Latest trends in the ETF market and the rise of factor investing to improve portfolio diversification strategies

Transcription

1 Latest trends in the ETF market and the rise of factor investing to improve portfolio diversification strategies Dan Draper Managing Director Invesco PowerShares Global ETFs August 2016 US /16

2 Agenda Introduction Decoding the Smart Beta The (R)evolution of Smart Beta Strategies Portfolio Implementation Ideas 2

3 Introduction

4 Global asset management industry snapshot Global AUM was $71.4T at the end of 2015, while net revenues as a share of AUM continued to decline Source: The Boston Consulting Group, Doubling Down on Data, July

5 Invesco who we are An independent investment management firm dedicated to delivering an investment experience that helps people get more out of life Specialized investment teams managing investments across a comprehensive range of asset classes, investment styles and geographies Solid financials, an investment grade debt rating and strong balance sheet Source: invesco.com 5

6 Investment capabilities delivered through diverse vehicles to enable key outcomes for clients Our fundamental and factor investment capabilities Equity $349B AUM Fixed Income and Money Market $267B AUM Asset Allocation $47B AUM Alternative $116B AUM are delivered through diverse investment vehicles Institutional separate accounts Collective trusts Mutual funds (open/closed-end, on/offshore) Exchange-traded funds (ETFs) Unit investment trusts (UITs) Private placements Sub-advised portfolios Separately managed accounts/ Unified managed accounts Variable insurance funds Customized solutions to enable key outcomes that help our clients around the world achieve their investment objectives Income Capital preservation Growth Source: Invesco Ltd. Client-related data, investment professional, employee data and AUM are as of June 30, 2016, and include all assets under advisement, distributed and overseen by Invesco. Invesco Distributors, Inc. is the US distributor for Invesco Ltd. s retail products. The entities listed are each indirect, wholly owned subsidiaries of Invesco Ltd., except Invesco Great Wall in Shenzhen, which is a joint venture between Invesco and Great Wall Securities, and the Huaneng Invesco WLR Investment Consulting Company Ltd. in Beijing, which is a joint venture between Huaneng Capital Services and Invesco WLR Limited. Please consult your Invesco representative for more information. 6

7 What are ETFs? An ETF is a unique investment tool that includes some of the features of mutual funds with some of the features of individual stocks. Mutual Fund Stock Broad Exposure Transparency 1 Managed Portfolio Liquidity 2 Can be bought/sold through a financial advisor ETF Can be bought/sold through an investment representative Access to a group of securities with a single transaction Exchange traded at market determined prices As with any comparisons, advisors should be aware of the material differences between Mutual Funds and ETFs. Most ETFs are passively managed, whereas most mutual funds are actively managed. Other differences include, but are not limited to, expenses, management style and liquidity. Advisors should make their investors aware of these differences before investing. 1 ETFs disclose their portfolio holdings daily. 2 Shares are not individually redeemable and owners of the shares may acquire those shares from the Funds and tender those shares for redemption to the Funds in creation unit aggregations only, typically consisting of 50,000, 75,000, 100,000 or 200,000 shares. 7

8 AUM Global ETP growth Shown below, global exchange-traded product (ETP) assets now account for $3.1 trillion in assets ($2.2 trillion in the US). YTD, ETPs have constituted 28% of all trading volume in US dollars on US exchanges and have constituted 22% of all share volume. 1 3,000 7,000 2,500 6,000 2,000 1,500 5,000 4,000 3,000 ETPs 1,000 2, , Q1 '16 Global Assets ,156 1,483 1,525 1,944 2,396 2,797 2,959 3,106 US Assets ,012 1,062 1,350 1,701 2,009 2,135 2,183 # Global ETPs ,541 2,220 2,694 3,543 4,311 4,759 5,024 5,431 5,449 5,967 # US ETPs ,099 1,370 1,445 1,536 1,661 1,846 1,878 0 Chart Source: Blackrock and Bloomberg L.P., from Dec. 31, 2001 to March 31, Sources: Bloomberg, L.P. and ArcaVision, as of March 31,

9 ETF industry trends Global ETF asset growth continues Total global ETF AUM = $3.2 trillion * US constitutes 73% of globally managed AUM Global landscape for ETFs continues to expand with new opportunities coming from various regions, including other parts of NA and Asia Pacific Smart Beta strategies are growing nearly 2x faster (based on 3YR CAGR) than the overall ETF market and represent 12% of the US ETF market Growing use of Smart Beta strategies by both institutional and retail investors in the US Non-US investor demand is at an early stage (remains in the awareness stage) Rapidly growing adoption of factor investing within Smart Beta. Factor investing, multi-factor strategies have led Smart Beta fund launches 2015 (84) through YTD 2016 (9) Rapidly growing Smart Beta competition from large existing competitors, led by ishares, and new entrants including traditional active asset managers Proliferation of new Smart Beta launches Challenging environment to create differentiated Smart Beta messaging Increasing competition for talent Investors quest for yield, low volatility and quality investment continues Fixed income has led all categories in terms of flows over the last 12 months, attracting over $87 billion in flows between both taxable and municipal based products Rising apprehension related to traditional bond investing is prompting investors to diversify their fixed income holdings and turn to alternative multi-asset (including dividends, preferreds, international bond, real estate, equity income, MLPs, etc.) Investors continue to flock to managed volatility products and have been adopting other factors, including momentum and quality (gaining popularity more recently) Source: PowerShares Global ETF Products & Research, as of June 30, 2016 *Source: ETFGI as of June 30,

10 ETF industry trends (cont d) While the US remains the primary ETF market, global ETF opportunities are developing quickly Japan saw the highest growth rate in 2015 accelerated by Bank of Japan ETF purchases Removing the United States, Canada saw the second highest average quarterly growth rate for the calendar year 2015 European Cross-Border listings are currently in the number two spot with regard to market share, and are the only group that has seen increased growth rates year over year for the last three years Department of Labor (DOL) proposed fiduciary rule for retirement accounts US retail advisors and RIA s are likely to see increased pressure to steer clients toward low cost, passive product with the advent of the new DOL ruling Widely ETFs will be a major beneficiary of the DOL rule Growing use of Smart Beta & factors by institutions and advisors Increasing demand from some institutions, including sovereign wealth funds and pensions, to factor investing strategies away from alternatives Institutional demand for ETFs are growing at a faster rate than retail in the US driven in large part by increasing demand in fixed income and factor ETFs Active ETF s potential to be a growth driver remains untapped The first non-transparent active ETF launched this year, brought by Eaton Vance, and met with a lot of skepticism to date has very little volume and minimal assets Different transparency standards and other operational differences between active ETFs and mutual funds are key inhibitors Active ETFs represent only 1% of industry assets and 3% of 12 month flows More providers filed for non-transparent active ETF exemption Source: PowerShares Global ETF Products & Research, as of June 30,

11 Overview of Invesco PowerShares Aspirations Beliefs Strategic Priorities Operate as high-conviction, smart beta managers focused on delivering better outcomes to clients Increase our relevance in select markets across the globe Continue to grow our business by delivering great outcomes for clients Industry leadership will increasingly be driven by innovation ETP experience and deep infrastructure support will differentiate market participants Quality of products, indexes and portfolio execution will serve as critical success factors Next generation products will favor non-traditional indexes and active management Investment integrity Deliver ETF solutions Stronger relationships Harness the power of our global infrastructure Build a high performance organization Value Proposition Deliver innovative solutions to investors in our core markets around the globe 11

12 4 th largest US ETF provider focused on Smart Beta & access Rank Firm Description No. of Products ETF AUM (SB) Industry Market Share 12 Month Net Flows ($B) Top 3 Products as a % of AUM 1 ishares Diversified Global Leader % 91 19% 2 Vanguard Low Cost % 76 27% 3 State Street SPY, GLD + Sector SPDRs % 20 54% 4 PowerShares Smart Beta + Access % 0 17%* 5 Schwab Access % 14 37% 6 WisdomTree Dividend Weighted % (14) 51% 7 First Trust Smart Beta % (3) 24% 8 Guggenheim Access % (2) 43% 9 Van Eck Access % 2 56% 10 ProShares Access % 5 25% *Ex-QQQ, 49% with QQQ included Source: Invesco PowerShares, as of June 30,

13 Broad product lineup We offer a broad suite of ETF strategies with 140+ domestic and international exchange-traded funds representing equity, fixed income and alternative asset classes which seek to outperform traditional benchmark indexes while providing access to an innovative array of focused investment opportunities. Equity We are a leader in factor strategies which seek to provide exposure to low volatility, momentum, quality, fundamentals, value and size. Our equity products also offer access to domestic and international sectors with targeted access to niche areas of the market such as small cap, commodities and thematic objectives. Examples: S&P 500 Low Volatility, S&P 500 High Dividend Low Volatility, S&P Small-Cap Sectors, Emerging Markets Infrastructure, Golden Dragon China and Active US Real Estate Fund Fixed Income We offer a suite of innovative equity and fixed-income products that provide access to income producing investment strategies, which in many cases were not previously available in an ETF. Examples: Variable Rate Preferred, Build America Bond, Global Short Term High Yield Bond and CEF Income Composite Alternative Asset Classes This area offers convenient access to traditional physical commodities and currencies through the use of futures contracts. It also offers exposure to private and hedged equity, real estate, senior loans and global macro strategies. Examples: DB Commodity Index Fund, Senior Loan and S&P 500 Downside Hedged 13

14 Decoding the Smart Beta

15 Once you get past the moniker, some very intelligent people are doing some very interesting things that intersect the world of active and passive investing. Jerry Kerns Editor-in-Chief, Morningstar Magazine The New Game Morningstar Magazine, April/May

16 Origins of indexing The Dow Jones Industrial Average was created in Microcosm of the US stock market - Intended to serve as a mathematical construct First Index Fund launched in Vanguard S&P 500 Index Fund First Exchange-Traded Fund (ETF) launched in SPDR S&P 500 ETF Information shown is for educational purposes and should not be deemed as a recommendation to buy or sell a specific product. 1 S&P Dow Jones Indices, djindexes.com 2)Vanguard, vanguard.com 3)State Street Global Advisors, spdrs.com An investor cannot invest directly in an index. 16

17 Growth of index-based investing For illustrative purposes only. From 2010 to 2015 Smart beta ETFs captured over 22% of US ETF equity inflows and now represent 12% of total industry assets. We anticipate that this trend will continue in Source: Bloomberg, L.P. as of June 30,

18 Common industry definitions The common thread among [smart beta ETFs] is that they seek to either improve their return profile or alter their risk profile relative to more traditional market benchmarks. 1 Ben Johnson, Director of Passive Funds Research, Morningstar COMMON DEFINITIONS FOR SMART BETA ETFS Based on Predetermined Rules, Systematically Rebalanced Not Market Cap Weighted Can Track a Variety of Factors Also Known As: Alternative Beta Alternative Indexing Strategic Beta Advanced Beta 1 Source: The Strategic Factor of Smart Beta Morningstar Magazine, April/May 2014 Beta is a measure of risk representing how a security is expected to respond to general market movements. Smart Beta: an alternative and selection index based methodology that may outperform a benchmark or mitigate portfolio risk, or both in active or passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk. 18

19 Invesco PowerShares definition Employing Features of Both Worlds: May outperform a benchmark* Replicates an index with rules-based methodology Passive Cap-Weighted Smart Beta Active Provides broad market exposure Ability to potentially reduce risk through diversification beyond a single security** Liquidity 1 Lower costs 2 Transparency 3 Beta: is a measure of risk representing how a security is expected to respond to general market movements. Smart Beta: an alternative and selection index based methodology that may outperform a benchmark or mitigate portfolio risk, or both in active or passive vehicles. *Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk. There is no assurance that an investment strategy will outperform or achieve its investment objectives. ** Diversification does not guarantee a profit or eliminate the risk of loss. 1 Liquidity: Shares are not individually redeemable and owners of the shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 50,000, 75,000, 100,000 or 200,000 shares. 2 Low Cost: Since ordinary brokerage commissions apply for each buy and sell transaction, frequent activity may increase the cost of ETFs. 3 Transparency: ETFs disclose their holdings daily. 19

20 Like everything else, how we invest has evolved Alpha Alpha Alpha Smart Beta/Factor Investing Beta Beta Time For illustrative purposes only and should not be deemed as an asset allocation recommendation Smart Beta: an alternative and selection index based methodology that seeks to outperform a benchmark or mitigate portfolio risk, or both in active or passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk. 20

21 The (R)evolution of Smart Beta Strategies

22 Global financial crisis The Global Financial Crises Created: Extreme market uncertainty Record-high volatility Sharp portfolio drawdowns Steep capital gain tax consequences Coming out of 2008, many of our clients have placed a renewed emphasis on: Tactical asset allocation (vs. buy & hold strategic asset allocation) Intraday liquidity 1 Daily transparency 2 Cost 3 Tax efficiency 4 1 Liquidity: Shares are not individually redeemable and owners of the shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 50,000, 75,000, 100,000 or 200,000 shares. 2 Transparency: ETFs disclose their holdings daily. 3 Cost: Since ordinary brokerage commissions apply for each buy and sell transaction, frequent activity may increase the cost of ETFs. 4 Tax Efficiency is a measure of performance for an investment or a fund that is calculated by dividing the after-tax return by the pre-tax return. Invesco PowerShares does not offer tax advice. Please consult your own tax advisor for information regarding your own tax situation. 22

23 Smart Beta fastest growing ETF segment Over the past three years, Smart Beta ETFs captured 20% of the US ETF flows and now represent over 12% of total assets. We expect this trend to continue into ETF Industry Year End AUM 12% 2015 YTD ETF Industry Flows 24% 18% Towers Watson* clients already have $20 billion of assets invested in smart beta strategies. *Towers Watson is a global consulting firm. Clients referenced are institutional clients. 2 There is a good chance 30 percent of equity allocations will end up in smart beta products. 88% 76% 82% The article underscores that an understanding of the diversity across smart beta funds is essential, and if strategies fail to deliver in the long term, investors will withdraw. 3 Smart Beta Non-Smart Beta 1 Source: Bloomberg L.P. as of Dec. 31, Total smart beta exposure for Towers Watson clients in Towers Watson, Understanding smart beta, July Source: Financial Times, Smart beta funds eye $5tn windfall, July 14,

24 % Technology in S&P 500 Cap weighting: unintended biases exist Did US equity investors intend to increase their exposure to Technology by 70% during the Tech Bubble? Tech Exposure Grew from 19% to 33% in Just One Year 35% 30% % Technology in S&P % 20% 15% 10% 5% 0% 3/1/99 9/1/99 3/1/00 9/1/00 3/1/01 An investor cannot invest directly in an index. Past performance is not indicative of future results. Source: Bloomberg L.P., FactSet as of Sept. 30,

25 % Japan in MSCI World Index Cap weighting: unintended biases exist Did global equity investors intend to double their exposure to Japan during the Japanese Equity Bubble? Japan Exposure Grew from 22% to 44% in Just Three Years 50% 45% % Japan in MSCI 40% 35% 30% 25% 20% 15% 10% 5% 0% 12/1/85 6/1/87 12/1/88 6/1/90 12/1/91 An investor cannot invest directly in an index. Past performance is not indicative of future results. Source: Bloomberg L.P., FactSet as of Sept. 30,

26 % Auto in US Corporate Bond Index Cap weighting: unintended biases exist Did US corporate bond investors intend to maintain exposure to the auto sector up to and through the rating agency downgrades to junk in 2005? Auto Exposure Lingered Over 6% into % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 9/1/03 5/1/04 1/1/05 9/1/05 5/1/06 1/1/07 For cap-weighted bond indexes, weightings tend to reflect amount of debt outstanding. Therefore, more indebted entities tend to have higher representation than less indebted entities. Commonly referred to as the US Corporate Bond Index, the Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market. An investor cannot invest directly in an index. Past performance is not indicative of future results. Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments. Source: Barclays as of Sept. 30,

27 Headlines reflect shift to Smart Beta Nasdaq Bolsters Smart Beta ETF Business with DWA Takeover Institutional Investor Magazine, Jan. 14, 2015 The New, Improved ETFs: How Smart is Smart Beta? Cover Story: Barron s, May 10, 2014 The Strategic Factor of Smart Beta Cover Story: Morningstar Magazine, April/May 2014 Index Funds That Just Might Beat The Market: Investors Have Put Billions Into Smart Beta Funds Over the Past Year The Wall Street Journal, Nov. 8, 2013 Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk. There is no assurance that an investment strategy will outperform or achieve its investment objectives. 27

28 Outlook for institutional use A majority of institutional decision makers plan to increase use of smart beta ETFs Expected Change in the Next 3 Years Somewhat/Significantly Decrease Somewhat/Significantly Increase Neither Increase of Decrease 36% Smart Beta ETFs 3% 38% 59% 54% 37% 9% Market Cap Index 13% 39% 48% Active ETFs 8% 53% 40% 10% Leveraged/Inverse ETFs 12% 70% 18% Evolution of Smart Beta ETFs, Market Strategies International, as of January

29 Institutions plan to increase use of Smart Beta ETFs Which types of Smart Beta ETFs will you likely begin using in the next three years? Current Usage Expected Usage (Next 3 years) 64% 62% 63% 55% 14% 15% 60% 51% 35% 43% 36% 44% 40% 35% 39% 43% 40% 39% 25% 20% 20% 43% 38% High Dividend Low Volatility Fundamental Weight Equal Weight High Beta Enhanced Fixed Income 1% Currency-Hedged Momentum Other 1% Forty-five percent of all institutional decision-makers expect to allocate more assets to smart beta funds moving forward -- proof of the growing acceptance and understanding of the category. Even among those who haven t yet used a smart beta ETF, 3 in 10 expect to do so. * Evolution of Smart Beta ETFs, Market Strategies International, as of January 2016 Evolution of Smart Beta ETFs, Market Strategies International, as of January

30 Research regarding Smart Beta ETF utilization Top Reasons for Not Using Smart Beta ETFs % Prefer to buy specific asset/stock 15% 3% 2% 9% 15% 11% Prefer active management 9% 10% 11% 10% 9% Not part of our invetment strategy 4% 10% 11% 6% 5% 4% Lack of history/track record 12% 11% 15% 4% 4% Lack of familiarity 26% 31% 34% 11% Evolution of Smart Beta ETFs, Market Strategies International, as of January

31 Portfolio Implementation

32 Express market views, fine tune exposures or diversify through core and satellite positions 1 Multi Factor or Alternatively Weighted Strategies 2 Single Factor Strategies 3 Access Fundamentals Weighted Equal Weighted Quantitative Weighted Alternatively Weighted Fixed Income Low Volatility Dividend High Quality Buyback Momentum High Beta Commodities Multi Strategy Alternatives Equity Hedge/Tail Risk Other Alternatives Commodities and futures generally are volatile and are not suitable for all investors. For more specific definitions of these factors, please see the Glossary and Terms section at the end of this presentation. 32

33 Three ways to access Smart Beta strategies Your financial advisor or consultant can help determine which approach may help achieve your unique investment goals. 1 Smart Beta ETFs Over 80 Investment Solutions 2 Asset Allocation Models* Strategic Smart Beta ETF Portfolios 3 Unit Trusts PowerShares SmartBeta Portfolios Broadest offerings across: Access Single factor Multi factor or alternatively weighted Core and satellite positions commonly used to: Express market views Fine tune exposures Diversify portfolios Asset allocation ideas created by Invesco Solutions team for financial advisors. Balanced-risk approach across global asset classes Allocations ideas based on risk tolerances: Conservative Moderate Aggressive Created by Invesco Solutions team, which employs: Rigorous historical quantitative analysis Qualitative capabilities review Market dynamics assessment overlay Three unique portfolios designed to meet a range of income and growth needs Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc. and broker dealers including Invesco Distributors, Inc. Both firms are indirect, wholly owned subsidiaries of Invesco Ltd. *These Hypothetical Models are not funds or investments. They are provided for informational purposes only, do not represent any actual account, or the results of any actual trading. For informational purposes only and should not be construed as investment advice nor as a recommendation of a particular strategy or product. Hypothetical Models are strategies that must be implemented by a Financial Adviser. 33

34 Smart Beta Chart Analysis - SPHB SPHB recently broke out of a downward sloping channel suggesting a trend reversal higher. The channel pattern is complemented by a head and shoulders bottom, furthering adding fuel to the ideas of a bottom. Notice the sustained uptrend from the May 2011 inception and the breakdown in July 2015 which led to the sell off down to the Feb 2016 low. The circle highlights the breakdown and start of the 2015 sell off which ended in February The current formation shows the upside breakout of the channel from the middle of 2015 to the spring of 2016 and a head and shoulders looking bottom like formation that projects toward $40 a new high. The distance from the neckline and the low (head of the head and shoulders) projected from the breakout. The shoulders of the pattern are marked with the S and the head is marked with the H the neckline is marked across the November 2015 and April 2016 highs. 34

35 Smart Beta Chart Analysis - PIE PIE shows short term favorable momentum, but remains in a downward sloping channel suggesting that the momentum factor is still working out longer term bottom in the EM segment. A rally across the top of the channel currently, in the $18 area, would signal a bottom and longer term bullish trend. On a shorter term basis PIE displays signs of a V shaped bottom between late 2015 and early 2016, and is bumping up against resistance in the $16.80 area across the lows made at the turn of 2014 and 2015 and the July 2015 low. Pull backs to the $15.50 area across recent highs (dashed lines) may provide support. Eventually, one would expect PIE to go back to the 2013 high near $22. 35

36 Smart Beta Chart Analysis - PXE PXE has a potential bullish set up for investors who like the energy sector. PXE is trending downward in a channel from the 2014 high. PXE has arguably touched the trendline off the 2014 highs six times, and has respected the bottom of the trend line (left side) with a little noise. PXE has a beautiful textbook channel pattern. PXE is attempting to form a bottom and breakout of the channel to the upside with a cup and handle formation. $25 is pivotal resistance across the lows of 2012, 2014, and It was too noisy to show, but a 38.2% retracement (Fibonacci) of the decline from the Jun 2014 high near $40 and the recent low under $16 in Feb 2016 is $25.15 and consistent with the lows from 2012, 2014, and PXE has a potential bullish set up for investors who like the energy sector. PXE is trending downward in a channel from the 2014 high. PXE has arguably touched the trendline off the 2014 highs six times, and has respected the bottom of the trend line (left side) with a little noise. PXE has a beautiful textbook channel pattern. PXE is attempting to form a bottom and breakout of the channel to the upside with a cup and handle formation. $25 is pivotal resistance across the lows of 2012, 2014, and It was too noisy to show, but a 38.2% retracement (Fibonacci) of the decline from the Jun 2014 high near $40 and the recent low under $16 in Feb 2016 is $25.15 and consistent with the lows from 2012, 2014, and

37 Annualized Excess Return (Relative to S&P 500 Index) Factor-based indexes historical performance Smart Beta Index Excess Return Since Respective Index Inception Annualized Excess Return 4.0% 2.0% 0.0% 1.9% 1.0% 1.6% 2.3% 3.4% 0.1% 0.6% 2.8% 0.4% -0.7% -2.0% -4.0% -6.0% -7.0% -8.0% Buyback Dividend Growers Fundamental High Beta High Dividend High Quality Low Volatility Momentum Small Cap Value Growth Index 11/9/ /9/ /28/2005 4/4/ /09/2005 6/20/2010 4/4/2011 1/9/2007 5/4/ /9/ /9/2003 inception Source: Bloomberg L.P., since index inception shown as of June 30, An investment cannot be made directly into an index. Index returns do not reflect any fees, expenses or sales charges. Nor do they represent fund performance. Past performance does not guarantee future results. Smart beta strategies may underperform cap-weighted benchmarks and increase portfolio risk. There is no assurance that an investment strategy will outperform or achieve its investment objectives. 37

38 Factor leadership can change rapidly Q Q Q Q Q Q Q Q Q Q High High Dividend High Dividend S&P 500 Low Volatility Momentum Growth High Dividend Low Volatility Low Volatility Dividend 4.9% 7.8% 1.1% 9.2% 5.9% 0.6% 0.4% 7.9% 6.7% 12.7% Low Volatility 3.3% Value 3.0% Fundamental 2.5% High Beta 2.2% High Quality 1.8% S&P % Small Cap 1.6% Momentum 1.6% Dividend Growers 1.4% Buyback 1.4% Growth 0.8% High Beta 7.2% Dividend Growers 5.4% S&P % Low Volatility 5.2% Fundamental 5.0% Value 4.9% Growth 4.7% Momentum 4.7% High Quality 4.1% Buyback 3.5% Small Cap 2.2% High Quality 1.1% Growth 1.0% Value 1.0% Momentum 0.9% Buyback 0.3% Fundamental -0.1% Dividend Growers -0.3% High Beta -0.3% Low Volatility -1.0% High Dividend -1.3% Small Cap -6.5% High Quality 8.6% Small Cap 7.9% Buyback 7.8% High Dividend 7.6% Growth 7.1% S&P % Dividend Growers 4.9% Fundamental 4.8% Momentum 4.3% Value 3.5% High Beta 3.4% Growth 4.9% Small Cap 3.4% Buyback 3.0% High Quality 1.2% High Dividend 1.0% S&P % Low Volatility 0.7% High Beta 0.7% Fundamental 0.3% Value -1.0% Dividend Growers -1.4% S&P % Small Cap 0.1% Fundamental -0.1% Value -0.3% Momentum -0.8% Buyback -1.0% High Quality -1.3% High Beta -1.6% Dividend Growers -2.1% High Dividend -2.7% Low Volatility -2.8% Low Volatility -1.2% High Quality -3.6% Growth -4.2% Dividend Growers -5.2% S&P % Momentum -6.6% Value -7.3% Fundamental -7.9% Buyback -9.4% Small Cap -11.5% High Beta -14.7% Growth 7.2% S&P % High Dividend 7.0% Dividend Growers 6.4% High Quality 5.9% Fundamental 5.7% Value 4.8% Buyback 4.2% High Beta 3.5% Small Cap 3.3% Momentum 3.0% Dividend Growers 6.5% High Quality 6.3% Low Volatility 5.2% Value 3.9% Fundamental 2.0% S&P % Small Cap 0.7% Buyback 0.2% Growth -1.0% Momentum -1.6% High Beta -1.6% Dividend Growers 4.9% High Dividend 4.0% Small Cap 3.6% Momentum 3.4% Value 3.3% Fundamental 3.3% S&P % High Quality 2.5% High Beta 2.4% Growth 1.5% Buyback 0.3% Difference Between Top and Bottom Performing Market Segments 4.1% 5.7% 7.7% 5.8% 7.2% 3.4% 15.1% 4.9% 14.3% 6.4% Source: Bloomberg L.P., as of June 30, An investment cannot be made directly into an index. Index returns do not reflect any fees, expenses or sales charges. Nor do they represent fund performance. Please see slide 40 for index proxies and definitions. Past performance does not guarantee future results. Smart beta strategies may underperform cap-weighted benchmarks and increase portfolio risk. There is no assurance that an investment strategy will outperform or achieve its investment objectives. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Investors should consult their Financial Advisors before making any investment decisions. Diversification does not ensure a profit or eliminate the risk of loss. 38

39 Core-satellite investing Build a diversified core with single-factor or multifactor/alternatively weighted strategies Tactically adjust market exposure based on market outlook with the objective of achieving portfolio outperformance Opportunistic Aggressive Cautious For illustrative purposes only. Defensive Smart beta ETFs can be used as core and/or satellite investments in virtually unlimited ways to construct portfolios in pursuit of desired investment outcomes. Many investors implement traditional long-term core holdings to access market returns and help reduce costs while aligning with individual risk tolerances. Others might see a benefit in short-term tactical adjustments based on current market outlook. When implementing investment objectives, it is essential that investors understand how factors may perform in different market cycles and may affect the overall performance of a portfolio. This is where financial advisors play a vital role in determining the optimal portfolio allocations for their clients. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Investors should consult their Financial Advisors before making any investment decisions. Diversification does not ensure a profit or eliminate the risk of loss. 39

40 Smart Beta for various market conditions Bull Market High Beta Buy Back Fundamental Momentum vs. Bear Market Low Volatility High Quality Credit Spread Narrows High Beta Fundamental vs. Credit Spread Widens Low Volatility High Dividend Increasing Fed Funds Target Momentum High Beta Decreasing Fed Funds Target High Dividend Low Volatility Higher Market Volatility Low Volatility High Quality Momentum Lower Market Volatility High Beta Buyback Yield Curve Steepens High Quality Low Volatility Yield Curve Flattens High Beta Value Falling Oil Prices High Quality Low Volatility Rising Oil Prices High Beta Momentum For Illustrative Purposes Only. These ideas are presented based on historical smart beta methodology index performance. An investment cannot be made directly into an index. Index returns do not reflect any fees, expenses or sales charges. Nor do they represent fund performance. This should not be construed as investment advice nor as a recommendation of a particular strategy or product. Consult with your financial advisor before making any investment decisions. High Beta utilizes a beta-weighted methodology to increase exposure to market movements of a benchmark without incorporating leverage. BuyBack tracks US companies that consistently repurchase their own outstanding shares. High Dividend ranks securities by their dividend yield while seeking to increase overall portfolio yield and potential for improved price performance. Momentum ranks securities relative to peers, utilizing relative strength methodology to identify the strongest and weakest investment trends. Low Volatility utilizes volatility rankings while seeking to minimize the effects of market fluctuations. High Quality focuses on companies that have a Standard and Poor s quality ranking of A-* or above which have historically exhibited higher sharpe ratios and lower volatility. Fundamentals weighted ranks all publicly listed US companies according to four fundamental measures of company size: sales, cash flow, book value and dividends. 40 US /16

41 Thank You