Synthetic Equity & Index Research US ETF Model Portfolios

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1 Normalized Level (100) Deutsche Bank Markets Research North America United States Synthetic Equity & Index Research US ETF Model Portfolios Date 12 February 2016 House View Portfolio: 2016 Annual Rebalance House View Update as of Feb 9th, 2016 Adding fixed income and gold, reducing equity and USD. Within equities, increasing US, decreasing Europe and Japan, and exiting EM Asia; while maintaining credit quality and increasing rates exposure in debt allocations Market and Model Performance Our HVP is up 17.2% since its launch on Oct 2, 2012, and 8.1% lower since the last rebalancing on Oct 7, In the meantime, the equity market (ACWI) and our multi-asset-class benchmark are 15.6% up and 6.5% down since the launch of our HVP, and down 10% and 9.3% since the last rebal, respectively. Figure 1: Portfolio performance since launch House View Port. ACWI Bnchmk 90.0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Source: Deutsche Bank, FactSet. Performance corresponds to Total Returns and it does not include transaction costs. Author Sebastian Mercado, CFA Strategist (+1) Team Contacts Hallie Martin Strategist (+1) Srineel Jalagani Strategist (+1) Recent research TAARSS says prefer defensive asset classes in February ETF flows suggest rotation from Equities to Fixed Income in January Source: Deutsche Bank Date 2 Feb Feb 2016 Portfolio Updates and New Membership We changed our strategic asset allocation from 70% allotted to equities to 55%, from 20% to fixed income to 30%, and from 10% to 15% alternatives via FX and Gold. Within equities, we increased our allocation to the US (20% to 30%), dropped our Intl DM (40%) and EM (10%) allocation, and combined all the Intl equity exposure to 25% DM and no EM. In the US, we added Banks and increased Utilities. In fixed income, we added 10% more to rates via Intermediate US Treasuries. In alternatives we decreased our USD position to 5%, and added a new 10% allocation to Gold. Figure 2: New House View Portfolio* ETF TER Weight Position Asset Direction Type Class Exposure USMV 0.15% 15% Long Core Equity US LC Min Vol KBWB 0.35% 5% Long Satellite Equity US Banks XLU 0.14% 10% Long Satellite Equity US Utilities EFAV 0.20% 25% Long Core Equity DM Intl LQD 0.15% 10% Long Core Credit Inv. Grade IEF 0.15% 20% Long Core Rates Intermediate UST IAU 0.25% 10% Long Core Comdty Gold UUP 0.80% 5% Long Core FX Long USD Source: Deutsche Bank.. *Target weights. See Figure 7 for old basket and change details. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MCI (P) 124/04/2015.

2 Table Of Contents The House View Portfolio... 3 Latest views... 3 Performance analysis... 4 Annual Performance Summary: Summary of closed & changed portfolio positions... 6 Portfolio Update Commentary... 8 New Portfolio constituent selection... 9 Portfolio constituent correlations ETF Standard Comparison Page 2

3 The House View Portfolio1 Latest views 2 The year continues to be bruising for risk assets and recent attempts at stabilisation have been unsuccessful. After a mild rebound, equities and US credit spreads are again close to their year s worst levels. In addition to the initial concerns about China and energy, two new issues further weigh on risk sentiment: the slowdown in US growth momentum and the tightening of financial conditions especially in European financial credit. Macro data in the US have been weaker than expected and have raised questions about the sustainability of the recovery. Consumer spending and the services sector, which had been the drivers of growth, have decelerated. Fundamentals there still look sound, but weakness may persist and we have revised our below consensus growth forecasts further down. The Fed turned more dovish in response to the slower momentum and market volatility, and we no longer expect a rate rise in March. Indeed, at this stage it is difficult to see the Fed hiking more than once this year. The Fed was not alone in this dovish turn. The Bank of Japan surprised markets by cutting rates into negative territory, and we actually expect a further cut later this year. As for the ECB, more easing should be forthcoming in March. A deposit rate cut seemed like the best course of action in response to purely external risks, but if the tightening of financial conditions does not subside an increase in the size of the QE purchase programme may be necessary. Our macro outlook for 2016 is broadly unchanged so far, uninspiring but not a disaster but downside risks have risen both in the US and in Europe. Meanwhile, the absence of new news has moved attention away from China, but the underlying problem remains unresolved. As for oil, volatility is becoming less relevant for macro and markets. Despite this monetary policy support, until US growth, European financial conditions, China and oil concerns are put aside, markets will remain volatile and a sustained change in risk appetite is difficult. Fundamentally, we see 15-20% upside to equities, US credit spreads fairly priced and still believe in the stronger dollar story but risks remain for all these views. Expectations for a drift higher in rates have not materialised, and dovish central banks and lingering macro concerns will continue to delay this normalization. David Folkerts-Landau, Group Chief Economist 1 For further details on the House View portfolio, refer to our report titled US ETF Investment Ideas: Implementing the House View with ETFs, Sebastian Mercado et al., published on October 2, This sub-section contains extracts from the report titled The House View, published on Feb 8, 2016 by Deutsche Bank Research. Page 3

4 Bnchmrk Bnchmrk House View Port. House View Port. 12 February 2016 Performance analysis At a headline level, we compare the performance of our HVP against the performance of Global 3 equities and of a multi-asset-class benchmark. The Global equities benchmark is represented by ACWI which tracks the MSCI All Country World index, while the multi-asset-class benchmark represents a basket of Global equity (ACWI), US fixed income (BND), and commodity (DBC) exposures with the following weights: 50%, 30%, and 20%, respectively. Our HVP is up 17.2% since its Oct 2012 launch, while ACWI has gained 15.6% and the multi-asset-class benchmark has lost 6.5% during the same period, respectively. The multi asset class benchmark has been the least volatile with annualized volatility of 8.2%, compared to 11.5% for our HVP and 13.4% for ACWI, since inception. Since the last rebalancing date on Oct 7, 2015, the HVP lost 8.1% vs. a 9.3% loss for the benchmark. The market sold-off in the beginning of 2016 driven by concerns about the Chinese Economy growth, softer economic data in the US, and tighter financial conditions on both sides of the Atlantic. Equity positions were the most hit by the sell-off with our China (-23.7%), India (-15.4%), and Japan (-14.8%) positions being the most affected ones; while our US Utilities (+8.3%) and US Treasury (+3.4%) positions were the best performers in this period. The equity positions in Japan, and Europe were the main drag on portfolio performance (Figures 3 & 4). Figure 3: Performance by position Figure 4: Performance contribution by Position Eq. US Large Caps (QQQ) Eq. US Utilities (XLU) Eq. Japan (DXJ) Eq. Europe (DBEU) Eq. India (EPI) Eq. China (FXI) Rates Interm. (IEF) IG Credit (LQD) FX Long USD (UUP) Equity (ACWI) Comdty (DBC) Fixed Income (BND) Performance -30% -25% -20% -15% -10% -5% 0% 5% 10% Eq. US Large Caps (QQQ) Eq. US Utilities (XLU) Eq. Japan (DXJ) Eq. Europe (DBEU) Eq. India (EPI) Eq. China (FXI) Rates Interm. (IEF) IG Credit (LQD) FX Long USD (UUP) Equity (ACWI) Comdty (DBC) Fixed Income (BND) Performance Contribution -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% Source: Deutsche Bank, FactSet. Total Return performance from Oct 7, 2015 to Feb 9, Source: Deutsche Bank, FactSet. Total Return performance from Oct 7, 2015 to Feb 9, Since Nov 1, 2013 we have changed the equity benchmark from US Equities (S&P 500 SPY) to Global Equities (MSCI All Country World Index ACWI). The House View Portfolio is a global multi-asset-class portfolio; therefore a Global equity benchmark is more appropriate than a US-centric one. Page 4

5 Annual Performance Summary: 2015 For the full year 2015, our model portfolio posted a total return of 3.3% with an annualized volatility of 14.6%, a Sharpe ratio of 0.23, and a maximum drawdown of 12.9%. Meanwhile, the multi asset class benchmark posted a total return of -6.6% with an annualized volatility of 9.6%, a Sharpe ratio of -0.69, and a maximum drawdown of 11.5%. Lastly, global equities (ACWI) posted a total return of -2.2% with an annualized volatility of 15.6%, a Sharpe ratio of and maximum drawdown of 15.1% (Figure 5). Figure 5: 2015 Performance Summary House View Portfolio. 20.0% 15.0% 10.0% HVP Benchmark ACWI % -5.0% 5.0% % 0.0% -5.0% % -10.0% Total Return Volatility -0.8 Sharpe -20.0% Max. DD Source: Deutsche Bank, FactSet. Data from Dec 31, 2014 to Dec 31, Sharpe= Tot Return / Volatility Page 5

6 Summary of closed & changed portfolio positions Figure 6: Details for closed & changed positions (most recent changes on top) Ticker Exposure Open Weight Close Weight Weight Change OPEN CLOSED Exit/Chg Performance QQQ Equity - US Large Caps 15.0% 0.0% -15.0% 7-Oct-15 9-Feb-16 Full -8.54% XLU US Utilities 5.0% 10.0% 5.0% 7-Oct-15 9-Feb-16 Increase 8.26% DXJ Equity - Japan 15.0% 0.0% -15.0% 29-Jul-14 9-Feb-16 Full -3.04% DBEU Europe 25.0% 0.0% -25.0% 7-Oct-15 9-Feb-16 Full % EPI Equity - India 5.0% 0.0% -5.0% 5-Jan-15 9-Feb-16 Full % FXI Equity - China 5.0% 0.0% -5.0% 12-Jun-15 9-Feb-16 Full % IEF Rates - Intermediate UST 10.0% 20.0% 10.0% 7-Oct-15 9-Feb-16 Increase 3.35% UUP FX - Long USD 10.0% 5.0% -5.0% 6-Mar-13 9-Feb-16 Partial 10.85% QQQ Equity - US Large Caps 20.0% 15.0% -5.0% 12-Jun-15 7-Oct-15 Partial -2.41% KBWB US Banks 7.5% 0.0% -7.5% 12-Jun-15 7-Oct-15 Full -9.24% IBB US Biotech/Pharma 5.0% 0.0% -5.0% 12-Jun-15 7-Oct-15 Full % XLU US Utilities 2.5% 5.0% 2.5% 12-Jun-15 7-Oct-15 Increase 4.06% DBEU Europe 20.0% 25.0% 5.0% 12-Jun-15 7-Oct-15 Increase -5.45% HYG Credit - High Yield 10.0% 0.0% -10.0% 5-Jan-15 7-Oct-15 Full -0.64% QQQ Equity - US Large Caps 25.0% 20.0% -5.0% 5-Jan Jun-15 Partial 7.46% BBH US Biotech 5.0% 0.0% -5.0% 29-Jul Jun-15 Full 35.54% XRT US Retail 5.0% 0.0% -5.0% 5-Jan Jun-15 Full 5.97% XLU US Utilities 5.0% 2.5% -2.5% 5-Jan Jun-15 Partial -8.50% HEDJ Eurozone 10.0% 0.0% -10.0% 5-Jan Jun-15 Full 17.37% ASHR China 5.0% 0.0% -5.0% 5-Jan Jun-15 Full 47.28% KBWB US Banks 5.0% 7.5% 2.5% 29-Jul Jun-15 Increase 13.10% QQQ Equity - US Large Caps 15.0% 25.0% 10.0% 29-Jul-14 5-Jan-15 Increase 5.64% EUFN Equity - European Fin. 5.0% 0.0% -5.0% 31-Oct-13 5-Jan-15 Full -9.24% EWG Equity - Germany 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full % EWP Equity - Spain 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full % EZU Equity - Eurozone 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full % FXI Equity - China 7.5% 0.0% -7.5% 29-Jul-14 5-Jan-15 Full 2.70% GMF Equity - EM Asia Pacific 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full -4.19% EPI Equity - India 7.5% 5.0% -2.5% 29-Jul-14 5-Jan-15 Partial -0.60% PCY Credit - EM Debt 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full -2.54% VTIP Inflation - Short Term TIPs 5.0% 0.0% -5.0% 29-Jul-14 5-Jan-15 Full -2.69% QDF Equity - US Divs. 15.0% 0.0% -15.0% 14-Feb Jul-14 Full 8.66% QQQ Equity - US Large Caps 20.0% 15.0% -5.0% 14-Feb Jul-14 Partial 8.55% EWG Equity - Germany 10.0% 5.0% -5.0% 14-Feb Jul-14 Partial -3.15% EZU Equity - Eurozone 15.0% 5.0% -10.0% 14-Feb Jul-14 Full 0.18% JNK Credit - HY Debt 5.0% 0.0% -5.0% 14-Feb Jul-14 Full 2.78% BKLN Credit - Senior Loans 5.0% 0.0% -5.0% 14-Feb Jul-14 Full 1.25% DXJ Equity - Japan 10.0% 15.0% 5.0% 14-Feb Jul-14 Increase 8.64% FXI Equity - China 5.0% 7.5% 2.5% 14-Feb Jul-14 Increase 16.13% JNK Credit - HY Debt 10.0% 5.0% -5.0% 3-May Feb-14 Partial 2.64% MCHI Equity - China 7.5% 0.0% -7.5% 28-Nov Feb-14 Full 3.94% IVV Equity - US Large Caps 20.0% 0.0% -20.0% 7-Feb Feb-14 Full 24.40% VGT Equity - US Technology 5.0% 0.0% -5.0% 3-May Feb-14 Full 23.25% BKLN Credit - Senior Loans 10.0% 5.0% -5.0% 7-Feb Feb-14 Partial 4.03% Source: Deutsche Bank, FactSet. Performance corresponds to Total Returns Page 6

7 Figure 6 (cont): Details for closed & changed positions Ticker Exposure Open Weight Close Weight Weight Change OPEN CLOSED Exit/Chg Performance VIG Equity - US Divs. 20.0% 0.0% -20.0% 3-May Feb-14 Full 10.68% DXJ Equity - Japan 7.5% 10.0% 2.5% 3-May Feb-14 Increase -0.32% XLF Equity - US Financials 5.0% 0.0% -5.0% 3-May Oct-13 Full 9.97% IVV Equity - US Large Caps 25.0% 15.0% -10.0% 7-Feb Aug-13 Partial 13.49% MCHI Equity - China 10.0% 7.5% -2.5% 28-Nov-12 3-May-13 Partial 3.00% SDY Equity - US Divs. 25.0% 0.0% -25.0% 7-Feb-13 3-May-13 Full 9.71% HYS Credit - High Yield 10.0% 0.0% -10.0% 7-Feb-13 3-May-13 Full 2.98% IVV Equity - US Large Caps 35.0% 25.0% -10.0% 7-Feb-13 3-May-13 Partial 7.33% IAU Cmdty - Gold 5.0% 0.0% -5.0% 1-Oct-12 6-Mar-13 Full % FXE FX - EURUSD 5.0% 0.0% -5.0% 1-Oct-12 6-Mar-13 Full 0.64% DVY Equity - US Divs. 20.0% 0.0% -20.0% 1-Oct-12 7-Feb-13 Full 5.74% USMV Equity - US Low Vol. 25.0% 0.0% -25.0% 1-Oct-12 7-Feb-13 Full 4.10% PCY Credit - EM Debt 10.0% 0.0% -10.0% 1-Oct-12 7-Feb-13 Full 0.40% JNK Credit - HY Debt 10.0% 0.0% -10.0% 1-Oct-12 7-Feb-13 Full 3.33% IAU Cmdty - Gold 15.0% 5.0% -10.0% 1-Oct-12 7-Feb-13 Partial -5.96% FXE FX - EURUSD 10.0% 5.0% -5.0% 1-Oct-12 7-Feb-13 Partial 3.81% DVY Equity - US Divs. 25.0% 20.0% -5.0% 1-Oct Nov-12 Partial -0.87% IAU Cmdty - Gold 20.0% 15.0% -5.0% 1-Oct Nov-12 Partial -3.24% Source: Deutsche Bank, FactSet. Performance corresponds to Total Returns Page 7

8 Portfolio Update Commentary4 Given the increased level of volatility in the market, and uncertain growth scenario in both developed and emerging economies, we have decided to rebalance our major target asset allocation weights at an asset class level in order to assume a more defensive approach to financial markets. Therefore we have reduced our equity allocation from 70% to 55%, increased our fixed income allocation from 20% to 30%, and increased our allocation to alternatives from 10% to 15% by adding Gold to the existing currency position. Figure 7: House View Portfolio Change Details ETF TER Weight Position Asset Old New Direction Type Class Exposure USMV 0.15% 0% 15% Long Core Equity US LC Min Vol QQQ 0.20% 15% 0% Long Core Equity US Large Caps KBWB 0.35% 0% 5% Long Satellite Equity US Banks XLU 0.14% 5% 10% Long Satellite Equity US Utilities EFAV 0.20% 0% 25% Long Core Equity DM Intl DXJ 0.48% 15% 0% Long Core Equity Japan DBEU 0.45% 25% 0% Long Core Equity Europe FXI 0.73% 5% 0% Long Satellite Equity China EPI 0.83% 5% 0% Long Satellite Equity India LQD 0.15% 10% 10% Long Core Credit Inv. Grade IEF 0.15% 10% 20% Long Core Rates Intermediate UST IAU 0.25% 0% 10% Long Core Comdty Gold UUP 0.80% 10% 5% Long Core FX Long USD Source: Deutsche Bank, Bloomberg Finance LP. Highlighted fields are portfolio updates Red: wgt increase. Green: wgt decrease. Gray: ETF update Within equities, we have decided to take a defensive approach by focusing on Developed Markets and staying away from Emerging Markets. In addition, to the market allocations, we have also implemented a defensive approach in the sector and strategy selection. In fact, both of our main positions in equities focus on the US and International DM markets by utilizing a strategy which seeks to invest in less volatile companies. While from a sector perspective we maintain an allocation to US Utilities, and US Banks. Although we recognize that US Banks is not a defensive industry per se, our equity strategist sees significant upside for this space mostly driven by low valuations 5. In terms of currency hedging, we see currency exposure as a less significant driver of international equity returns in 2016; therefore we have exited all of our currency hedged positions. We have reduced our allocation to equities by 15%, and added 10% to fixed income and 5% to Alternatives Within Fixed Income, we continue to be more bullish on rates than credit given the pressure on risky assets, fragile credit fundamentals (particularly in HY), and safe-haven demand. Finally, on the Alternatives side, we believe that USD strength should resume as decline in Fed pricing is overdone; while Gold should continue to see technical support from safe-haven demand given higher level of uncertainty across financial markets. 4 More details about the rationale behind the HVP investment ideas discussed in this section can be found at: The House View, published on Feb 9th, 2016 by Deutsche Bank Research 5 See In defense of Banks, published by David Bianco on Feb 8, 2016 Page 8

9 We are increasing our allocation to US equities by 10% from 20% to 30%. We have switched our 15% Mega Cap US exposure for a Large Cap US with minimum variance tilt, added 5% to US Utilities, and enter into a new 5% US Banks position. Conversely, we have exited all of our international equity positions (Europe, Japan, China, and India), and entered into a 25% single position to gain access to International DM equities with a minimum variance tilt, while staying away from EM equities. Furthermore, we have maintained a 10% allocation to IG credit, and added 10% to rates. Lastly we reduced our USD allocation by 5%, and entered a brand new position in Gold for 10%. Figure 8: Asset Class allocation Figure 9: Market allocation (Equity) Figure 10: Region allocation (Equity) 80% 70% 60% 50% 40% 30% 20% 10% 0% Previous Current Equity Fixed Income Alternatives 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Previous Current US DM Intl EM 35% 30% 25% 20% 15% 10% 5% 0% North America Previous Current Europe Japan Asia ex JP Source: Deutsche Bank Source: Deutsche Bank Source: Deutsche Bank New Portfolio constituent selection US Equities: Low Risk Strategy We analyzed four products that offer access to US equities with a focus on lower volatility. In general these funds have experienced lower levels of realized volatility compared to traditional indices such as the S&P 500. Furthermore, these ETFs also exhibit defensive betas to the S&P 500 making them less sensitive to market swings. Thus during market rallies these products tend to lag the market, while during market sell-offs these funds tend to outperform the market. The four alternatives we reviewed achieve their low risk objectives in different ways, for example, USMV utilizes minimum variance optimization, SPLV uses weighting based on the inverse of volatility in order to allocate a higher exposure to less volatile names, SPHD adds dividend screening to the low volatility framework, while OUSA uses a mix of fundamental quality factors and dividend requirements. USMV and SPLV are very large products with abundant liquidity and very efficient trading; they are also very cost efficient with the first one charging 15bps and the latter one charging 25bps. SPHD is a mature product with a very decent size and sufficient liquidity, although not at the same level than the previous two and comes at an expense ratio of 30bps. On the other hand, OUSA is a newer product compared to the other three, having less than 1 year and under $100 million in assets; nevertheless its strategy seems very attractive given the challenging market environment investors may want to involve a high touch trading desk to execute sizeable transactions on this fund. Sector exposure varies considerably from one offering to another. USMV has the highest exposure to those sectors rated as over/weight by our US Equity Strategist, and therefore provides the best fit for our house fundamental views. SPHD has a big tilt towards Utilities (20%), while SPLV and OUSA have a large allocation to Consumer Staples (22% and 20%, respectively) Page 9

10 Ratio ETF Vol / S&P 500 Vol ETF Beta to S&P 500 Under/Wgt Over/Wgt 12 February 2016 Figure 11: Comparison of US Low Risk ETFs Name ishares MSCI USA Minimum Volatility ETF PowerShares S&P 500 Low Volatility Portfolio PowerShares S&P 500 High Dividend Low Volatility Portfolio O'Shares FTSE US Quality Dividend ETF Ticker AUM $MM 20D ADV $MM Imp. Liquid. $MM Bid/Ask Spread ($) Bid/Ask Spread (bps) TER Sector Rating Overweight Equal Weight Underweight Sector Wgt USMV SPLV SPHD OUSA 8,213 5, ,016 1, , % 0.25% 0.30% 0.48% USMV SPLV SPHD OUSA 71.4% 57.0% 60.3% 45.5% 4.1% 2.5% 8.0% 8.7% 24.3% 40.6% 31.9% 45.0% USMV SPLV SPHD OUSA Health Care 18.8% 12.0% 4.6% 14.0% Technology 14.4% 2.8% 6.1% 11.3% Utilities 9.0% 12.8% 19.9% 6.9% Financials 20.8% 26.3% 19.9% 6.4% Cons. Discr. 8.3% 3.1% 9.8% 6.9% Equal Telecom 4.1% 2.5% 8.0% 8.7% Cons. Staples 15.3% 22.3% 8.5% 20.1% Industrials 4.6% 16.0% 13.4% 12.2% Materials 2.3% 2.3% 7.1% 2.5% Energy 2.0% 0.0% 2.9% 10.2% Source: Deutsche Bank, Bloomberg Finance LP. Data as of Feb 10, 2016 Overall, USMV has the most stable risk profile relative to the other three ETFs (OUSA doesn t have enough history to prove the contrary). Given the seasoning of USMV (i.e. asset size and liquidity), the cost, the methodology, its sector exposure, and the stability of its risk profile, we have chosen this product to implement our US Large Cap Min Volatility view. We have chosen USMV for its capacity (size, and liquidity), its cost, its sector exposure, and its risk profile. Figure 12: 60D Realized Volatility Ratio to S&P 500 Vol Figure 13: 60D Beta to S&P USMV SPHD SPLV OUSA 0.3 USMV SPHD SPLV OUSA Source: Deutsche Bank, FactSet. Based on Total Returns. Volatility is 60-day Rolling realized volatility. S&P 500 is represented by IVV. Source: Deutsche Bank, FactSet. Based on Total Returns. S&P 500 returns are represented by IVV. The rolling Beta s calculated over a 60-day rolling window. Page 10

11 US Banks The US Banks position is not new to our portfolio. We have reviewed and held Banks in the past, and we usually have looked at the following candidates: KBWB, KBE, and KRE. KRE tends to have a focus on regional banks, while KBE and KBWB focus on banks in general. However KBE utilizes an equalweighting approach which gives the fund a more significant bias towards mid and small cap banks, compared to KBWB which employs a market capweighting approach and therefore has a more significant large cap bias. On this occasion we prefer a Large Cap bias and therefore we have chosen KBWB. KBWB has over $400 million in assets, trades over $5mn on a daily basis on exchange, and charges 35bps. International DM equities: Low Risk strategy We considered three ETFs for our international developed market equities position. EFAV employs a minimum variance approach in order to provide a less risky profile similar to USMV. IDLV focuses on realized volatility and seeks to assign a higher weight to those companies with lower volatility like SPLV. Finally, IDLB offers another alternative with a focus on Beta in order to deliver a more defensive approach by equal weighting a basket of stocks with a beta lesser than one relative to its parent benchmark, and positive trailing 12M earnings. EFAV is clearly a more established product when it comes to assets and liquidity, however IDLV and IDLB can also provide interesting vehicles for implementing a defensive approach in International DM. EFAV has almost $5bn in assets and over $60mn in daily traded value on exchange; in addition, it is the most cost efficient option from a holding and transaction cost perspective charging 20bps and exhibiting competitive spreads, respectively. Figure 14: Comparison of International DM Low Risk ETFs Name Ticker AUM $MM 20D ADV $MM Imp. Liquid. $MM Bid/Ask Spread ($) Bid/Ask Spread (bps) TER Regional Wgt % Western Europe Japan Asia ex Japan Middle East & Africa North America ishares MSCI EAFE Minimum Volatility ETF PowerShares S&P International Developed Low Volatility Portfolio PowerShares FTSE International Low Beta Equal Weight Portfolio EFAV IDLV IDLB 4, % 0.25% 0.45% EFAV IDLV IDLB 48.5% 37.8% 34.5% 29.1% 7.9% 34.8% 19.7% 34.0% 23.4% 2.0% 2.3% 2.6% 0.3% 18.2% 4.5% Source: Deutsche Bank, Bloomberg Finance LP. Data as of Feb 10, 2016 The regional exposure can vary significantly among these three products as well. For example, EFAV holds almost 80% in Western Europe and Japan, and nothing on North America (i.e. Canada). On the other hand, IDLV has a significant allocation to Asia Pac ex Japan and North America; while IDLB has more balanced allocation to Western Europe, Japan, and Asia ex Japan. Page 11

12 Ratio ETF Vol / MSI EAFE Vol ETF Beta to MSCI EAFE 12 February 2016 In terms of risk profile, the three ETFs exhibit a defensive profile, but EFAV seems to have a more stable risk profile. For this reason and for the size of the product, liquidity, cost, and regional allocations we have chosen EFAV to implement our DM Intl equity exposure. Figure 15: 60D Realized Volatility Ratio to MSCI EAFE Vol Figure 16: 60D Beta to MSCI EAFE EFAV IDLV IDLB 0.3 EFAV IDLV IDLB Source: Deutsche Bank, FactSet. Based on Total Returns. Volatility is 60-day Rolling realized volatility. MSCI EAFE is represented by EFA. Source: Deutsche Bank, FactSet. Based on Total Returns. MSCI EAFE returns are represented by EFA. The rolling Beta s calculated over a 60-day rolling window. Gold In our most recent monthly report we discussed different Gold ETPs. Given the nature of our position as a strategic Core addition, we wanted an ETF with very good tracking to physical Gold, good liquidity, an established asset base, and cost efficient. Therefore after reviewing different alternatives such as GLD, IAU, and SGOL, we have decided that IAU fits our requirements in the best way, and therefore we have chosen it to implement our Gold exposure. IAU charges 25bps, and has $7.0bn in assets and close to $100mn in secondary market liquidity. Page 12

13 Portfolio constituent correlations Pair-wise correlations within the HVP are relatively low and are key in improving the portfolio s risk adjusted performance. Our newest additions (USMV, KBWB, EFAV, and IAU) present clearly lower pair-wise correlations and we expect additional diversification benefits from these new positions (Figure 9). Figure 17: Correlations for HVP constituents and main asset classes 1 Year Daily Correl. Portfolio Constituents Equity Real Estate Fixed Income Comdty Crncy USMV KBWB XLU EFAV LQD IEF IAU UUP SPY VNQ BND DBC UUP USMV KBWB XLU EFAV LQD IEF IAU UUP Source: Deutsche Bank, FactSet. As of 09 Feb 2016 Page 13

14 ETF Standard Comparison This section presents standard performance and fee & expense information about all the ETFs mentioned in the present report. Figure 18: Average Annual Total Returns Data as of December 31, 2015 Ticker Name Inception Date One Year Five Year Ten Year Since Inception Prospectus available at ETFs BBH Market Vectors Biotech ETF 12/21/ % n.a. n.a % BKLN PowerShares Senior Loan Portfolio 3/3/ % n.a. n.a. 2.09% DVY ishares Select Dividend ETF 11/7/ % 12.37% 5.89% us.ishares.com DXJ WisdomTree Japan Hedged Equity Fund 6/16/ % 10.96% n.a. 3.20% EPI WisdomTree India Earnings Fund 2/22/ % -4.48% n.a % EUFN ishares MSCI Europe Financials ETF 2/3/ % 2.25% n.a. 1.30% us.ishares.com EWG ishares MSCI Germany ETF 3/18/ % 4.25% 5.16% us.ishares.com EWP ishares MSCI Spain Capped ETF 3/18/ % -0.03% 2.11% us.ishares.com EZU ishares MSCI Eurozone ETF 7/31/ % 2.95% 2.12% us.ishares.com FXI ishares China Large-Cap ETF 10/8/ % -1.26% 7.84% us.ishares.com GMF SPDR S&P Emerging Asia Pacific ETF 3/23/ % 0.03% n.a. 4.66% HYS PIMCO 0-5 Year High Yield Corporate Bond Index 6/17/ % n.a. n.a. 3.36% IVV ETF ishares Core S&P 500 ETF 5/19/ % 12.50% 7.25% us.ishares.com JNK SPDR Barclays High Yield Bond ETF 12/4/ % 3.53% n.a. 4.61% KBWB PowerShares KBW Bank Portfolio 11/1/ % n.a. n.a % MCHI ishares MSCI China ETF 3/31/ % n.a. n.a % us.ishares.com PCY PowerShares Emerging Markets Sovereign Debt 10/11/ % 5.64% n.a. 6.52% Portfolio QDF FlexShares Quality Dividend Index Fund 12/19/ % n.a. n.a % QQQ PowerShares QQQ 3/10/ % 16.84% 11.60% SDY SPDR S&P Dividend ETF 11/15/ % 11.95% 7.53% VTIP Vanguard Short-Term Inflation-Protected Securities 10/16/ % n.a. n.a % ETF USMV ishares MSCI USA Minimum Volatility ETF 10/20/ % n.a. n.a % us.ishares.com VGT Vanguard Information Technology ETF 1/30/ % 13.22% 9.28% VIG Vanguard Dividend Appreciation ETF 4/27/ % 10.53% n.a. 6.86% XLF Financial Select Sector SPDR Fund 12/22/ % 10.28% -0.74% UUP PowerShares DB US Dollar Index Bullish Fund 2/20/ % 2.40% n.a. 0.43% XRT SPDR S&P Retail ETF 6/22/ % 13.55% n.a % XLU Utilities Select Sector SPDR Fund 12/22/ % 10.84% 7.17% HEDJ WisdomTree Europe Hedged Equity Fund 12/31/ % 7.81% n.a. 7.01% HYG ishares iboxx $ High Yield Corporate Bond ETF 4/11/ % 4.22% n.a. 4.63% us.ishares.com ASHR Deutsche X-trackers Harvest CSI 300 China A- 11/6/ % n.a. n.a % etfus.deutscheawm.com DBEU Shares Deutsche ETFX-trackers MSCI Europe Hedged Equity 10/1/ % n.a. n.a. 6.17% etfus.deutscheawm.com IBB ETF ishares Nasdaq Biotechnology ETF 2/9/ % 29.57% 16.08% us.ishares.com LQD ishares iboxx $ Investment Grade Corporate Bond 7/26/ % 4.96% 5.29% us.ishares.com IEF ETF ishares 7-10 Year Treasury Bond ETF 7/26/ % 4.53% 5.48% us.ishares.com EFAV ishares MSCI EAFE Minimum Volatility ETF 10/20/ % n.a. n.a. 9.43% us.ishares.com Indices* SPTR S&P United States 500 Total Return 1.38% 12.57% 7.31% NDUEACWF MSCI AC World Daily TR Net USD -2.36% 6.09% 4.75% LBUSTRUU Barclays US Aggregate TR Value Un-hedged USD 0.55% 3.25% 4.51% Notes: Since Inception performance data is provided for those ETFs which do not have full 10 Year performance history. Performance calculations are based on total returns (i.e. reinvested dividends). Price utilized corresponds to ETF NAV. *Index returns do not reflect deductions for fees, expenses, or taxes. Source: Deutsche Bank, Bloomberg Finance LP. Additional information can be found in the prospectus for each fund at their respective Issuer s ETF websites Performance data quoted represents past performance. Past performance is not a guarantee of future results and current performance may be higher or lower than performance quoted. Investment returns and principal value will fluctuate and shares when sold or redeemed, may be worth more or less than their original cost. Page 14

15 Figure 19: Fees and Expenses Data as of most current prospectus Ticker Name Prospectus Date Management Fee Distribution and Service (12b-1) Fees Other Expenses Acquired Fund Fees and Expenses Total Annual Fund Operating Expenses Fee Waiver Total Annual Fund Operating Expenses After Fee Waiver ETFs BBH Market Vectors Biotech ETF 2/1/ % None 0.05% None 0.40% 0.05% 0.35% BKLN PowerShares Senior Loan Portfolio 2/27/ % None None 0.01% 0.66% 0.01% 0.65% DVY ishares Select Dividend ETF 8/31/ % None None None 0.39% None 0.39% DXJ WisdomTree Japan Hedged Equity Fund 8/1/ % None None None 0.48% None 0.48% EPI WisdomTree India Earnings Fund 8/1/ % None None None 0.83% None 0.83% EUFN ishares MSCI Europe Financials ETF 12/1/ % None None None 0.48% None 0.48% EWG ishares MSCI Germany ETF 12/31/ % None None None 0.48% None 0.48% EWP ishares MSCI Spain Capped ETF 12/31/ % None None None 0.48% None 0.48% EZU ishares MSCI Eurozone ETF 12/31/ % None None None 0.48% None 0.48% FXI ishares China Large-Cap ETF 12/1/ % None None None 0.73% None 0.73% GMF SPDR S&P Emerging Asia Pacific ETF 1/31/ % None None None 0.49% None 0.49% HYS PIMCO 0-5 Year High Yield Corporate Bond Index ETF 10/31/ % None None None 0.55% None 0.55% IVV ishares Core S&P 500 ETF 8/1/ % None None None 0.07% None 0.07% JNK SPDR Barclays High Yield Bond ETF 10/31/ % None None None 0.40% None 0.40% KBWB PowerShares KBW Bank Portfolio 2/27/ % None None None 0.35% None 0.35% MCHI ishares MSCI China ETF 12/31/ % None None None 0.62% None 0.62% PCY PowerShares Emerging Markets Sovereign Debt 2/27/ % None None None 0.50% None 0.50% Portfolio QDF FlexShares Quality Dividend Index Fund 3/1/ % None 0.01% None 0.38% 0.01% 0.37% QQQ PowerShares QQQ 1/31/ % None 0.14% None 0.20% None 0.20% SDY SPDR S&P Dividend ETF 10/31/ % None None None 0.35% None 0.35% VTIP Vanguard Short-Term Inflation-Protected Securities ETF 1/27/ % None 0.02% None 0.08% None 0.08% USMV ishares MSCI USA Minimum Volatility ETF 12/1/ % None None None 0.15% None 0.15% VGT Vanguard Information Technology ETF 12/22/ % None 0.03% None 0.10% None 0.10% VIG Vanguard Dividend Appreciation ETF 5/28/ % None 0.03% None 0.10% None 0.10% XLF Financial Select Sector SPDR Fund 1/31/ % 0.04% 0.06% None 0.14% None 0.14% UUP PowerShares DB US Dollar Index Bullish Fund 9/23/ % 0.05% None None 0.80% None 0.80% XRT SPDR S&P Retail ETF 10/31/ % None None None 0.35% None 0.35% XLU Utilities Select Sector SPDR Fund 1/31/ % 0.04% 0.06% None 0.14% None 0.14% HEDJ WisdomTree Europe Hedged Equity Fund 8/1/ % None None None 0.58% None 0.58% HYG ishares iboxx $ High Yield Corporate Bond ETF 7/1/ % None None None 0.50% None 0.50% ASHR Deutsche X-trackers Harvest CSI 300 China A-Shares 9/30/ % None None None 0.80% None 0.80% ETF DBEU Deutsche X-trackers MSCI Europe Hedged Equity ETF 9/30/ % None None None 0.45% None 0.45% IBB ishares Nasdaq Biotechnology ETF 8/1/ % None None None 0.48% None 0.48% LQD ishares iboxx $ Investment Grade Corporate Bond ETF 7/1/ % None None None 0.15% None 0.15% IEF ishares 7-10 Year Treasury Bond ETF 7/1/ % None None None 0.15% None 0.15% EFAV ishares MSCI EAFE Minimum Volatility ETF 12/1/ % None None None 0.33% 0.13% 0.20% Notes: You may also incur usual and customary brokerage commissions when buying or selling shares of the Funds, which are not reflected in the fees above. Fee waivers are temporary. Fund prospectus should be consulted for additional details. Source: Deutsche Bank, Bloomberg Finance LP Page 15

16 Appendix 1 Important Disclosures Additional information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Sebastian Mercado Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period Equity rating dispersion and banking relationships % 49 % 55 % 42 % Buy Hold Sell Companies Covered 2 % 40 % Cos. w/ Banking Relationship North American Universe Page 16

17 Regulatory Disclosures 1.Additional Information Information on ETFs is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any fund that is described in this document. Consider carefully any fund's investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the fund's prospectus. Prospectuses about db X-trackers funds and Powershares DB funds can be obtained by calling or by visiting Read prospectuses carefully before investing. Past performance is not necessarily indicative of future results. Investing involves risk, including possible loss of principal. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products' prospectuses. Shares of ETFs may be sold throughout the day on an exchange through any brokerage account. However, shares may only be redeemed directly from an ETF by authorized participants, in very large creation/redemption units. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. ETFs are obliged to distribute portfolio gains to shareholders. Deutsche Bank may be an issuer, advisor, manager, distributor or administrator of, or provide other services to, an ETF included in this report, for which it receives compensation. db X-trackers and Powershares DB funds are distributed by ALPS Distributors, Inc. The opinions expressed are those of the authors and do not necessarily reflect the views of DB, ALPS or their affiliates. Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at Page 17

18 Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank may act as principal for its own account or as agent for another person. Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise. Deutsche Bank and/or its affiliates may also be holding debt securities of the issuers it writes on. Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues. Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained herein changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst s judgment. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Prices and availability of financial instruments are subject to change without notice and investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties. Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. Page 18

19 Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options, at If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Analysts employed by non-us affiliates may not be associated persons of Deutsche Bank Securities Incorporated and therefore not subject to FINRA regulations concerning communications with subject companies, public appearances and securities held by analysts. Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law (competent authority: European Central Bank) and is subject to supervision by the European Central Bank and by BaFin, Germany s Federal Financial Supervisory Authority. United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request. Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch. India: Prepared by Deutsche Equities Private Ltd, which is registered by the Securities and Exchange Board of India (SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations. Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are Page 19

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