hedged ETF State Street Global Advisors Dividends 7/24/17 USMR Horizons USA Managed Risk ETF Recon Capital Low Volatility 9/8/17 Sources: NYSE Arca, BATS, NASDAQ, Strategic Insight, FUSE, ETF.com, Morgan Stanley Smith Barney, Ignites, ETFTrends and Company websites. Strategic beta classification based on Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 14

16 Morningstar s Strategic Beta Taxonomy Return-Oriented Risk Oriented Other Dividend Screened/Weighted (Dividends) Low/Minimum Volatility/Variance (Low Volatility) Non-Traditional Commodity Value Risk-Weighted Non-Traditional Fixed Income Growth Low/High Beta Equal-Weighted Fundamentals Weighted (Fundamental) Multi-Asset Multi-Factor Size Momentum Buyback/Shareholder Yield Earnings Weighted Quality Expected Returns Revenue Weighted Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 15

17 Morningstar Strategic Beta Attributes Definitions Attribute Dividend Screened/Weighted (Dividends) Size Value Growth Fundamentally Weighted (Fundamental) Definition Dividend screened and/or weighted strategies seek to deliver equity income by employing a number of dividend-oriented screening and/or weighting criteria. These include screening a universe of stocks for dividend paying firms, weighting stocks on the basis of dividend payments, screening on the basis of dividend growth, isolating firms based on metrics that would indicate dividend stability, and other dividend-related criteria. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Morningstar does not consider size on a stand-alone basis, but only within the context of a multi-factor strategy that introduces size tilts. Products tracking small cap benchmarks (e.g. Russell 2000) are not classified as strategic beta. Also, Morningstar does not classify small- or mid-cap benchmarks that screen constituents for growth or value characteristics as being Multi-Factor. Only those products that track multi-factor benchmarks that implement a size tilt will be tagged with this attribute for example, the JP Morgan Diversified Return Global Equity ETF (JPGE). Value strategies will screen a segment of the stock market looking to identify those stocks that display value characteristics. These characteristics will differ across index providers. Common value characteristics include: low price/prospective earnings, price/book, price/sales, and price/cash flow ratios, and above average dividend yields among others. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Growth strategies will screen a segment of the stock market looking to identify those stocks that display growth characteristics. These characteristics will differ across index providers. Common growth characteristics include: aboveaverage long-term projected earnings growth, historical earnings growth, sales growth, cash flow growth, and book value growth, among others. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Fundamentally weighted in this case refers exclusively to Research Affiliates RAFI Fundamental Index equity strategies which select and weight their constituents based on fundamental measures such as sales, adjusted sales, cash flow, dividends, dividends plus share buybacks, book value, and retained cash flow. Multi-Factor Multifactor strategies set out to combine a variety of factors (e.g. value, growth, size, momentum, quality, low volatility, etc.) in an effort to improve risk-adjusted performance relative to a standard benchmark. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 16

18 Morningstar Strategic Beta Attributes Definitions (Cont d) Attribute Momentum Buyback/Shareholder Yield Earnings Weighted Quality Expected Returns Definition Momentum strategies will select and/or weight their constituent securities on a number of factors which might include price momentum, adjustments to earnings estimates, and earnings surprises. Buyback/Shareholder yield strategies will select and/or weight their constituents of some measure of cash returned to shareholders (typically any one or some combination of the following: dividends, share repurchases, and debt retirement) over a specified period. Earnings screened and/or weighted strategies seek to deliver excess returns by employing a number of earnings-oriented screening and/or weighting criteria. These strategies look to build a portfolio of stocks comprised of quality companies, which are characterized by their durable business models and sustainable competitive advantages. Quality companies tend to have high and stable levels of profitability and clean balance sheets. These equity strategies will select their constituents based on one or more measures of expected returns or relative performance (e.g. quantitative rankings, broker recommendations, etc.) and weight them in a variety of ways. Revenue Weight Low/Minimum Volatility/Variance (Low-Volatility) Low/High Beta Revenue weighted indexes assign weights to their constituents according to each company s revenue relative to the total revenue of all the companies in the index. Low/Minimum Volatility/Variance strategies select and weight their constituents on the basis of historical volatility. Low/High Beta strategies select and weight their constituents based on their beta relative to a standard market capitalization weighted benchmark. Risk-Weighted Risk-weighted strategies weight constituents according to their individual expected contributions to overall portfolio risk. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 17

19 Morningstar Strategic Beta Attributes Definitions (Cont d) Attribute Non-Traditional Commodity Definition Non-traditional commodity benchmarks aim to improve upon the performance of standard indexes (e.g. DJ UBSCI, S&P GSCI) by avoiding their chief drawbacks (e.g. roll losses resulting from contango). These include benchmarks that employ alternative weighting and/or rolling methodologies. Equal-Weighted Equal-weighted strategies assign an equal weight to their constituent securities. Non-Traditional Fixed Income Non-traditional fixed income benchmarks are not market capitalization weighted. The oft-cited drawback of market capitalization weighting in the case of bond benchmarks is that it results in a portfolio that overweights the most heavily indebted issuers. At present, most non-traditional bond benchmarks weight constituents on the basis of fundamental metrics indicative of debt service capacity which results in portfolios that skew towards more creditworthy issuers. Multi-Asset Multi-asset strategies tend to be income-oriented and will screen eligible securities (which may include but not be limited to stocks, bonds, preferred securities, and MLPs) on the basis of yield amongst other characteristics. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 18

20 Definition ETP (exchange-traded product) In addition to ETFs (exchange-traded funds), several other investment products are also exchange-traded and are therefore similarly categorized, including exchange-traded notes (ETNs), commodities, unit investment trusts (UITs), grantor trusts and limited partnerships. As ETFs represent the vast majority of these exchange-traded investment products, the term is often used as a catchall. Here, the label exchange-traded product (ETP) is used as the umbrella under which ETFs and other related investment products fall. Strategic Beta Morningstar defines strategic beta indexes as indexes that seek to either improve their return profile or alter their risk profile relative to traditional cap-weighted indexes. According to Morningstar, strategic beta products represent a middle ground on the active-to-passive spectrum, deviating from traditional cap-weighted products but do so in a rules-based, transparent and relatively low-cost manner. Charles Schwab Investment Management, Inc. For Institutional Use Only 19