the magazine for etf advisors ///////////////////////////////////////////////////// march 2014

Transcription

1 the magazine for etf advisors ///////////////////////////////////////////////////// march 2014 ETF.com/ETF Report published by

2 WE MAkE IT EASy TO FolloW ThE leaders. Find 100 companies at the top of innovation in one fund. advertisement Volume 14 No Contents features Smart Beta Finds Its Footing ETF Report digs into the wide-ranging smart-beta field, surveying the various index methodologies and what they offer investor portfolios. Is Smart Beta A Trap? Despite its outperformance and nontraditional approaches to indexing, Dave Nadig warns investors that smart beta comes with its own set of risks and problems. How The Experts Are Using Smart Beta Why include smart-beta ETFs in your portfolio? ETF Report speaks with four experts on why they like smart-beta investments and how they use them in their portfolios. Not For The Faint Of Heart Leveraged and inverse ETFs have been demonized in some financial circles and the subject of much litigation, but many sophisticated investors find them to be useful tools. Understanding Tail-Risk-Hedged ETFs Do these complex products accomplish what they purport to do? Paul Britt explains how they work and considers whether they re likely to meet investor expectations. // There are risks involved with investing in exchangetraded funds (ETFs) including possible loss of money. The funds are not actively managed and are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. Shares are not FDIC insured, may lose value and have no bank guarantee. // Invesco PowerShares does not offer tax advice. Investors should consult their own tax advisors for information regarding their own tax situations. powershares.com/qqq Follow We are leading the Intelligent ETF Revolution. PowerShares QQQ invests in 100 of the most innovative companies listed on the NASDAQ Stock Market. To learn more, visit powershares.com/qqq. While it is not Invesco PowerShares intention, there is no guarantee that the PowerShares ETFs will not distribute capital gains to their shareholders. // 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 shares. // PowerShares is a registered trademark of Invesco PowerShares Capital Management LLC. ALPS Distributors, Inc. is the distributor for QQQ. Invesco PowerShares Capital Management LLC is not affiliated with ALPS Distributors, Inc. // An investor should consider the Fund s investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and other information about the QQQ, a unit investment trust, please contact your broker, call or visit Please read the prospectus carefully before investing. Publisher, Director of Sales Foster Wright, fwright@etf.com President, Analytics & Publications Matt Hougan mhougan@etf.com Editor Drew Voros dvoros@etf.com Managing Editor Olly Ludwig PRODUCTION Editor Heather Bell Copy Editor Lisa Barr Vice President of ETF analytics Paul Baiocchi Creative Director Jeannine Gaubert Pamoukdjian graphic designer Patrick Hamaker ETF.com 201 Mission St., Ste. 720 San Francisco, CA Founder, CEO Jim Wiandt Departments 2 New ETF Launches Newcomer Vident rolls out a U.S. complement to its fundamentally weighted international ETF. Plus: Our monthly look at new ETF launches and closures. 4 ETF Explainer: UNG Our ETF explainer looks at the United States Natural Gas ETF (UNG) and digs into the causes of its wild swings over the last 12 months. 6 Profile Matthew Krusko s brand-new firm takes the emphasis off alpha in order to focus on asset allocation. 36 Why I Own: RSP Richard Loy of Ed Kirkland Co. discusses why his firm favors RSP over other largecap funds as a core portfolio holding. 38 Sectors In Review In January, health care, real estate and utilities were isolated bright spots, with the other broad sectors exhibiting negative performance. 40 ETF Data Our monthly databank breaks down ETF returns for every market segment. Subscribe Subscribe by contacting Lauren Paisley at lpaisley@etf.com or by calling The annual subscription rate is $ ETF.com. All rights reserved. The text, images and other materials contained or displayed are proprietary to ETF.com, except where otherwise noted, and constitute valuable intellectual property. No material from any part of any ETF.com publication, product, service, report, or website may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of ETF.com. For permission to photocopy and use material electronically, please contact sales@etf.com or call GO

3 NEW Funds By Heather Bell ETF Launches etf filing activity LAUNCHES VXUS Vanguard Total International Stock ETF Help put a world of opportunities in your clients hands. U.S. Equity Direxion Zacks High Income MLP Shares First Trust High Income First Trust Low Beta Income First Trust Nasdaq Rising Dividend Achievers PowerShares NYSE Century SPDR MFS Systematic Core Equity SPDR MFS Systematic Growth Equity SPDR MFS Systematic Value Equity Vident Core US Equity 4% Leveraged 4% Inverse 8% US Fixed Income 28% Int l Equity 25 ETFs Year-to-date 36% US Equity INT L Equity db X-trackers MSCI All World ex US Hedged Eq db X-trackers MSCI Mexico Hedged Equity db X-trackers MSCI South Korea Hedged Equity Market Vectors MSCI Emerging Markets Quality Market Vectors MSCI Em Mkts Quality Dividend Market Vectors MSCI International Quality Market Vectors MSCI Intl Quality Dividend 20% Int l Fixed Income Featured ETF Vident Core U.S. Equity Fund (VUSE) ETF is a follow-up to the highly successful VIDI, launched in late VUSE Quick View Vident Financial, the Issuer ETF Series Solutions new exchange-traded Segment Expense Ratio Structure Date LAUNCHED Competing Funds Equity: U.S. Total Market 0.55% Open-ended fund 1/22/2014 VTI, IWV, SCHB fund firm that launched the Vident International Equity ETF (VIDI F-39) in October via ETF Series Solutions, rolled out the Vident Core U.S. Equity ETF (VUSE) on the Nasdaq stock market on Jan. 22. The new fund has an annual expense ratio of 0.55%. VUSE has an underlying index that selects stocks based on their above-average corporate governance and accounting practices and the relative strength of their valuations in relation to their overall sector. The index also takes into account earnings quality, growth and market sentiment, VUSE s prospectus said. The benchmark selects its components from all portions of the U.S. stock market, allocating greater weightings to the small- and midcap segments than to largecap; companies represented in the index must have market capitalizations of at least $500 million. Individual component weightings are based on risk levels, taking into account how each stock responds to volatile markets and its risk contribution to the sector to which it is assigned, according to VUSE s prospectus. A fact sheet provided by Vident noted the fund had 550 holdings at its launch. VIDI s launch was a notable success, with the fund quickly accumulating roughly $575 million within its first few months of trading. Exchange Traded Concepts is the advisor for both VIDI and VUSE. U.S. Fixed Income AdvisorShares Sage Core Reserves Market Vectors Short High-Yield Municipal int l Fixed Income EGShares TCW EM Intermd Term Inv Gr Bond EGShares TCW EM Long Term Inv Gr Bond EGShares TCW EM Short Term Inv Gr Bond Pimco Diversified Income Pimco Low-Duration Leveraged Direxion Daily FTSE Europe Bull 3x Inverse Direxion Daily FTSE Europe Bear 3x Selected Closures Etracs Natural Gas Futures Contango ETN Etracs Oil Futures Contango ETN ishares MSCI ACWI ex US Consumer Discr ishares MSCI ACWI ex US Consumer Staples ishares MSCI ACWI ex US Energy ishares MSCI ACWI ex US Financials ishares MSCI ACWI ex US Healthcare ishares MSCI ACWI ex US Industrials ishares MSCI ACWI ex US Info Tech ishares MSCI ACWI ex US Utilities advertisement Are you Vanguarding your clients portfolios? You re dedicated to helping your clients reach their goals. That s why we ve been dedicated to keeping costs low from day one. With large-, mid-, and small-capitalization securities in developed and emerging international markets, VXUS can help keep your clients portfolios on track. To see why ETF costs matter, visit advisors.vanguard.com/vxus today All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by non-u.s. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets. Prices of mid- and small- capstocks often fluctuate more than those of large-company stocks. Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. For more information about Vanguard ETF Shares, visit advisors.vanguard.com/vxus, call , or contact your broker to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. Source: ETF.com, Data and information as of 1/31/2014. ETF Filings sidebar covers launches and filings for the month of January The Vanguard Group, Inc. All rights reserved. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. Vanguard Marketing Corporation, Distributor. 2 ETF.com/ETF Report Follow for important insights, news, and education.

4 in detail By Paul Baiocchi ETF Explainer: UNG United States Natural Gas Each month, we look at an ETF with a particularly interesting chart and explain the market forces behinds its performance. This month we look at United States Commodity s Natural Gas ETF (UNG B-96), which has slightly more than $900 million in assets under management, and has had some major swings over the past 12 months. RETURN 25% JAN 24 APR 19 UNG Quick View Issuer Segment Expense Ratio 1.0% AUM U.S. Commodity Funds Commodities: Energy Natural Gas $903.8 Million Competing Funds GAZ, NAGS, DCNG, UNL SEP 15 DEC 16 JAN % 25 Years of Rising Dividends 54 S&P 500 Companies One ETF NOBL PROSHARES S&P 500 ARISTOCRATS ETF AUG 1 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN UNG ETF advertisement Dividends. Good companies pay them. Great companies grow them. Now, for the first time, the companies in the S&P 500 with the best track record of year-over-year dividend growth the Aristocrats are available in an ETF. NOBL features: An index that has outperformed the S&P 500 (9.76% vs. 6.72% annual return*) with lower volatility S&P 500 companies with at least 25 years of consecutive dividend growth The first opportunity to buy the Aristocrats of the S&P 500 in an ETF or mutual fund To learn more call or visit ProShares.com. JAN 24 An EIA report shows that natural gas accounted for 30% of U.S. electricity generation for the first nine months of 2012, a 200% increase from 10 years earlier. SEP 15 ExxonMobil, the nation s top energy producer, predicts that natural gas demand will increase 65% over the next 30 years due largely to increased use in electricity generation. APR 19 A smaller-than-expected increase in natural gas inventories sends front-month futures 5% higher as UNG attracts 20% of its daily volume in mere minutes. DEC 16 Natural gas prices rise 2% despite a Department of Energy report forecasting U.S. natural gas production will grow by 56% from 2012 to GLOBAL FIXED INCOME HEDGE STRATEGIES GEARED INFLATION AND VOLATILITY AUG 1 Natural gas futures fall to a five-month low as stockpiles rise more than forecast during the week. The front-month contract falls to $3.39/mmbtu. 4 ETF.com/ETF Report JAN 22 Natural gas futures rise to a two-year high as a violent winter storm blankets the East Coast. The front-month futures contract on natural gas climbs 5% to $4.64/mmbtu. Source: Bloomberg. Data for 1/22/-1/22/2014 *Since inception of the S&P 500 Dividend Aristocrats Index on 5/2/2005 through 9/30/. Investing involves risk, including the possible loss of principal. Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in summary and full prospectuses. Read them carefully before investing. Obtain them from your financial adviser or broker/dealer representative or visit ProShares.com. There is no guarantee any ProShares ETF will achieve its investment objective. The S&P 500 Dividend Aristocrats Index is a product of S&P Dow Jones Indices LLC and its affi liates and has been licensed for use by ProShares. S&P is a registered trademark of Standard & Poor s Financial Services LLC ( S&P ) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ) and have been licensed for use by S&P Dow Jones Indices LLC and its affi liates. ProShares have not been passed on by S&P Dow Jones Indices LLC and its affi liates as to their legality or suitability. ProShares based on the S&P 500 Dividend Aristocrats Index are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affi liates, and they make no representation regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES. ProShares are distributed by SEI Investments Distribution Co., which is not affi liated with the fund s advisor. PSA -5314

5 PROFILE Don t Sweat The Alpha Golden Bay founder says investors shouldn t worry too much about alpha, but rather focus on asset allocation By Hung Tran Matthew Krusko, founder of Chappaqua, N.Y.-based Golden Bay Advisors, opened up shop last June in the midst of the S&P 500 Index s surge that took it to 30% by year-end. But the former attorney and congressional aide Advisor Quick View hasn t let the market s stratospheric Firm Founded Golden Bay Advisors rise cloud his investment decisions. Rather, Krusko, who currently manages $50 million in total assets, Location Chappaqua, NY recently explained to ETF Report aum $50 Million staff writer Hung Tran why he thinks All ETFs? No investors shouldn t worry as much about chasing alpha returns or beating an index as they should about how they re invested and how much those investments cost. What motivated you to open up an advisory firm? I started the firm to offer a broad array of wealth management services such as providing advice with respect to running a business, getting a divorce and lots of other different areas, not just asset management. I also concluded that, for the most part, the appropriate asset allocation is far more important to an investor s success than beating a benchmark. Too many people are paying too much in fees, and Former attorney and congressional aide Matthew Krusko launched Golden Bay Advisors in mid- I wanted to provide advisory services at a more reasonable rate. I am fee based and don t charge transaction commissions. What s your emphasis when speaking to your clients about ETFs? Most of my clients are invested in ETFs. I just don t think there is a more efficient and cost-effective way to create a diversified and well-balanced portfolio of publicly traded securities. As an investor, you want to push the odds in your favor as much as possible, and investing in ETFs is an excellent way to limit costs and taxable gains. More and more people understand that beating an index is both hard and not necessarily a guarantee of financial security. Research shows that how your assets are invested, overall costs of investment strategies and your spending decisions are far more important than alpha to your overall financial success. My role is to help people make a series of informed decisions about their investments. I ll leave it to someone else to try to beat an index. I really try to impress upon people that all money has a life span and needs to be invested accordingly from the money in your wallet to the money in your Roth IRA. Photo by Irene Park What percentage of your firm s assets under management is in ETF? A significant majority. Last year was a great year for equities. Where were you invested with respect to market cap, and what ETFs did you use to express your views? was a great year to be invested in U.S. stocks, and not just in large-cap ETFs such as the ishares Core S&P 500 ETF (IVV A-97), but also in midcaps and smallcaps represented by the ishares Core S&P MidCap ETF (IJH A-82) and the ishares S&P SmallCap 600 ETF (IJR A-90). I have client money invested in all three of those ETFs, which paid off enormously. What is a typical asset allocation model for you? 60% in stocks, 40% in bonds? There is no typical asset allocation. Every account has an asset allocation that s specifically tailored to the role the account in question plays in a client s overarching financial plan. How do you use ETFs for fixed income? With respect to fixed income, I ve used a handful of fixed-income ETFs, such as the iboxx $ High Yield Corporate Bond ETF (HYG B-75), to get an allocation to a specific slice of the fixed-income market when I ve felt that that particular market has been oversold or otherwise looks interesting. I m comfortable with owning beta because I was comfortable with the duration and diversification of the fund. I ve also invested with a handful of absolutereturn fixed-income managers, which I think nicely complements the fixed-income ETFs I use. What are your expectations for 2014? In 2014, I think there will still be a focus on the U.S., and that economic growth will pick up without the head wind and drag that we ve had over the past year or two from federal tax increases and spending cuts. The Federal Reserve has been an investor s friend for the last four years or so, and that will continue to be the case under Janet Yellen. Particularly given In 2014, I think there will still be a focus on the U.S., and that economic growth will pick up how anemic job growth and inflation is, I don t think investors should fear the outcome of the next Fed meeting or next several meetings. What opportunities are you currently considering for your ETF clients? Right now, I m trying to figure out whether it makes sense to invest in Africa using ETFs, and I m also learning more about smart-beta strategies. I think Africa is relatively undiscovered and has an enormous population. If you look at corporate America and where a lot of multinational companies are focused right now, more often than not, you ll find that Africa is on the short list. Smart beta is just an extension of what a lot of people have known for years in terms of the power of an index and investing in a way where the construction of the index can not only be a source of return, but a source of risk control as well, potentially avoiding some of the pitfalls of investing in a marketcapitalization strategy. I m looking into the ishares MSCI Frontier 100 ETF (FM D-93) for Africa, and I like what Research Affiliates has done on the smart-beta side. I ve yet to invest in any of their funds, but I m taking a hard look at them. What are your views on emerging markets? Emerging markets seemed to have fallen out of favor a bit, but that has to do with political and currency issues as much as anything else. It s not an area where you want to have a significant portion of your assets, but it s also not an area you want to neglect. A lot has been made about accessing China directly via China A-shares, especially from entities such as Deutsche Bank. Are you sold on this seemingly hot new trend? I would rather invest in companies outside of China that do business in China. I think China is incredibly complex; it s next to impossible to get a real-time fix on the economic situation there. I think within the next years the Chinese will have a very tough time controlling the population and keeping the country together. 6 ETF.com/ETF Report March

6 By Olly Ludwig Outsmarting The Market Call it what you want, but indexing is moving in new and sophisticated directions Tech Bubble Roots While academic research probing alternatives to cap-weighted indexing has been around for a while, the insurgency against cap weighting really began to take shape after the technology-stock bubble burst in Countless tech stocks, most notably Cisco Systems, soared in 1998 and 1999, and began occupying bigger and bigger pieces of whatever cap-weighted indexes they were part of. That had major consequences after the Nasdaq peaked on March 10, 2000, and started tumbling thereafter. Investors experienced unusually sharp losses as tech stocks fell Earthward, giving rise to the expression the Cisco Equal Weighting Effect that captures the essence of what transpired for countless investors in capweighted index funds. Those inflated share prices were deflating, and so were those cap-weighted indexes. Something clearly must be wrong with the efficient market hypothesis, which holds that asset prices are essentially on the mark because the market reflects all available information, according to pioneers of the movement, including Rob Arnott of Research Affiliates and Jonathan Steinberg of WisdomTree Investments. We have an investment view that markets are not efficient, and there is a meanreversion, said Michael Larsen, global head of Affiliate Relations at Newport Beach, Calif.-based Research Affiliates. There s a lot of good information out there, but behaviorally, investors overreact or underreact to information at times, Larsen added, arguing that that s why securities are routinely mispriced. Given that inefficiency, we believe that s a great opportunity that can be exploited for the benefit of investors in a very low-cost manner, Larsen said, who noted that at the end of last year, about $117 billion in assets was benchmarked to Research Affiliates indexes. Complain as he might, the world of indexing has gotten away from Vanguard founder John Bogle s vision To be sure, the glory days of the Vanguard 500 Index Fund are hardly over it s still the world s biggest equity mutual fund. But the capitalization-weighted approach Bogle pioneered in the mid-1970s that weights securities in a portfolio based on their prices is facing real competition from new index funds. The name of the game in this expanding pocket of index investing is to beat the returns of so-called purebeta cap-weighted methodologies pioneered by Bogle, in ways big and small. It s not exactly an easily characterized trend. The semantic debate about just what to call these investments continues. Whether you call it alternative beta, enhanced beta, smart beta, intelligent beta, factor-focused investment or fundamental indexing, it truly is a Babel of beta, courtesy of the Wall Street marketing machine. But make no mistake: Investors now have a variety of ways of carrying out indexing, whether they want tilts toward lowvolatility stocks or wish to embrace a rules-based approach to enhance returns by buying low and selling high. In all, about $200 billion in U.S. ETF assets are earmarked to so-called smart-beta strategies, and it seems as if the assetgathering has begun to accelerate significantly in the past year or so. A recent Cogent study found that one in four institutional decision makers are now using smart-beta ETFs. Equal-weighted strategies are as good a place to start as any, since they re easy to understand and have been around the longest. The Guggenheim S&P 500 Equal Weight ETF (RSP A-72), which has been around for almost 11 years, is composed of the 500 stocks of the S&P 500 Index, but weights them equally and rebalances quarterly. The methodology tilts the holdings toward relatively smaller firms, giving RSP access to the size factor that, on the whole, means greater returns over time than in a cap-weighting approach, according to academic research. It also means returns are likely to be bumpier along the way, and that trading costs and tax consequences associated with the quarterly rebalancing do detract from returns. Still, RSP has easily bested the returns of its close cousin, the cap-weighted SPDR S&P RSP Vs. SPY RETURN 30 % FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC JAN 2014 Source: Bloomberg 500 ETF (SPY A-97) in the past 10 years. RSP has risen an annualized 9 percent in that time frame, while SPY is up 6.4 percent. RSP, at the end of the day, owns more of the smaller-sized S&P 500 constituents, giving the portfolio a higher beta than RSP the cap-weighted SPY. That more than justifies the RSP s annual expense ratio of 0.40%, or $40 for each $10,000 invested. SPY, by comparison, has an annual expense ratio of about 0.09%, or $9 for each $10,000 invested. SPY 8 ETF.com/ETF Report March

7 Fundamental Pioneers Around the same time that RSP came to market, WisdomTree and Arnott s Research Affiliates were working on their own ways to overcome the Cisco Effect. RAFI s approach, Larsen says, has a clear aspect of behavioral economics, with a rules-based approach that arguably helps prevent investors from being their own worst enemies institutionalized courage, to borrow Arnott s formulation. Specifically, both the RAFI and WisdomTree screens seek to overweight undervalued securities that have high expected returns, while also underweighting overvalued securities that have relatively depleted expected returns. It plays off the concept of reversion to the mean, WisdomTree s Chief Investment Strategist Luciano Siracusano said. It can sound complicated, but it s actually taking advantage of a very simple idea, and that is that cap-weighted indexes never rebalance back to any measure of relative value. But fundamentally weighted indexes do, he added. Anyone who has taken a fair look at what the returns have been over the last six or seven years after these indexes and funds have been live including 2008, which was an important down year the conclusion is that, on balance, these strategies have beaten the cap-weighted indexes, Siracusano noted. To be clear, Siracusano is unabashed that fundamentally indexed funds marketed by WisdomTree PRF Vs. IWB should be tools to explore the core, as RETURN 200 % he puts it. Plenty of advisors, 150 eager to enforce good behavior on their clients, are entirely on board with that idea. I buy into RAFI on 0 a philosophical basis. I m not sure you re -50 going to beat the market by a ton, but for us it s going to generate some alpha and also protect us when we get into the extremes. And it does, said Nick Carver, director of investment services at Neenah, Wis.-based Legacy Private Trust Co. Legacy Private Trust manages about $800 million in assets, half of it ETFs. Among other securities, it uses the Power- Shares FTSE RAFI US 1000 ETF (PRF A-86). PRF has what Research Affiliates calls a dynamic value tilt that toggles exposure over time between core, value and deep value swaths of the U.S. large-cap equities market PRF IWB Source: Bloomberg The RAFI methodology is big on rebalancing, Carver said. And we re big rebalancers. We rebalance all the time. That s Arnott s point: It s a mathematical principle that if you have volatility, it s smart to rebalance. advertisement /TBT Do-It-Yourself Alpha Many advisors whose minds are indeed open to alternative-beta products eschew the broader brush strokes of ETFs like PRF or the WisdomTree Emerging Markets Equity Income Fund (DEM D-76) or even the First Trust Large Cap Core AlphaDEX Fund (FEX B-69). Instead, they seek to create their own portfolios that outperform broad-market benchmarks such as the S&P 500 Index using smart-beta funds to achieve that objective. They do use broad and ultracheap cap-weighted index funds for the core of a portfolio, but add smart-beta funds with factor tilts on the perimeter say low volatility, momentum or perhaps quality. The portfolio should tell the story, said Scott Kubie, chief investment strategist at Omaha, Neb.-based CLS Investments. If you look at your portfolio and you have an overweight in growth because you want to add momentum, why not just own momentum? That s a clear communication of how much your allocation is to yourself. But it s also a clear indication to your clients that this is what s going on in my portfolio, these are the things I m emphasizing. I think that s a better way of doing it, Kubie added. He said multifactor alternative beta funds with indexes from, say, Research Affiliates or WisdomTree are really meant to replace core exposure, and that s not the way he builds portfolios. If I were a passive investor who didn t ever trade and who didn t want to add things that added a little value, I d be a lot more interested in the RAFI or WisdomTree products for a larger allocation, noted Kubie. Instead, Kubie said he owns ETFs zeroing in on momentum, quality, value and minimum volatility. Those four are the strongest ones out there. We re an active manager and we want to target what we want to own, and we want the option of moving out of it. The World s Leading Authority on Exchange-Traded Funds 10 ETF.com/ETF Report

8 SPONSORED CONTENT Why Sectors Matter A common-sense approach to building portfolios Sector Performance 40 XLK US Equity XLE US Equity XLB US Equity XLU US Equity XLP US Equity XLI US Equity XLY US Equity XLF US Equity XLV US Equity SPONSORED CONTENT 30 Dan Dolan SVP, Sector SPDRs Sectors matter. That s the conclusion you have to reach after, when at large-cap value stores. I m shopping for technology or the spread between the best- and worst-performing sector in the S&P consumer goods. 500 reached 30%. Exactly. We don t think in a size-and-style framework. And importantly, Exchange-traded fund investors know this. At the end of January markets don t trade that way, either. 2014, U.S. investors had more than $240 billion invested in sectorspecific Think about the excesses of the past 30 years. If you go back to the ETFs. That huge asset base reflects more than $43 billion in net 1980s when energy stocks crumbled, was that large-cap value having a new money that poured into sector products in. problem? No, it was sector-specific, and a sector approach could have ETF.com s editorial team sat down recently with Dan Dolan, who heads steered around it. up the market-leading Select Sector SPDRs family of ETFs, to discuss why Fast-forward to Was it large-cap growth that crumbled? sectors matter and how advisors can use them to build better portfolios. Of course not, it was technology. Was it large-cap value in 2007 when the financial meltdown occurred? Of course not. What is the case for sector-driven strategies as opposed to Part of the problem is that the mutual fund industry is set up in size advertisement traditional size and style approaches? It starts with the diversification benefits sectors can provide. The average financial advisor starts with some sort of size and style model. But if you look at the 10-year correlations of large-cap growth and large-cap value stocks to the S&P 500, the correlations are 0.98 for each. Even if you get into international stocks like the MSCI EAFE [Europe, Australasia and Far East] Index, the correlation to the S&P 500 is 0.89 over the past 10 years. Emerging markets are a little better at 0.79, but still, you re highly correlated. The problem with building a portfolio using highly correlated parts is that you don t get the diversification benefit you want (or that your clients demand). That equation changes when you look at sectors. If you look at the 10-year correlations for the 10 sectors in the S&P 500, they range from 0.93 for industrials to 0.55 for utilities. Half the sectors health care, consumer staples, energy, telecom and utilities have lower correlations to the S&P 500 than does the MSCI Emerging Markets Index. With so much more to work with correlationwise, you can build portfolios that are much more robust. I think people are somehow brainwashed by the Morningstar style box. After 30 years of staring at the box, a lot of people think it s the only way to approach portfolio construction. But it s based on a flawed concept. You can do a better job for clients with sector diversification than you can with a size and style approach. Doesn t it line up better with how investors think about the world, anyway? When I m out shopping, I m not shopping and style buckets, so when you have an asset allocation model and it comes time to fill it, there are a lot of choices of large-cap growth funds and large-cap value funds. It s easy to follow a model like that, but that doesn t make it a good idea. Where should advisors turn for sector-driven research if they re interested in building a sector-driven strategy? Most of the large broker-dealers today have sector models. In fact, they have multiple sector models, using a risk-based approach that slots clients in to various sector strategies ranging from capital preservation to aggressive growth. In a capital preservation portfolio, you might want to focus more on utilities and consumer staples. In an aggressive growth Select SPDRs Fund Ticker AUM ADV ($) Consumer Discretionary Select SPDR XLY 7, Consumer Staples Select SPDR XLP 6, Energy Select SPDR XLE 8, , Financial Select SPDR XLF 17, Health Care Select SPDR XLV 8, Industrial Select SPDR XLI 9, Materials Select SPDR XLB 4, Technology Select SPDR XLK 13, Utilities Select SPDR XLU 4, Feb 7 Mar 7 Apr 7 May 7 Jun 7 Jul 7 Aug portfolio, you might look harder at industrials and technology. The models are out there for advisors to use. 7 Sep What about ETF strategists? We ve seen big returns and big Why do you combine tech and telecom into one ETF? asset flows for firms like F-Squared Investments, which provide It s simply a matter of compliance: You have to have 20 securities to sector rotation models. Are they big users of Select Sector ETFs, make a RIC-compliant fund. There are simply not enough stocks to make advertisement and why do they choose them in comparison with other sector ETFs on the market? F-Squared and other ETF strategists use our products in some cases and other products in other cases. When you look at why investors turn to Sector SPDRs, it s because they are the market leaders in terms of assets, liquidity and expenses. The Sector SPDRs traded 110 million shares a day in. That s 97% of the sector share volume overall. As a result, we have penny-wide spreads all day long, which really matters if you re going to be trading in and out on a regular basis. On top of that, basing the sectors on the S&P 500 gives you the ability to tweak your exposure to the benchmark if you re trying to outperform the market. You can overweight one sector or underweight another, all while staying within the 500 securities. By far, the biggest reason we hear from investors is liquidity. Sector SPDRs are the go-to solution because we offer the liquidity investors need and the exposure investors want. Let s talk performance. What was the spread in sector returns in? What did well and why? was a great year for the equity markets. In the Sector SPDRs, we combine tech and telecom, so we have nine ETFs on the market. All nine had double-digit returns. Consumer discretionary led the way, with an almost 43% return, and health care and industrials also posted returns over 40%. The worst sector was utilities, which provided a 13% return. As you look at 2014, I suspect we ll see some sort of return to normal market conditions. We think technology has some room to run, and 7 Oct 7 Nov 7 Dec 7 Jan Feb 2014 financials could be attractive. You can t expect another 30%+ year, but fundamentally, we re looking pretty good as we head into a diversified mutual fund in telecom alone, so we combine it with the sector it s most highly correlated to, which is technology. That s the way it s been for 10 years. Is it expensive to run a sector-based approach versus a size and style approach? There s enough competition in both spaces that it s pretty similar. The sector-based approaches have attracted a lot of assets, so fees have dropped to less than 0.20% per year for a lot of funds. The Sector SPDRs charge 0.16%, for instance. You can spend more, but core exposure comes pretty cheap. Do you see the interest in sector strategies growing? Is the hegemony of size and style investing on the ebb? We re seeing more and more investors gravitate to the sector space. What should advisors do if they ve been running a size-and-stylebased approach but are interested in transitioning to sectors? Learn. It s all about knowing more about sectors and sector-based approaches. Once you understand the basics, you can move on towards finding a model that works for you, whether it s one you use across your book or one you customize for different types of investors. Then you can find the best products to execute that model. And those would be the Select Sector SPDRs? Every investor has to make their own choice. Thanks for your time, Dan.

9 The Smart-Beta Don t get too comfortable By Dave Nadig Trap problem1 False Alpha Perhaps the biggest problem with alternatives to traditional market-cap indexes is that they can lure you into believing you ve found a better mousetrap, when in fact all you ve done is found more risk. Consider the myriad ways people have found to improve on the S&P 500. At the time of this writing (1/22/14), the S&P 500 SPDR was up 26.08% for the trailing 12 months. Figure 1 shows some of the other ways you could have skinned those same 500 stocks with ETFs. This dizzying list of funds has a oneyear spread of returns of more than 20%, and employs everything from complex options strategies (PBP D-52) to VIX futures overlays (VIXH D-67) to simple equal weighting with regular rebalancing (EQL D-83). The danger with a group of funds like this is looking at the fund on top (SPHB A-38) and just assuming that since it s fishing from the same pool, it s simply a better mousetrap and should be bought. Luckily, SPHB has the decency to put its strategy clearly in the name it s only buying the 100 highest-beta stocks in the S&P 500. The resulting portfolio has an overall beta of 1.44, which can be interpreted as when the S&P is up 1%, I should be up 1.44%. When it s down 1%, I should be down 1.44%. In other words, it s effectively acting from a risk perspective like leverage in your portfolio. Worse, however, is the way in which that extra risk manifests. A quick trip to etf.com/sphb would reveal that SPHB has an upside beta of just 1.29, and a downside beta of That means when the S&P 500 is up 1%, you only expect to be up 1.29%, but when it s down, it s down even more! The conclusion here is simple: Smart beta, nearly by definition, takes on different risks than plain-old boring market-cap indexes. Anytime you consider a smart-beta product, you have to look hard at how the smart part is affecting the beta part. This issue of the ETF Report is full of good ideas on how you can use new approaches to indexing to make money, reduce portfolio risk and access new patterns of investment returns. But that s not what this article is about. Instead, I m here to tell you what can go wrong. With every new invention comes new dangers. When the steam locomotive started spreading across the United States, people were killed regularly crossing train tracks, even though they could see the oncoming train. Why? It took an entire generation for people to learn how to judge the intercept vector of something moving so fast and get out of the way in time! It s not all that different with so-called smart-beta ETFs. They can be powerful tools, but you ve got to slow down and take a look to avoid getting run over. Selected Smart-Beta S&P 500 ETFs FIGURE 1 Ticker Fund 1-Year Return (1/22/14) SPHB PowerShares S&P 500 High Beta 31.82% RSP Guggenheim S&P 500 Equal Weight 28.46% SPY SPDR S&P % VSPY Direxion S&P 500 RC Volatility Response 25.63% SDOG ALPS Sector Dividend Dogs 24.80% EQL ALPS Equal Weight 24.11% SPLV PowerShares S&P 500 Low Vol 17.61% SPHD PowerShares S&P 500 High Dividend 15.07% VIXH First Trust CBOE S&P 500 VIX Tail Hedge 14.65% PHDG PowerShares S&P 500 Downside Hedged 10.78% PBP PowerShares S&P 500 Buy Write 9.46% Source: Bloomberg problem2crowding As long as investors go into their investments with open eyes, there s nothing wrong with having a different take on the market. If you want to equal-weight the S&P because you think the effect of larger companies is too great in the index and want a midcap skew, that s fine, as long as you know you re going to eat some returns in rebalancing costs and miss out on the next big Apple run-up to do it. But sometimes returns look too good to be true, even unexplainably good. Such was the case with the low volatility craze that swept the ETF world for much of 2012 and. For much of that period, low-volatility ETFs were the single fastest-growing group of ETFs, with the first entrant, the PowerShares S&P 500 Low Vol ETF (SPLV A-47), pulling in nearly $5 billion in assets in its first two years on the market. The flows were chasing what seemed to be an odd anomaly. Academics would tell us that the riskier an asset is, the more return should be demanded by investors. Yet for a while, it seemed as though lower-risk stocks in the S&P 500 were consistently outperforming higherrisk stocks, and not just in down markets, either. This low-vol anomaly spawned dozens of academic papers, articles in the Journal of Indexes and eventually, ETFs. At the peak, more than $12 billion in new assets chased these low-vol strategies. 14 ETF.com/ETF Report March

10 SPLV Vs. SPY FIGURE 2 RETURN 50 % May May May problem3 Tracking SPLV SPY Source: Bloomberg What happened next was somewhat predictable (see Figure 2). As more and more money started chasing low-vol stocks, they stopped being the outperformers they had been. Indeed, in, a year that featured a correction both in May and in August, the low vol stocks significantly underperformed as the market went down, and ended the year trailing the S&P 500 by nearly 10%. It s of course impossible to prove empirically exactly why the low vol anomaly evaporated, but my inclination is to chalk up another victory for efficient markets. When something is too good to be true, people start piling in. Once people pile in, whatever inefficiency was being exploited has a nasty tendency to evaporate. problem4trading Finally, many smart-beta funds share something in common with all niche ETFs they often don t trade particularly well. The reason this is particularly concerning for smart-beta products is that often the alternative products being considered vanilla ETFs trade very well. Put another way, if you re looking to invest in corn futures, you don t have many options, and will have to deal with some tricky trading to get at the corn ETFs. But global equities? There are dozens of funds trading at fair value and penny spreads, all day long. Consider one of the fastest-growing funds of, the Vident International Equity ETF (VIDI F-39). Since its recent launch in November of last year, VIDI has pulled in more than $550 million in assets, making it one of the largest international equity ETFs on the market. Yet despite that initial size, it s struggled to find good on-screen volume. Consequently, the fund has traded at significantly different prices than fair-value might suggest (see Figure 4). These kinds of premiums and discounts driven by flows aren t uncommon in smart-beta products, and for good reason. Because these strategies follow nonstandard indexes, they re more difficult for market makers and authorized participants to hedge against. That means they re more likely to allow the price of an ETF to drift from fair before stepping in to create or redeem shares. VIDI: Trading Woes FIGURE 4 USMV 1-Year Tracking Difference One of the glorious things about marketcap-weighted indexes is that they re comparatively easy to run. Once you own all the stocks you want in their market weights, you generally don t need to touch the portfolio except to reinvest dividends, handle corporate actions and deal with index changes. There s still a science to doing that well, but it s relatively straightforward. Smart-beta strategies by definition are doing something different. They re holding securities in different weights, adjusting their portfolios to match their RETURN 0 % January April July October FIGURE 3 USMV Source: Bloomberg smart strategies, and often rebalancing regularly. All of that means that ETFs tracking smart-beta indexes often have a much more difficult time than their vanilla brethren. Consider the ishares S&P 500 ETF (IVV A-97). We won t bother with a chart, because it s literally impossible to tease out the difference in performance between IVV and the actual S&P 500 Index. By the numbers, it trails the index by precisely the amount of its expense ratio in any given year, with a variation of generally less than a basis point. The ishares MSCI USA Minimum Volatility ETF (USMV A-54) fares much worse. While it charges an expense ratio of 15 bps, on an average year, it trails its index by 22 bps. In a bad year, it trails by nearly 40 bps (see Figure 3). Even something as seemingly simple as equal weighting can add significant variability to your returns. Guggenheim s S&P 500 Equal Weight ETF (RSP A-72), has a median annual tracking difference of 57 basis points more than its 40 bp expense ratio would suggest and in its worst years, trails by almost 70 bps. premium/discount RETURN VIDI Fund Flows (Millions) 3.5 % November December January 2014 Trap Awareness VIDI Premium Source: Bloomberg None of these issues trading, tracking, crowding and false alpha is unavoidable. In fact, for the most part, they re very easy to spot using free tools like the analytics at ETF.com. As with everything in ETFs, you need to look closely before you leap. It s just doubly true when you re hunting for a better mousetrap. Because sometimes it s not the mouse who gets trapped. flows ($, millions) 16 ETF.com/ETF Report March

11 SPONSORED CONTENT What Does Smart Beta Mean? An interview with David Koenig of Russell Indexes Russell Investments has been a leading index provider since launching its U.S. index series in 1984, including the Russell 2000 Index the first small-cap benchmark. Today Russell Indexes offers more than three dozen product families and calculates more than 700,000 benchmarks daily. Approximately $4.1 trillion in assets are benchmarked to Russell Indexes. The editors of ETF.com sat down recently with David Koenig, investment strategist for Russell Indexes, to discuss the latest in index innovation and what it means for clients. David Koenig, CFA, FRM Investment strategist, Russell Indexes broad range of investment strategies many of which have nothing to do with hedging at all. Similarly, alternatives include hedge funds, private equity, commodities, managed futures and several other strategies. It s important to recognize that smart beta also includes several categories of index-based strategies, such as: Nonmarket-cap-weighted indexes that provide exposure to a complete market or market segment. These indexes don t explicitly target specific risk factors, and their factor exposures tend to be dynamic over time. Examples include equal-weighted and fundamentally weighted indexes. Factor indexes that consist of a focused subset of securities within a specific market segment and that seek to maximize exposure to a specific factor. Examples include indexes that target factors such as Russell Investments has continued to build on its heritage of thoughtful index innovation with the introduction of a number of so-called smart-beta indexes. How does Russell define smart beta? At Russell, we define smart-beta indexes as transparent, rules-based advertisement low volatility, momentum, quality, size and value. strategies designed to provide exposure to specific market segments or factors. Smart-beta strategies are typically not weighted by market capitalization and include strategies such as fundamentally weighted indexes and equal-weighted indexes and factor indexes such as low volatility, value, momentum, quality and several others. Smart-beta strategies are generally designed to: Increase portfolio diversification and potentially enhance returns over time Help reduce portfolio risk Provide a combination of diversification/return enhancement and risk reduction Smart-beta indexes offer a way for investors to diversify their indexbased strategies while retaining many of the benefits of traditional indexing such as transparency, diversification, high capacity, liquidity and relatively low implementation costs. They can be used within investment portfolios as complements to both traditional cap-weighted index strategies as well as actively managed strategies. At Russell, we believe the broadest definition of smart beta would also include some cap-weighted indexes that are designed to measure specific market segments or styles. Examples would include defensive and dynamic indexes that divide market segments into companies that have historically been less economically sensitive and less volatile versus firms that have been more economically sensitive and more volatile. There are many different strategies that are grouped within the smart-beta category. How do you characterize these strategies, and what has led to so much interest in them recently? You might think of it in the same way the industry uses the term hedge funds, or even more broadly, alternatives. Hedge funds include a Investment strategy indexes designed to provide exposure to markets or market segments through a nontraditional structure. Examples include strategies such as high dividend yield, which seeks to deliver income; and GeoExposure, which seeks to provide emerging markets exposure through developed-market companies that generate significant revenue in emerging markets. Many of these strategies have existed for many years and are supported by a wide body of academic research. Interest in these strategies has increased in recent years due to the slow growth, highly volatile and low-interest-rate environment as well as the rapid growth in the ETF industry, which has helped to democratize access to these strategies in the same way that ETFs helped to democratize access to various asset classes over the past two decades. Most industry participants say they don t like the term smart beta, but it seems to be the term that is becoming most widely adopted to describe these strategies. Why is that, and is there a better term? While much of the focus today seems to be on the term smart beta itself, we believe that, over time, the focus of investors is likely to move past the broad term and center more on the individual strategies themselves. Whenever a new term is introduced, it is typically met with skepticism and much debate. For example, when Russell introduced the first growth and value style indexes in the 1980s, this type of market segmentation had not yet been widely adopted across the industry. Since that time, style investing has become an industry standard. As of the end of, there were more than 1,000 ETFs and mutual funds with more than $1.5 trillion in assets benchmarked against U.S. style indexes, with 90% of that consisting of Russell style indexes. i It is also useful to remember that not so long ago, index-based investing itself was met with skepticism and criticism. When Vanguard Group founder John Bogle launched the first index-based mutual fund in 1976, his efforts were maligned as Bogle s Folly. ii Since that time, indexing has become widely accepted, with assets in index-based investments worldwide reaching more than $7.3 trillion in. iii Are smart-beta strategies active or passive? That is a common question regarding smart-beta strategies. My answer is always that the question is incomplete. There is an important difference between active management and active exposures in a portfolio relative to a cap-weighted benchmark; in other words, exposures that are different from those of the benchmark. True active management requires ongoing forecasts and judgments of a portfolio manager, who makes adjustments to portfolio holdings and weightings based on those judgments. By contrast, smart-beta strategies are transparent rules-based index strategies and do not involve ongoing judgments or forecasts. Once the index construction and rebalancing rules are set, the strategy follows those rules going forward and does not actively deviate from the methodology. That said, they are, of course, designed to have active So how can investors best go about implementing these strategies? exposures relative to a cap-weighted benchmark. At Russell, we view smart-beta strategies as complements to traditional I would also acknowledge that investors should analyze smart-beta cap-weighted index strategies as well as actively managed strategies. strategies in the same way they evaluate actively managed strategies. Investors need to understand their objectives and the exposures they re Just like the due diligence that investors devote to understanding an active trying to gain in their portfolio. They need to understand the objectives of manager s philosophy, process, people and performance, investors need to the index, its exposures and expected behavior in various environments spend the time to understand the objective of a smart-beta index and advertisement how and how the index is constructed. In some cases, a cap-weighted index that fits with their views and investment goals. They also need to be sure they understand the index construction methodology and the exposures and the expected behavior of the index in various market environments. Not all smart-beta strategies are created equally. For example, many smart-beta indexes that seemingly target the same strategy such as low volatility have very different approaches to index construction that lead to significant differences in exposures and performance. So it s important to know what you own. Are smart-beta indexes actually smart, then? The academic research on many of these strategies has found that they have historically delivered excess returns and improved riskadjusted returns over long time periods, and so they are called smart. But investors should not expect these strategies to always outperform particularly in the short term. Each of these strategies has a performance cycle and might outperform their cap-weighted counterpart in one period but underperform in another period. And they can experience extended periods of underperformance. The potential benefits seen in the academic research generally occur over the long term, so usage of these strategies typically requires patience and commitment from investors. As an industry, we also need to ensure we are providing the necessary education so investors understand the behavior of these strategies and that the smartness comes from the implementation of the strategies, not from the index itself. Are smart-beta strategies really focused on beta, or would it be more accurate to call them dumb alpha? This is really a terminology question. As an industry, we ascribe an almost mythic quality to the term beta. Beta has generally been understood to mean the cap-weighted market for more than 50 years. iv However, in the research, beta really just means sensitivity to something, or how much a security or portfolio is expected to move relative to a reference point. In multifactor models, each factor has a beta, and the portfolio s exposure to that factor indicates how sensitive it is to the factor. v Among the most familiar of these multifactor models is the Fama-French three-factor model, which includes the market, size and value factors. vi Additional factors include momentum, leverage, liquidity, quality and several others. vii According to Fama and French, Multifactor efficiency implies a relation between expected return and beta risks, but it requires additional betas, along with a market beta, to explain expected return. viii Beta is sensitivity to the market and to other factors, while alpha is value added by forecasting and active security selection. Part of what might previously have been considered alpha is attributable to factor betas, and we are now able to construct rules-based indexes to capture these factor betas. Given this, I would say it is completely appropriate to refer to smart-beta strategies as beta. might be the preferred solution; in others, it might be a smart-beta index strategy, and in others it might be an actively managed strategy. In many cases, an investor might hold a combination of all of these in a diversified global multi-asset portfolio. Which strategies are preferable for any single investor will depend on their investment beliefs, objectives, tolerance for risk and time horizon. Investors have access to a great deal of research from index providers and fund providers about each of these individual strategies and how investors can use them in their portfolios. As always, the advice and guidance of a financial advisor is important in constructing and maintaining a portfolio to help investors meet their objectives. i Morningstar, as of 12/31/. ii Bogle, John. The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy, Bogle Financial Center, iii Pensions & Investments, as of 6/30/. iv Sharpe, William, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, 1964; Lintner, John, The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, Review of Economics and Statistics, 1965; Black, Fischer, Capital Market Equilibrium with Restricted Borrowing, Journal of Business, v Merton, Robert, An Intertemporal Capital Asset Pricing Model, Econometrica, 1973; Ross, Stephen, The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, vi Fama, Eugene and K. French, The Cross-Section of Expected Stock Returns, Journal of Finance, 1992; Fama, Eugene and K. French, Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, vii Basu, Sanjay, Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis, Journal of Finance, 1977; Banz, Rolf, The Relationship Between Return and Market Value of Common Stocks Journal of Financial Economics, 1981; Bhandari, Laxmi, Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence, Journal of Finance, 1988; Jegadeesh, Narasimhan and S. Titman, Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency, Journal of Finance, viii Fama, Eugene and K. French, The Capital Asset Pricing Model, Journal of Economic Perspectives, SPONSORED CONTENT

12 By Olly Ludwig ASK THE How Do You Use Smart Beta? EXPERTS Nick Carver Director of Investment Services Legacy Private Trust Co. Neenah, Wis. Are you using smart-beta products? Yes. A few years ago, I started thinking that if the whole core of a portfolio is in cap-weighted indexes, it s really hard to justify your fee. You have to generate enough alpha on the rest of it to pay your fee, so I thought maybe I should look into some of the smart-beta products. Right away, we went to two PowerShares products: low vol and RAFI. Initially, I was a RAFI skeptic I was reading Arnott s stuff in the Financial Analysts Journal, and like many people s initial reaction, I was thinking: This is just another value thing, and I know how to buy value, so why do I need this fundamental index thing? I went to a PowerShares University event in Chicago, and Rob Arnott spoke, and I ended up thinking: This makes a lot of sense. Initially, I was probably more convinced by the fixedincome argument. The argument on the fixed-income side is: Why do you want to overweight the bond issuers who are issuing the most debt? Do you buy the case that Arnott and his company are making, say, in the case of an equities fund like PRF [the PowerShares FTSE RAFI US 1000 fund (A-86)] that you can get something on the order of 200 basis points of annualized return relative to a comparable fund like the ishares Russell 1000 ETF (IWB A-92)? Well, backtested things always outperform reality by a certain amount. In other words, in practice, I m not sure it s always outperforming in the same way. I buy into RAFI on a philosophical basis. I m not sure you re going to beat the market by a ton, but for us, what we re looking at is: Is it going to generate some alpha and also protect us when we get into the extremes? Does RAFI achieve those objectives? Yes, it does. The RAFI methodology is big on rebalancing, and we re big rebalancers. We rebalance all the time. That s Arnott s point: It s a mathematical principle that if you have volatility, it s smart to rebalance. Do you own PHB [the PowerShares Fundamental High Yield Corporate Bond Portfolio (B-74)]? Yes, I do. And, on the equities side, do you own PRF? Yes, we own PRF. It s half of our core at 20%, and we use low volatility for the other half. By low vol, do you mean SPLV [the PowerShares S&P 500 Low Volatility Portfolio (A-47)]? When it first came out, we went with SPLV, but we ve since decided to go with USMV [the ishares MSCI USA Minimum Volatility ETF (A-54)]. USMV is more about the weightings of low-volatility stocks that s probably why we own it. Anything else? If we really like large-cap, we might own some RSP [the Guggenheim S&P 500 Equal Weight ETF (A-72)], which some people think is smart beta. Just like intelligence, smart beta can be defined in a myriad of ways The world of so-called smart-beta ETFs is exploding as investors and advisors look for ways to improve on first-generation, capitalization-weighted index investing pioneered by Vanguard founder John Bogle in the 1970s. Instead of weighting securities in a portfolio based on their prices, the ETF industry has evolved into bringing to market products that weight stocks based on fundamentals such as income, sales or book value. Alternatively, an increasing number of funds are targeting factors such as value and growth, and more recently popular ones such as momentum. There are very different ways to go about implementing smart-beta strategies. The options range from funds that canvas broad swaths of the market and serve as core holdings, to more finely calibrated tools, designed for active and tactical asset managers. ETF Report s Olly Ludwig caught up with four practitioners whose different sensibilities reflect the complexities of this brave new world of beta. In sum, more than $200 billion of the $1.6 trillion market of U.S.-listed ETFs now targets some variation of smart beta. clayton Fresk Portfolio Management Analyst Stadion Money Management Watkinsville, Ga. Do you use smart-beta products at Stadion? We have used them in different capacities, on a tactical basis. You re not using Rob Arnott or Wisdom Tree set-and-forget solutions. Your firm is more of the do-it-yourself alpha seekers, tilting the portfolio with a single-factor security, perhaps? Yes. We ll analyze our universe of ETFs, and we can see when certain factors are in favor and certain factors are out of favor. For example, there are times that [the Guggenheim S&P 500 Equal Weight ETF (RSP A-72)] will rise in our ranks as a little bit of a higher-beta option compared to the S&P 500. But then, as things ebb and flow, we might see low volatility rising in the ranks and use SPLV [PowerShares S&P 500 Low Volatility Portfolio (A-47)]. And you re using funds like RSP or SPLV on the perimeter of an equities allocation? Or could they become the core? We haven t used them within a core allocation yet. We ve kind of used them more in the perimeters. Since we re trend followers, we ll see when one is in front of the other, and we might move in and out of them on that basis. We haven t used them as a park-andplay allocation. I don t see that changing in the near term. What are some of the factors worthy of your consideration? Oldies like size and value, or some of the others, like momentum or quality? I definitely think, like you said, the oldies growth and value are viable. But I think if you keep it broad with quality and value, there s viability in that. It s when you get away from these broad, wide-net sort of things, when you get more granular in the kind of selection process, that s where some of these factors might lose some viability. Along the lines of RSP, there are some equal-weighted Nasdaq-100 ETFs that are interesting. There s QQEW [the First Trust Nasdaq-100 Equal Weighted ETF (B-54)] and QQQE [the Direxion Nasdaq-100 Equal Weighted ETF (B-54)]. The First Trust one is considerably larger $294 million compared with $23 million. Would you gravitate toward the bigger security to ease your trading-execution challenges? Generally, if we re looking at two names that are pretty equal in different aspects, we re going to migrate toward the more liquid, higher-volume and larger one. Does Stadion like equal weighting in general, just because you like the tilt toward higher beta? For us, it corresponds with some of the models we re doing. We have a model that s kind of based more on an equal weight, and having that carry over and using equal-weight ETFs can make sense. 20 ETF.com/ETF Report March

13 We looked for a methodology that was complementary to the approach we take to individual stocks paul Meehan Managing Director Edgemoor Investment Advisors Bethesda, Md. Do you use any fundamental or smart-beta ETFs? Although we don t use ETFs often, we have used two ETFs, EES and DEM [the WisdomTree SmallCap Earnings Fund (EES A-81) and the WisdomTree Emerging Markets Equity Income (DEM C-76)]. They give us exposure to parts of the market emerging markets or small-cap stocks where we don t feel we have the expertise or, with respect to emerging markets, the research capacity to delve into individual securities in those markets to the extent that we would feel comfortable. But we do feel it s important to have exposure to those parts of the market. As we looked for the best way to get that exposure, we started thinking about ETFs, and once we were looking at ETFs, we looked for a methodology that we felt was complementary to the approach we take to individual stocks. What does that mean, exactly? We liked that the WisdomTree funds aren t cap-weighted. Why avoid cap-weighted funds? As active managers, we don t look at our approach as mimicking the market. Obviously, we want to outperform the market, and we think the way to do that is not to just invest in exactly the same securities at exactly the same weight that the overall market is. So when we looked for ETFs, we wanted a strategy that approached investing similar to the way we do. The Wisdom- Tree ETFs offer an approach that is attractive to us it fits with the way we look at our individual investments. So you believe that EES, which weights companies based on strong and stable earnings, and DEM, which screens for attractive dividend yields in the emerging markets, will both outperform similar cap-weighted strategies? Yes. In our opinion, that s a superior method for investing over the long term. Obviously, over any short-term period, it could do better or worse, but we do believe over the longer term it will be better. Are you thinking about looking for more factor-based smart beta to integrate into the portfolio? And what areas might be ripe for such consideration? I could see us doing that, and other non-u.s. markets might be a possibility beyond the emerging markets. I suppose debt or fixed income, that s another possibility, probably outside the U.S. How long ago did you make these decisions regarding EES and DEM? EES was about two years ago, and DEM more like 3 ½ years. And you ve been in business how long? Since around the beginning of Right now we have about $700 million under management, and that s a mixture of equity and income oriented. Scott kubie Chief Investment Strategist CLS Investments Omaha, Neb. A lot of advisors won t touch enhanced beta with a 10-foot pole. They get their factor exposure using pure-beta market cap. In what instances do you make use of enhanced beta securities? You can use some of the style boxes in such a way as to get those exposures. But you don t get it as pure, as consistently or as targeted. So you don t really know how much momentum you re getting if you re buying growth, or how much momentum you re losing if you re buying value, or whatever the case may be. The smart-beta fund gives you a targeted exposure. If you look at your portfolio, and you have an overweight in growth because you want momentum, why not just own momentum? That s a clear communication of how much your allocation is. But it s also a clear indication to your clients that this is what s going on in my portfolio, these are the things I m emphasizing. I think that s a better way of doing it. The presence of that particular security is a very explicit sign that this is a tilt. Apart from that tilt, do you have what might be called market weights in a more pure-beta kind of approach? Yes, absolutely. You could do it with market weights, or you can sort of turn around and take that part and try to do something else to add value with the rest of the portfolio. But either way, it s very explicit. You don t lose track of it. So we know that, if we ve got a 4% percent allocation to MTUM [ishares MSCI USA Momentum Factor ETF (B-64)], we have a 4% allocation to a pure momentum play. If we ever say, Wow, we don t like momentum anymore, we also know exactly which security to change to adjust the portfolio very quickly back to where we want to go. Are you open to the multifactor things WisdomTree and Rob Arnott s Research Affiliates are doing? The types of securities that Wisdom Tree and Research Affiliates are offering have a little bit different character, because they have lots of factors. And they re really meant to replace your large-cap core exposure. You replace all of your S&P exposure with that, because you really believe in that multifactor system. It s not meant to be used tactically, or not meant to be used in a targeted fashion. I like the targeted smart beta more for what we do, because we really want to zero in on something that s less diversified, because we re an active manager. What are the factors you think all the academic research show as clearly viable? I like the value factors, and I really like momentum and also quality; they tend to tilt your portfolios a little bit more to the growth side. Minimum volatility is one that we would tend to buy into as well. Those four are the strongest ones that are out there. And there are ETFs for each of those too, right? Yes. We own MTUM. And we own QUAL and SPHQ [the ishares MSCI USA Quality Factor ETF (A-68) and the Power- Shares S&P 500 High Quality Portfolio (B-74)]. One of the aspects that s interesting about quality is there are two very different approaches to it that end up with very different asset allocations. One [SPHQ] has a very low weighting in technology, and one [QUAL] has a really high weighting in technology. We own VLUE [the ishares MSCI USA Value Factor ETF (B-88)], too, and we ll also use another ETF, JKE [the ishares Morningstar Large- Cap Growth ETF (B-89)]. Momentum and quality tend to tilt your portfolios a little bit more to the growth side 22 ETF.com/ETF Report March

14 SPONSORED CONTENT What Factor Investing Really Means And How It Works In Your Portfolio A Conversation with Brett Hammond of MSCI SPONSORED CONTENT time compared to the parent index. Quality is actually one of the more outstanding factors, from a risk-return perspective, over the long term. Those last couple of words are important, though: These strategies aren t making any guarantee of having better performance or lower risk all of the time. They may over long periods. But there are going to be lots of periods lasting one, two or even three years when they underperform the cap-weighted parent index. Those two features the potential for long-term outperformance, but periods of short-term underperformance are very important for investors to understand. ETFs tracking new indexes that focus outside the traditional size and style boxes of yesteryear are becoming the fastest-growing products in the market. With products tracking everything from low-volatility stocks to high quality, it s easy to understand how some advisors might be a bit overwhelmed. We sat down with Brett Hammond, Managing Director and Head of Index Applied Research at MSCI, to get the straight story on this new wave of factor-based indexes. ETF.com: What s all the buzz about factor investing? What is it, and why should advisors care? Brett Hammond: Advisors and institutional investors alike have a long tradition of investing in two different ways: passive investing and active investing. Factor indexes represent a new, third way. Factors are common characteristics shared by groups of stocks and explain part of their returns. Academic research has shown and MSCI believes that historically, six factors have experienced periods of outperformance: value, quality, momentum, low volatility, dividend yield and size. For decades, active investors have been using factors in their attempts to outperform the market. The MSCI Factor Indexes take the low-cost approach associated with sticking close to an index, but capture some of the extra returns that used to be available only to active investors. It s a good combo. ETF.com: So is factor indexing always better than traditional market-cap-weighted indexing? Hammond: No. What we firmly believe at MSCI is that this is really just a third way of looking at investing. And remember: Factors are cyclical. There is no free lunch. Factor indexes should not be viewed as replacements for marketcapitalization-weighted indexes. Market-cap indexes remain the reference point for representing the entire opportunity set available to investors. Brett Hammond Managing director, MSCI Traditionally, investors might have started with a large-cap domestic equity portfolio and then bolted on international exposure or maybe some sort of small-cap portfolio. What we finally realized is that, instead of bolting things on and running the risk of having gaps and overlaps in the portfolio, you need to start with the full global market-cap opportunity set. We call it ACWI [All Country World Index]. That s an extraordinarily good starting point that encompasses all the opportunities that are out there. What we re saying is that there are some factors that have been shown over long periods of time to produce returns that are in excess of the benchmark or provide volatility that s lower than the benchmark. That s what factor investing taps into. ETF.com: How do you take one of those factors let s say quality or low volatility and capture it in an index? What does that actually mean? Hammond: Methodology matters a lot. Not all factor indexes are born equal. You need to combine sophisticated expertise in both indexing and investment analytics to produce reliable factor indexes. Let s take the idea of quality as the example. Quality has to do with finding companies that have a higher quality than the average company in an index. So to construct a quality index, we ll first start with a market-cap weighted index that already exists, like the MSCI World or the MSCI USA. Then we want to emphasize high-quality stocks. What do we mean by that? Well, stocks with earnings that don t go up and down rapidly; stocks with low debt-to-equity measures. These are firms most equity analysts would look at and say this is a high-quality, well-run company. We ll screen the companies in the parent index on those kinds of measures, so that we have a more concentrated, or tilted, index. We will impose certain constraints to make sure that the factor index retains the characteristics of the parent index and does not introduce unwanted biases. And then we will review that every six months, and rebalance back to the highest-quality portfolio. Overall it takes a lot of careful steps, high data quality and high-end investment expertise to produce factor indexes. This is why MSCI is the call of choice of institutional investors. For example, MSCI is the #1 index provider for low-volatility ETFs worldwide. ETF.com: How does the resulting index look compared to a market-cap weighted index? Hammond: The quality index and this is true of some of the others has been shown to have significantly higher returns over long periods of ETF.com: How should advisors think about using factor indexes given the periods of underperformance? Hammond: We think it s very important to understand what these factor indexes do and how they perform over time. But what s even more important is that there are potential benefits to combining factors. If you look at the six factors we track, the correlations among them are very low. Quality, value and minimum volatility all perform differently at different times, so their periods of underperformance haven t historically coincided. They are impacted by different market and economic conditions, so their periods of outperformance don t overlap either. This is why we have created the MSCI Multi-Factor Indexes. When you take the MSCI Quality Mix Index, which combines quality, value and minimum-volatility factors, you get a powerful multifactor index that reduces the periods of underperformance but still has strong periods of outperformance. In fact, some have nicknamed this combination Buffett s Beta after Warren Buffett, because it tracks the shape of his historical returns and a lot of his stated investment principles very well. ETF.com: Is that how institutions are using this? Are they combining different factor strategies? Hammond: Yes. One of the interesting things, when I ve talked to RIAs, is they are often interested in knowing what institutional investors are doing. They re asking: How can I bring the best of institutional investing to my clients? And we are indeed seeing institutions combining factor indexes and using them in portfolios. It s public knowledge the State of Arizona has done exactly that with a range of factor indexes that, together, lower the chance of underperforming and offer investors a smoother ride along the way.

15 SPONSORED CONTENT ETF.com: One challenge investors face is that there are a lot of these factor indexes out there from different index providers. How should an investor evaluate the different products? Hammond: Three things. Firstly, is it transparent? Can I understand what the index is doing? Secondly, is it investable? And thirdly, does it represent what you re trying to invest in? The best place to look for an index that meets these criteria is to start with a solid, cap-weighted parent index. You want one that has been around for a while and has all the latest methodological advances built into it: float-adjustment, buffer zones and so on. A good parent index will come with built-in solutions to the investability and breadth problems. It will already have screened out stocks that you can t buy or sell. In our case, whether you start with the MSCI ACWI or MSCI World or MSCI USA, you know it accurately represents the market of investable stocks you re interested in. Then, when you apply a factor methodology to it like quality, you should understand the factors that are being used so there is no mystery. Do the factors make sense and do they give you the exposure that you re looking for? Our methodologies are absolutely transparent and rules-based. You can see what s going on, and that s important. ETF.com: If I m an advisor and I ve grown up in the size- and style-box world, but I m interested in factors, how do I get started? How does this new world compare to a factor-driven world? Hammond: Honestly, it s not that different. Size and style are factors. So from a top-level view, people are already used to the concept. They ve just been looking at the real world through a two-dimensional prism. Style boxes typically break the world down into value, blend and growth. The value box represents one-third of the market; the blend box represents one-third of the market; and so on. In reality, the market won t be one-third, one-third, and one-third. In some cases, we might be in a high-growth period where things that are usually defined as value become growthy. In a typical box system, they have to stay in the value box. But we simply take all the stocks in the index and just tilt towards the ones that are actually expressing that value factor. ETF.com: There have been some concerns with heavy fund flows into some factor indexes, particularly low volatility. Can trades get crowded? Do observed factors lose their value? Hammond: We don t think so, at least not yet. Obviously if every investor in the world invested in a single factor index, it would, by definition, wipe out the effect. But we don t think we re there yet. The factor index market has grown tremendously, from $15 billion to $200 billion in the past three years. But the market as a whole is worth tens of trillions of dollars, so we are still talking about a very small part of invested assets. We did a project last year for the sovereign wealth fund for Norway, which is a huge fund with almost $1 trillion in assets. They were worried that if they started investing in these factor indexes they could crowd the trades. So we asked: What if you re investing $100 billion or more in these areas? What we found was that in many cases, the effects would be almost non-detectable in terms of liquidity, returns and volatility. We re a long way from having the trades be crowded. ETF.com: Let s take that question on a different angle. A lot of people come to this space and they re looking at essentially backtested data returns. How should people use historical returns when they re evaluating factor indexes and how they work in a portfolio? Hammond: We all know that past returns are no prediction of future results. However, one of the best sources of knowledge about factor index performance is: What did they look like in the past? As we look at historical returns, we have to ask: What is the difference between a factor index and a market cap index in terms of either volatility or returns? And did they move together or separately? So backtests are an important element to consider, even if they are not the only one. You also want to consider the factor that you re tapping into. Is this a factor that we think could persist over long periods of time? Most of these factors have been discovered by academics in the past, and they have grounded these factors in terms of true anomalies that don t necessarily go away. But you do have to monitor it and be aware of it. ETF.com: What explains some of these factors? Why should, say, low volatility lead to higher long-term returns? Hammond: The empirical evidence is that a minimum-volatility index both delivers an expected lower-volatility pattern of returns when compared with a cap-weighted parent index, while also generating returns that are at least on par over the long haul. They re not going to always outperform market cap, but they re going to provide similar returns at lower volatility. Why would that exist? Why wouldn t the market arbitrage that away? The academic evidence seems to suggest a couple of things. One is that there are some periods of time when there are lower returns, and many investors don t want to put up with that. Number two, there is a belief or view that investors kind of like visible stocks; sexy stocks. And what are sexy stocks? They re stocks that go up a lot. But they re also stocks that go down a lot, too. So they tend to be more volatile. Therefore, investors undervalue stocks that are steady, and that s the minimum-volatility kind of stock. That s the theory behind it. ETF.com: Let s talk about the other factors. How do investors choose between, say, quality and momentum? It seems like everyone would love quality, right? Hammond: Not necessarily. Remember, the factors are not well correlated. Momentum is the most unusual case of all six because it shifts so quickly. But momentum in combination with something else might work, or a more dynamic portfolio that tells you when to go in and out of momentum might work. The other factors are more valid as long-term holdings, but they all have different purposes. Minimum volatility is something that you want to use if you re trying to control the volatility of your portfolio. Many of the others, like quality and value, will outperform at different points in the economic cycle. But it s really the combination that is the most valuable. The MSCI Quality Mix Index that I mentioned earlier and that some call the Buffett s beta index is an equal-weighted, regularly rebalanced combination of quality, value and minimum volatility. It just so happens that when we put these together you track Warren Buffett s returns quite well over a long period of time. He gets credit for being a value investor, but when you actually look at what kind of companies he buys, they are companies that are a good value, have low price-to-book ratios, steady earnings, and so on. It s the same things that drive the different factor models. He s really a quality mix investor. ETF.com: If the MSCI Quality Mix Index tracks the performance of the best active manager ever, what s left for active? Hammond: First, some active managers do market timing with individual stocks. The MSCI Quality Mix Index doesn t do that. Second, we don t lever up, while some active managers lever up something like 1.6x. In a recent study we did on active investors we found that, on average, a significant portion of the alpha that they add can be explained by our factor indexes. You can invest in our factor indexes at much lower cost and then get that alpha. However, there are a set of active managers that are providing alpha on top of what our factor indexes can get. There is still value in active management. You don t want to buy a closet factor indexer. You want to buy somebody who isn t being a factor indexer, who s doing a great job of stock selection or rotation or another approach that s compatible with the factor investing approach. Active managers can use MSCI factor indexes to benchmark their own active factor strategies. Further, they can use MSCI multi-factor indexes to implement their own active use in a more effective manner. ETF.com: So if there s one point you want investors to take away from this interview about factor investing, what would it be? Hammond: I think it s that we re in the middle of a major evolution. Investors can now get access to returns that used to be only accessible through active management. Today, thanks to the MSCI Factor Indexes and the ETFs tracking them, these returns are available to all investors and their advisors. The first revolution was indexing; now, we are allowing clients to replicate the performance of some active managers, but in a passive way. SPONSORED CONTENT

16 The Leveraged and inverse exchangetraded products funds and other ETPs that use leverage in going long or short an index or other benchmark have gotten some bad press, arguably for good reason. The funds often don t perform as a casual observer would expect, and their returns can be a surprise to investors who were not fully aware of what they were getting into. Because of that, these funds are considered unsuitable for unsophisticated investors, especially those who buy and hold. FINRA Steps In There have been a number of complaints and lawsuits over the last few years. Most recently, the Financial Industry Regulatory Authority in early January fined two St. Louis-based broker-dealer affiliates of Stifel Financial Corp. a combined $550,000 and ordered them to pay a total of nearly $475,000 in restitution to 65 customers for mak- & ing unsuitable recommendations when selling them leveraged and inverse exchange-traded funds. In a press release, FINRA noted that because these funds reset their leverage levels daily to maintain their objectives, their performance can quickly diverge from investor expectations. And the regulator warned that such divergence is often magnified during periods of marked volatility. Specifically, when markets are bouncing back and forth, the daily reset in leveraged funds causes those funds to lose value. Imagine the following: You have an index that starts at 100, and a 2x fund that starts at $100. On day 1, the index rises 10% (or 10 points) to 110, and the 2x fund rises 20% (or $20) to $120. On day 2, the index falls 10% (or 11 points) to 99, while the 2x fund falls 20% (or $24) to $96. By Ronald Fink Short of ETF Leverage Leveraged and inverse ETFs may not be for the fainthearted, but some of the most sophisticated investors embrace their volatility After just two days, the index is down 1%, while the 2x fund is down 4%, despite the fact that the fund matched the daily moves perfectly. Ouch. Recently, however, sophisticated investors increasingly see what lessexperienced investors might call a bug in leveraged ETF design as a feature, and are using it to their advantage. Leveraged & Inverse ETF Assets FIGURE 1 Asset Class total AUM ($mm) Leveraged 20, Inverse 19, Source: ETF.com, 2/7/2014 Exploiting The Flaw My use of levered ETPs varies, said Mark Harris, head of multi-asset portfolios at London-based asset management firm City Financial. It s part of a wider process, but they re used to incorporate and manage fund efficiency, cash manage- ment [or] lever a short or long view. More specifically, investors like Harris exploit the funds leverage by timing market volatility. For example, Michael Gayed, a CFA with Pension Partners, an investment advisory firm based in New York, uses leveraged funds to go long only when market volatility is low based on the allocation decisions derived from the quantitative model he employs. Gayed says he shifts between stock and bond ETFs with that purpose in mind as inflation expectations change. And while critics of leveraged ETFs note that their fees are high compared with those of unleveraged funds, Gayed says that s not the right comparison. Rather, he says, when you weigh the fees of leveraged ETFs against the cost of a credit line for purposes of buying securities on margin, ETFs are a better choice even though one can deduct the interest on margin debt. But Gayed is careful to avoid them when his model suggests volatility will increase, as a result of how daily resets erode a fund s capital base. The enemy is volatility, he noted, adding that his approach to the use of leveraged ETFs amounts to timing volatility. When it s low, that s exactly when we use it. Short/Short Strategies With ETFs Some investors exploit the capital erosion such volatility produces. Logan Sugarman, a principal in the New York-based money management firm Balcony Partners, has used leveraged as well as inverse funds to short their benchmarks when volatility is high, a strategy known as a short/short use of ETFs, for purposes of running partner capital. Popular Spaces For Leveraged/Inverse ETFs Inverse Fixed Income: U.S. Government Treasury Long-Term Leveraged Equity: U.S. - Large Cap Inverse Equity: U.S. - Large Cap Leveraged Equity: U.S. Financials Leveraged Equity: Developed Markets - High Dividend Yield Leveraged Equity: U.S. - Large Cap Growth AUM ($B) $1.3 b $1.1 b $2.1 b For the most part, Balcony uses such an approach to hedge a diversified global portfolio that includes everything from U.S. equities to natural gas and precious metals, but the firm is also employing the short/ short tactic with its allocations to Asia and emerging markets as a result of rising volatility in those markets and because the cost of other forms of hedging them is high. So satisfied with the tactic is Balcony which runs money for clients ranging from pension funds, endowments, insurance companies, large banks, and funds of funds to family offices and wealthy individuals the firm has been seeking client money for a fund it started last July that employs the strategy. And while leveraged and inverse ETFs are commonly said to work poorly for buy-and-hold investors, Sugarman said, Our exposures tend to be pretty constant, because of Balcony s particular approach. He notes that volatility tends to be $5.2 b $5.8 b $6.9 B Source: ETF.com, 2/7/2014 Some investors exploit the capital erosion volatility produces FIGURE 2 persistent and changes slowly over time. We don t try to get ahead of volatility, and we wouldn t chase it. Sugarman also insists that the short/short approach is superior to other hedges that are currently popular. Unlike long puts and tail-risk funds, for example, the short/short use of leveraged and inverse ETFs captures the downside, as he put it, because the funds don t require an investor to close out his positions. As he sees it, Nothing goes straight up and down. When volatility spikes, We capture that, and when markets go down, Sugarman asserts that the alternative hedges won t work as well as we work. An ETF Multitool City Financial s Harris uses leveraged ETFs in a broader way. I may wish to express a view in the portfolios, he noted, but pointed out that in other circumstances, I may wish to purely capture a short-term tactical position, where I feel that 28 ETF.com/ETF Report March

17 Largest Leveraged & Inverse ETF ISSUERS BY AUM ProShares Direxion Barclays Capital UBS Invesco PowerShares VelocityShares $6.6 B $2.5 B $1.7 B $1.4 B $1.3 B AUM ($B) beta expression should be levered to properly reward. For example, last year when gold prices plummeted to a point where he believed there was too much pessimism about the precious metal s prospects, Harris bought a leveraged gold fund to take advantage of what he called outsized rewards whenever the market jumped on the slightest good news. But he also used an inverse fund to short the credit markets when the Federal Reserve started talking about tapering its asset purchases last May, and interest rates spiked as a result. Yet because leveraged and inverse funds perform poorly during periods of high volatility, Harris generally limits his use of them to markets that are trending without much in the way of ups and downs: In high-volatility markets, the funds tend to work against you. For that reason, he uses them most often for short-term tactical purposes. Nonetheless, he says, they serve multiple, multiple purposes such as hedging markets where the alternatives are costly or impractical, such as against the S&P 500, the FTSE 250 or the Nikkei indexes. Inverse ETFs, he notes, allow you to hedge your portfolio a lot more effectively these days. $26.1 B FIGURE 3 Source: ETF.com, 2/7/2014 Harris also finds that the cost of levered and inverse funds isn t onerous, because their gearing allows him to commit less capital on any given exposure. He finds that useful simply because he must maintain a certain level of cash on hand, and a leveraged ETF enables him to gain exposure without spending as much for the purpose. For Harris, all those examples demonstrate how such ETFs can help him manage portfolios in what he calls a difficult and complex environment. Assets Growing, Costs Shrinking Meanwhile, their cost is showing signs of coming down thanks to growing liquidity, according to Jason Griffin, head of sales for the ETF division of TFS Derivatives, a London-based trading firm. Griffin is surprised at the amount of volume he currently sees in the market, noting he s lately been getting big orders from market makers and banks. That drives down the cost of trading, said Griffin. Growing liquidity could naturally reduce volatility, which of course may not be good news for Balcony Partners and other investors employing a short/short approach. It looks like investors are growing more comfortable with leveraged and inverse ETF liquidity, Griffin said. Still, he doesn t know exactly who the end clients are. Griffin says market makers who call him are unlikely to be working for Schroders (a U.K. asset management firm), Vanguard or Black- Rock, which do their own trading, whereas a bank that calls him up might be representing hedge funds or other sophisticated investors. When it comes to assets under management, inverse and leveraged funds have gathered just about the same amount of money in the U.S. Since the inception of the first inverse ETFs, the funds have collected $19.9 billion; meanwhile, leveraged funds have gathered $20.2 billion (Figure 1). U.S. large-cap equity inverse and leveraged funds are the most Leveraged and inverse funds perform poorly during periods of high volatility popular funds of this nature in general each has more than $5 billion in assets but inverse fixed income (specifically U.S. government Treasury long-term exposure) has the most AUM by specific category, with nearly $7 billion in assets (Figure 2). For issuers, ProShares is head and shoulders above the competition in terms of assets, with more than $26 billion in AUM. Direxion is a distant second, with $6.6 (Figure 3). Choose the Right ETFs for Your Clients ETF.com Analytics your one-source research solution to help you analyze, compare and select from more than 1,500 ETFs across every segment of the market. NOW FREE advertisement ETF RaTing SySTEm Designed specifically for ETFs, our easy-to-understand classification system measures funds on Efficiency, Tradability and Fit, helping you quickly compare funds along the dimensions that matter. analyst Pick Our Analyst Pick features the team s most highly recommended funds in each segment of the market. analyst insight The world s largest dedicated ETF research team provides the richest set of analyst insight and commentary available anywhere. Visit ETF.com Today! 30 ETF.com/ETF Report

18 The & of Tail-Risk-Hedged ETFs By Paul Britt VIXH s dynamic exposure uses volatility (as expressed by short-term VIX futures prices) as a trigger to buy calls on the VIX. However, when volatility is sky-high, the fund actually holds no VIX calls, on the theory that they offer little bang for the buck at such times. VIXH allocates up to 1% to VIX calls, which produces leveraged but variable volatility exposure. The VelocityShares Tail Risk Hedged Large Cap ETF (TRSK D-66) takes a different tack. It doesn t rely on triggers to set its exposure to volatility. Instead, its exposure to VIX futures is rebalanced regularly to a fixed target. The fund offsets roll costs by adding a short position in VIX futures. Moreover, the fund s long position in VIX futures is actually 2x levered (as it seeks to gain from the non-normal shape of the distribution) to yield a net-long stance within its 15% volatility exposure. Let s face it none of these products can be considered simple or easy to understand for most advisors, to say nothing of their clients. With the incredible tangle of hoses and wires under the hood, the performance record becomes that much more important. The Foggy Rearview Mirror An investor weighing the performance of tail-risk-hedged ETFs faces several problems. First, the record is generally short TRSK, for example, has been on the market less than a year. Second, the bull market environment of recent years makes it hard to evaluate how the funds will do when bears emerge. Performance FIGURE 1 US Equity tail-risk-hedged strategies index S&P 500 VQT & PHDG VIXH TRSK Total Return 32.4% 14.3% 19.4% 20.1% Volatility 11.1% 7.7% 9.3% 8.5% That said, a look at performance yields insight into how the strategies really work. The comparisons in Figures 1 and 2 use the indexes underlying each fund rather than the funds themselves in order to include TRSK. The S&P 500 provides a point of reference. One thing s clear: All of the tail-risk-hedged strategies profoundly affect performance relative to the S&P 500. Clearly, it s not the case that tail-risk-hedged ETFs only alter baseline equity performance in extreme conditions. All three strategies trailed the S&P 500 by double digits in, missing out on significant gains. Still, the TRSK and VIXH strategies provided considerable upside participation, at 20.1% and 19.4%, respectively, while the VQT/PHDG strategy returned 14.3%. While these funds expressly aim to tame the most extreme downturns the left tail of the distribution they reduced volatility overall. The VQT/PHDG strategy had the lowest volatility (7.7% versus 11.1% for the S&P 500), consistent with its lower returns. Can you buy equity exposure with built-in protection from large and unforeseen downturns? That s the promise of tail-risk-hedged ETFs. These funds take a long position in the S&P 500 and add derivatives on the VIX index to get their hedging power. ETFs with risk-hedging overlays have never been more popular. Issuers are tripping over each other to deliver international equity funds with built-in currency hedges and bond funds with interest-rate-risk protection. So it s not the asset plus overlay structure that sets the tailrisk-hedged ETFs apart, it s the nature of the overlay itself. These funds rely on futures or options on the VIX index, an exposure mechanism that s notoriously expensive and complicated. The VIX index spikes up when equity markets tank a perfect trait for a tail-risk overlay. However, it s truly uninvestable. Futures and call options on the VIX index are the next best thing, but their hedging power is severely hampered by high costs. Persistent upsloping of the VIX futures term structure translates to brutally high roll costs over time. Annual returns of -50% or worse from VIX futures exposure are routine. For this reason, the tail-risk-hedged strategies are defined by how they balance the carry costs against the hedging power of their VIX derivatives. The Barclays S&P Veqtor ETN (VQT B-31) and the Power- Shares S&P 500 Downside Hedged Portfolio (PHDG B-50) share a common approach they essentially track the same S&P 500 Dynamic Veqtor Index. (Although PHDG is an actively managed fund, its strategy is virtually identical and its performance tracks closely with that of VQT.) Both funds take a dynamic approach to VIX futures exposure, dialing it up (and bearing higher costs) at times, and carrying less coverage (and reducing hedge costs) at other times. The index relies on recent volatility in the S&P 500 and trends in the VIX index as triggers for its dynamic exposure. Based on these two triggers, the index will set its nominal volatility exposure from as little as 2.5% to as much as 40%. The index also includes a stop-loss status, whereby it bails out of equity and VIX futures altogether and moves to cash. While dynamic exposure to VIX futures makes perfect sense given the high cost of this insurance, it also flies in the face of protecting against a true black swan event, which by definition is unpredictable. If a major market downturn occurs out of the blue, the index might have its guard down and provide little protection. Like VQT and PHDG, the First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH D-67) also relies on dynamic exposure to keep the cost of hedging tail risk in check. But unlike VQT and PHDG, VIXH buys calls on the VIX rather than using VIX futures. While the fund avoids the high roll costs that typically come with VIX futures, it pays the premiums for the options. Monthly Returns: S&P 500 vs Tail-Risk-Hedged Strategies FIGURE 2 RETURN 6.0% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Data: Bloomberg. Monthly returns for SPXT Index, SPVQDTID Index, VXTH Index & TRSKID Index S&P 500 Index VQT & PHDG s Index VIXH s Index TRSK s Index 32 ETF.com/ETF Report March

19 The first performance takeaway is that tail-risk-hedged strategies delivered lower risk and lower return compared with baseline equity exposure. Monthly returns may be a better tool for measuring tail-risk hedging than overall volatility. The S&P 500 had only two months of negative performance in the joyride June and August. Only one strategy delivered positive returns in either of the down months: VQT and PHDG s strategy turned in a 0.4% gain in April when the S&P 500 Index dropped 1.3%. However, the index provided only the slightest benefit in August, when it lost 2.6% to the S&P 500 s 2.9% drop. Still, that beats VIXH s strategy, which actually lost more than the S&P 500 in both June and August. VIXH s index does show more equity upside in the 10 up months, from which one might infer that it hedges with a lighter hand. What about the strategies ability to protect against big single-day losses? Here again, the record is mixed, at best. On June 20,, the S&P 500 dropped 2.5%, and VQT and PHDG s approach significantly reduced the loss to just 0.4% for the day (Figure 3). In contrast, the VIXH strategy provided little shelter on April 15 and Feb. 25, essentially showing the same large loss as the S&P 500. In no case did any strategy produce an actual gain on the three biggest daily losses of. s Biggest Down Days: S&P 500 vs Tail-Risk-Hedged Strategies FIGURE 3 RETURN 0.0% jun 20 apr 15 feb S&P 500 Index VQT & PHDG s Index VIXH s Index TRSK s Index Lastly, performance over drawdown periods peak to trough in the S&P 500 also shows middling hedging performance. VQT and PHDG s index greatly tempered, but did not eliminate, the loss from May 21 to June 24. Yet the strategies failed to provide much help in the Aug. 2 to Aug. 7 drawdown. The second performance takeaway is that these strategies provide uncertain benefit with respect to their primary mission: hedging against sharp losses. In, either the downturns whether measured by month, day or drawdown period weren t sharp enough to trigger a massive response from the hedging exposure, or the hedging exposure just wasn t strong enough Biggest Drawdowns: S&P 500 vs Tail-Risk-Hedged Strategies FIGURE 4 RETURN 0.0% /21-6/24 8/2-8/27 9/18-10/ S&P 500 Index VQT & PHDG s Index VIXH s Index TRSK s Index The Fire Next Time Proponents of these strategies would argue that they re not built for years like. True, but none of the funds existed in 2008 when equity markets crashed, and most of their indexes don t go back that far, either. What s more, the funds complex exposure makes them sensitive to the exact way in which markets drop. There are many ways to get to a 20% loss over, say, 15 trading days, and the exact path will impact the hedging effect. Regarding the nuts and bolts of accessing these funds, VQT and PHDG use the same strategy, but differ in how they deliver it. VQT is an ETN, so it carries counterparty risk, but it has the longest track record and enjoys the largest asset base by far. PHDG is a traditional open-ended fund and charges less than VQT. Technically it s an active fund, but its mandate is to match (not beat) VQT s index. While VIXH and TRSK are backed by stable issuers, the funds themselves have tiny asset bases. Use care trading either product (especially VIXH), and monitor fund-closure risk. Investors with no faith in the tail-risk-hedge approach have other choices. Trend-following funds like the RBS US Large Cap Trendpilot ETN (TRND B-77) offer equity exposure with a stop-loss provision that toggles to cash when markets swoon. Inverse-equity funds offer exposure that zigs when equity markets zag. Time-tested hedges like gold, cash and Treasurys also have their place. Each of these comes with its own costs and trade-offs. Still, tail-risk-hedge ETFs offer sophisticated risk mitigation strategies that haven t been available to advisors and their clients. While it may be the case that systematic VIX-based hedging simply costs too much to hold in the quantity needed for it to work, it ll take the next market blowout to definitively answer that question an outcome few are anxious to see PAUL BRITT, CFA, IS A SENIOR ETF Specialist at etf.com. He can be reached at Pbritt@etf.com advertisement /DXJ Data: Bloomberg. Monthly returns for SPXT Index, SPVQDTID Index, VXTH Index & TRSKID Index The World s Leading Authority on Exchange-Traded Funds 34 ETF.com/ETF Report

20 WHY I own RSP Guggenheim S&P 500 Equal Weight ETF Strategy Richard Loy Portfolio Manager Firm: Ed Kirkland Co. LLC Location: Columbia, SC Founded: 1982 AUM: $57 Million All ETFs? 90% There are also fundamentally weighted large-cap ETFs. Why not go with one of those? I like the liquidity. We block trade. So we re trading 100,000 shares at a time. We trade the high volume all at one time. And the liquidity of it, the tightness of the spread, the volume is important to us. A lot of those fundamentally weighted ETFs have too little volume. 60-Minute CoMpliMentary live Webinars the etf.com expert series Webinars provide attendees with in-depth knowledge, cover relevant topics and highlight trends within the etf industry. Join us as we cover the topics below and much more during our live expert series Webinars. all webinars begin at 11 a.m. pt / 2 p.m. et on the following dates. What ETF currently stands out in your portfolio? RSP, the Guggenheim S&P 500 Equal Weight ETF (RSP), for a couple reasons. It diminishes the concentration risk that you have versus the marketweighted S&P ETF, where you re buying the mega caps they re so dominant. The top 10 positions of a market-weighted S&P 500 fund are almost 20% of the portfolio. With RSP, I like the idea that Medtronic has the same weight as a Johnson & Johnson. I like that SunTrust Bank, a little regional bank, has the same weight as a Bank of America. We use a core satellite approach to our portfolios. RSP is a core. This is the anchor of our portfolio. What we do is use sectors that are in favor to add some alpha. I like it because I get 500 stocks with great exposure to the lower end of the S&P 500 and the top end of the S&P 400. I get the larger midcaps too, and it s equal weighted. I love the idea of the disciplined rebalancing schedule. They rebalance every quarter. We use it as a staple. It s our anchor for all three of our portfolios. Is this a long-term holding? What would induce you to change the size of your allocation to RSP? Oh yes. We ve had it in the portfolio since August As for the size of the allocation, we use a tactical asset allocation model. We re constantly looking at the positions. We use moving averages. We use the 50-, 75- and 150-day moving averages. The position has to maintain a positive above those. So, if it breaks one, we get out by a little percentage. If it breaks another one, we get out by some more. If it breaks the third one, we re completely out. But we haven t had to touch this position. Actually, we ve added to it over the last year and a half. The expense ratios are fairly high in comparison with a domestic large-cap ETF like SPY. Do you feel the rewards outweigh that? I m from the school where cost is only important in the absence of value. I feel that the 40 basis points versus the whatever, 15, 18 bps of the others the way we manage money with the core satellite tactical approach, the 30, 35 bps that I m paying over something else is well worth it. All you have to do is look at the returns over the last couple years. It s almost 200 bps higher than the market-cap-weighted funds. Over five years, it s almost 500 bps higher than the marketcap weighted funds. Performance drives the engine. And who knows what s going to happen with the recent volatility in the market? RSP doesn t have the mega caps that the other large-cap funds have. Or rather it does, but they re all equal-weighted, so they don t have the impact they would have if they were weighted by market cap. Every position has to stand on its own two feet to be in our portfolio. And this one has done very well. Even with the higher basis points and the fees, it s still outperforming the market-weights ETFs. Guggenheim S&P 500 Equal Weight ETF (RSP) Segment: Equity: U.S. - Large Cap RETURN 30% Issuer: Guggenheim 25 Legal Structure: 22.1% Open-Ended Fund 20 Expense Ratio: 0.40% 15 AUM: $6.36 Billion 10 AD$V (30-Day): $65.47 Million 5 Avg. Spread: 0.02% 0 Competing Funds: -5 SPY, VOO, IVV, EWRI, EQL F M A M J J A S O N D J 2014 Source: Bloomberg, ETF.com. Data as of 1/21/2014. Complimentary Webinars all of the live Webinars below are approved by the CFp board and CiMa for 1 hour of Ce credit UpCoMing Webinar topics THURS mar 06 wed mar 12 THURS mar 13 THURS mar 20 an evolving asset Class: Commodity solutions for today, tomorrow and beyond advertisement an introduction to etf.com analytics* the Changing advisory landscape: effective Use of etf Model portfolios research affiliates Fund Focus sponsor sponsor sponsor sponsor to find out more or to register for any of our webinars, please visit *this webinar does not currently qualify for Ce credits 36 ETF.com/ETF Report

21 in review By Paul Baiocchi TAKE A NEW LINE WITH YOUR EQUITY January was met with a broad market sell-off that hit most cyclical pockets of the market hardest. Consumer cyclical stocks were the worst performers in January, falling nearly 6%. A disappointing holiday season hit retailers bottom line, sending the industry 9.4% lower for the month and fueling nearly $200 million in outflows out of the SPDR S&P Retail ETF (XRT A-41). The weakness was not limited to the consumer space although consumer non-cyclicals dropped 5% in January. Eight of the 11 headline sectors finished January deeply in the red. The best-performing sector in January was one of the market s weakest in : utilities. The Utilities Select SPDR (XLU A-93) rose 2.97% in January, while taking in $400 million in new assets. Health care stocks, one of s best-performing sectors, managed to buck the trend as well thanks to an 8.4% rise in biotech firms. The real estate industry, a big drag on the financial sector in, finished January 2.6% higher, while the ishares Dow Jones U.S. Real Estate ETF (IYR B-92) saw $586 million in net inflows during the month, the most of any U.S. sector ETF. Top Inflows ticker net flows aum ($m) ishares U.S. Real Estate IYR , Real Estate Utilities Select SPDR XLU , Utilities Technology Select SPDR XLK , Technology Vanguard REIT VNQ , Real Estate First Trust Industr/Prod Dur AlphDx FXR Industrials Top Outflows ticker net flows aum ($m) SPDR S&P Regional Banking KRE , Financials SPDR S&P Retail XRT Retail Financial Select SPDR XLF , Financials Industrial Select SPDR XLI , Industrials Consumer Discretionary Select SPDR XLY -1, , Cons. Cycl. Health Care Sector SPDR ETF Top Ten Holdings* XLV - HEALTH CARE Company Name Symbol Weight 1 Johnson & Johnson JNJ 12.05% 2 Pfizer PFE 9.25% 3 Merck MRK 6.82% 4 Gilead Sciences GILD 5.37% 5 Bristol-Myers Squibb BMY 4.10% 6 Amgen AMGN 4.01% 7 AbbVie ABBV 3.92% 8 Unitedhealth UNH 3.56% 9 Celgene CELG 3.25% 10 Biogen Idec BIIB 3.15% * Components and weightings as of 12/31/13. Please see website for daily updates. Holdings subject to change. advertisement Sector Performance January 2014 BASIC MATERIALS CONS. CYCL. CONS. NON-CYCL. ENERGY FINANCIAL HEALTH CARE INDUSTRIAL REAL ESTATE TECH TELECOM UTILITIES XLB -4.58% MINING XME -5.19% XLY -5.92% HOMEBLD XHB -5.05% MEDIA PBs -5.92% RETAIL xrt -9.41% LEISURE PeJ -4.78% 38 ETF.com/ETF Report XLP -5.03% FOOD PBJ -4.58% XLe -5.70% EQUIP iez -5.52% EXPLOR xop -4.06% XLF -3.62% BANKS kbwb -2.71% BANK & IN iai -3.99% insurance kbwi -7.38% SERVICES iyg -3.83% XLV 0.96% BIOTECH ibb 8.39% MED DEV ihi 0.89% pharma ihe 2.40% equipment xhe 1.33% services ihf -0.35% XLI -4.22% DEFENSE ppa 0.03% TRANSPO iyt -1.17% engineer pkb -2.19% IYR 3.58% vnq 4.24% xlk -2.58% INTERNET fdn 0.22% SEMIS xsd -0.72% software igv -0.04% /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Source: Bloomberg. Data from 12/31/ to 1/31/2014. ETFs chosen to represent each sector based on the most liquid ETF in each segment of the ETF.com ETF Classification System. KEY: - IYZ -3.16% vox -2.76% XLU 2.97% vpu 2.70% Potential benefits of adding Sector SPDR ETFs to your portfolio include: Undiluted exposure to a specific sector of the S&P 500 The all-day tradability of stocks The diversification of mutual funds Total transparency Liquidity Time For A Stock Alternative Visit or call SECTOR-ETF Consumer Discretionary - XLY Consumer Staples - XLP Energy - XLE Financial - XLF Health Care - XLV Industrial - XLI Materials - XLB Technology - XLK Utilities - XLU An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and other information, call SECTOR-ETF or visit Read the prospectus carefully before investing. The S&P 500, SPDRs, and Select Sector SPDRs are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use. The stocks included in each Select Sector Index were selected by the compilation agent. Their composition and weighting can be expected to differ to that in any similar indexes that are published by S&P. The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. The index is heavily weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investors cannot invest directly in an index. The S&P 500 Index figures do not reflect any fees, expenses or taxes. Ordinary brokerage commissions apply. ETFs are considered transparent because their portfolio holdings are disclosed daily. Liquidity is characterized by a high level of trading activity. Select Sector SPDRs are subject to risks similar to those of stocks, including those regarding short-selling and margin account maintenance. All ETFs are subject to risk, including possible loss of principal. Funds focusing on a single sector generally experience greater volatility. Diversification does not eliminate the risk of experiencing investment losses. ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust.

22 ETF DATA Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % U.S. Equity: Total Market Fidelity NASDAQ Composite Tracking Stock ONEQ ishares MSCI USA Momentum Factor MTUM FlexShares Morningstar U.S. Market Factor Tilt TILT SPDR Russell 3000 THRK ishares MSCI USA Minimum Volatility USMV , Vanguard Total Stock Market VTI , ishares Dow Jones U.S. IYY ishares Russell 3000 IWV , Schwab U.S. Broad Market SCHB , ishares Core S&P Total U.S. Stock Market ITOT , FlexShares Quality Dividend QDF WisdomTree Total Dividend DTD ALPS Barron's 400 BFOR U.S. Equity: Total Market Growth ishares Russell 3000 Growth IWZ ishares MSCI USA Quality Factor QUAL U.S. Equity: Total Market Value ishares Russell 3000 Value IWW U.S. Equity: Extended Cap Vanguard Extended Market VXF , PowerShares FTSE RAFI US 1500 Small-Mid PRFZ U.S. Equity: Large Cap U.S.-Listed ETFs by Asset Class and Year-to-Date Return Data as of 1/31/2014 Exp Ratio is annual expense ratio AUM is net assets in $US millions YTD is year-to-date 3YR and 5YR returns are annualized Includes all U.S.-listed ETFs and ETNs with assets of $190 million and above Source: ETF.com First Trust NASDAQ-100 Equal Weighted QQEW RBS NASDAQ-100 Trendpilot ETN TNDQ PowerShares QQQ QQQ , PowerShares S&P 500 BuyWrite PBP PowerShares S&P 500 Low Volatility SPLV , ishares MSCI USA ESG Select KLD Guggenheim S&P 500 Equal Weight RSP , ishares MSCI KLD 400 Social DSI Vanguard Russell 1000 VONE Schwab U.S. Large-Cap SCHX , ishares Russell 1000 IWB , ishares Morningstar Large-Cap JKD Barclays S&P Veqtor ETN VQT Vanguard Large-Cap VV , ProShares Large Cap Core Plus CSM ishares Core S&P 500 IVV , SPDR S&P 500 SPY , Vanguard S&P 500 VOO , Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % RBS US Large Cap Trendpilot ETN TRND ishares Core S&P Small-Cap IJR , ishares U.S. Broker-Dealers IAI Vanguard Mega Cap MGC WisdomTree SmallCap Dividend DES , First Trust Financials AlphaDEX FXO PowerShares S&P 500 High Beta SPHB WisdomTree SmallCap Earnings EES SPDR S&P Capital Markets KCE First Trust Large Cap Core AlphaDEX FEX First Trust Small Cap Core AlphaDEX FYX SPDR S&P Regional Banking KRE , PowerShares FTSE RAFI US 1000 PRF , RevenueShares Small Cap RWJ SPDR S&P Insurance KIE ALPS Sector Dividend Dogs SDOG U.S. Equity: Small Cap Growth U.S. Equity: Health Care WisdomTree LargeCap Dividend DLN , Vanguard Small-Cap Growth VBK , SPDR S&P Biotech XBI , ishares S&P 100 OEF , ishares Russell 2000 Growth IWO , PowerShares Dynamic Biotech & Genome PBE PowerShares S&P 500 High Quality SPHQ ishares S&P Small-Cap 600 Growth IJT , Market Vectors Biotech BBH RevenueShares Large Cap RWL SPDR S&P SmallCap 600 Growth SLYG First Trust NYSE Arca Biotechnology FBT , Guggenheim Russell Top 50 Mega Cap XLG U.S. Equity: Small Cap Value ishares Nasdaq Biotechnology IBB , SPDR Dow Jones Industrial Average Trust DIA , Vanguard Small-Cap Value VBR , First Trust Health Care AlphaDEX FXH , U.S. Equity: Large Cap Growth Guggenheim S&P 500 Pure Growth RPG , ishares Morningstar Small-Cap Value ishares S&P Small-Cap 600 Value JKL IJS , SPDR S&P Pharmaceuticals ishares U.S. Pharmaceuticals XPH IHE Schwab U.S. Large-Cap Growth SCHG , SPDR S&P SmallCap 600 Value SLYV PowerShares Dynamic Pharmaceuticals PJP , PowerShares Dynamic Large Cap Growth PWB ishares Russell 2000 Value IWN , Vanguard Health Care VHT , ishares Morningstar Large-Cap Growth JKE U.S. Equity: Micro Cap ishares U.S. Healthcare IYH , First Trust Large Cap Growth AlphaDEX FTC ishares Micro-Cap IWC ishares U.S. Medical Devices IHI ishares Russell 1000 Growth IWF , U.S. Equity: Basic Materials Health Care Select SPDR XLV , ishares S&P 500 Growth IVW , First Trust Materials AlphaDEX FXZ ishares U.S. Healthcare Providers IHF Vanguard Russell 1000 Growth VONG Vanguard Materials VAW PowerShares S&P SmallCap Health Care PSCH Vanguard Growth VUG , Materials Select SPDR XLB , U.S. Equity: Industrials Vanguard S&P 500 Growth VOOG ishares U.S. Basic Materials IYM ishares U.S. Aerospace & Defense ITA SPDR S&P 500 Growth SPYG SPDR S&P Metals and Mining XME ishares Transportation Average IYT ishares Russell Top 200 Growth IWY U.S. Equity: Consumer Cyclicals First Trust Industrials/Producer Durables AlphaDEX FXR Vanguard Mega Cap 300 Growth MGK , ishares U.S. Consumer Services IYC Vanguard Industrials VIS , U.S. Equity: Large Cap Value ishares Russell 1000 Value IWD , PowerShares Dynamic Leisure and Entertainment SPDR S&P Homebuilders PEJ XHB , Industrial Select SPDR ishares U.S. Industrials XLI IYJ , , Vanguard Mega Cap Value MGV First Trust Consumer Discretionary AlphaDEX FXD , U.S. Equity: Technology Vanguard Value VTV , Vanguard Consumer Discretionary VCR , ishares North American Tech-Multimedia Networking IGN PowerShares Dynamic Large Cap Value PWV PowerShares Dynamic Media PBS First Trust Dow Jones Internet FDN , ishares Morningstar Large-Cap Value JKF Consumer Discretionary Select SPDR XLY , First Trust Technology AlphaDEX FXL ishares S&P 500 Value IVE , SPDR S&P Retail XRT , ishares North American Tech-Software IGV , Guggenheim S&P 500 Pure Value RPV ishares U.S. Home Construction ITB , SPDR Morgan Stanley Technology MTK Schwab U.S. Large-Cap Value SCHV U.S. Equity: Consumer Non-Cyclicals First Trust NASDAQ-100-Technology QTEC First Trust Large Cap Value AlphaDEX FTA First Trust Consumer Staples AlphaDEX FXG ishares PHLX Semiconductor SOXX U.S. Equity: Mid Cap ishares Morningstar Mid-Cap JKG PowerShares Dynamic Food & Beverage Consumer Staples Select SPDR PBJ XLP , Guggenheim S&P Equal Weight Technology PowerShares NASDAQ Internet RYT PNQI Schwab U.S. Mid-Cap SCHM Vanguard Consumer Staples VDC , ishares U.S. Technology IYW , ishares Russell Mid-Cap IWR , ishares U.S. Consumer Goods IYK ishares North American Tech IGM ishares Core S&P Mid-Cap IJH , U.S. Equity: Energy Vanguard Information Technology VGT , SPDR S&P MidCap 400 MDY , ETRACS Alerian MLP ETN AMU Technology Select SPDR XLK , WisdomTree MidCap Dividend DON First Trust North American Energy Infrastructure EMLP Market Vectors Semiconductor SMH Vanguard S&P Mid-Cap 400 IVOO Yorkville High Income MLP YMLP PowerShares S&P SmallCap Information Technology PSCT Vanguard Mid-Cap VO , JPMorgan Alerian MLP ETN AMJ , U.S. Equity: Telecommunications First Trust Mid Cap Core AlphaDEX FNX Alerian MLP AMLP , Vanguard Telecommunication Services VOX WisdomTree MidCap Earnings EZM Barclays ETN+ Select MLP ETN ATMP ishares U.S. Telecommunications IYZ U.S. Equity: Mid Cap Growth ishares Morningstar Mid-Cap Growth JKH First Trust ISE-Revere Natural Gas ETRACS Alerian MLP Infrastructure ETN FCG MLPI , U.S. Equity: Utilities Utilities Select SPDR XLU , Vanguard Mid-Cap Growth VOT , Credit Suisse Cushing 30 MLP ETN MLPN Vanguard Utilities VPU , ishares Russell Mid-Cap Growth IWP , SPDR S&P Oil & Gas Exploration & Production XOP ishares U.S. Utilities IDU ishares S&P Mid-Cap 400 Growth IJK , ishares U.S. Oil & Gas Exploration & Production IEO U.S. Equity: Real Estate Vanguard S&P Mid-Cap 400 Growth IVOG ishares U.S. Oil Equipment & Services IEZ ishares Residential Real Estate Capped REZ Guggenheim S&P MidCap 400 Pure Growth RFG First Trust Energy AlphaDEX FXN ishares Mortgage Real Estate Capped REM U.S. Equity: Mid Cap Value ishares S&P Mid-Cap 400 Value IJJ , Energy Select SPDR Vanguard Energy XLE VDE , , ishares Cohen & Steers REIT Vanguard REIT ICF VNQ , , ishares Russell Mid-Cap Value IWS , ishares U.S. Energy IYE , SPDR Dow Jones REIT RWR , Vanguard Mid-Cap Value VOE , SPDR S&P Oil & Gas Equipment & Services XES Schwab U. S. REIT SCHH U.S. Equity: Small Cap Vanguard Small-Cap VB , U.S. Equity: Financials PowerShares KBW High Dividend Yield Financial KBWD ishares U.S. Real Estate U.S. Equity: Alpha-Seeking IYR , Schwab U.S. Small-Cap SCHA , ishares U.S. Regional Banks IAT First Trust US IPO FPX Vanguard Russell 2000 VTWO Vanguard Financials VFH , PowerShares DWA Momentum PDP , ishares Russell 2000 IWM , ishares U.S. Financials IYF , Market Vectors Wide Moat MOAT PowerShares DWA SmallCap Momentum DWAS Financial Select SPDR XLF , Guggenheim Raymond James SB-1 Equity RYJ ishares Morningstar Small-Cap JKJ SPDR S&P Bank KBE , Guggenheim Insider Sentiment NFO SPDR S&P SmallCap 600 SLY ishares U.S. Financial Services IYG Guggenheim Spin-Off CSD ETF.com/ETF Report March

23 Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % PowerShares Buyback Achievers PKW , ishares MSCI EAFE Growth EFG , ishares Global Utilities JXI U.S. Fixed Income: Treasury - Intermediate Global X Guru GURU ishares MSCI Germany EWG , ishares Global Infrastructure IGF ishares 7-10 Year Treasury Bond IEF , U.S. Equity: High Dividend Yield ishares MSCI Pacific ex Japan EPP , PowerShares Water Resources PHO Schwab Intermediate-Term U.S. Treasury SCHR First Trust Morningstar Dividend Leaders FDL ishares MSCI Netherlands EWN Guggenheim S&P Global Water CGW ishares 3-7 Year Treasury Bond IEI , WisdomTree Equity Income DHS ishares MSCI Japan EWJ , ishares Global Timber & Forestry WOOD U.S. Fixed Income: Treasury - Long-Term ishares Select Dividend DVY , Vanguard FTSE Pacific VPL , ishares Global Tech IXN ishares 20+ Year Treasury Bond TLT , PowerShares High Yield Equity Dividend Achievers PEY ishares MSCI Hong Kong EWH , PowerShares Global Water PIO ishares Year Treasury Bond TLH SPDR S&P Dividend SDY , ishares MSCI Singapore EWS , First Trust Nasdaq Technology Dividend TDIV U.S. Fixed Income: Agencies First Trust Value Line Dividend FVD WisdomTree Japan Hedged Equity DXJ , PowerShares Global Listed Private Equity PSP ishares Agency Bond AGZ WisdomTree Dividend Ex-Financials DTN , ishares MSCI South Korea Capped EWY , Guggenheim Timber CUT U.S. Fixed Income: Agency MBS ishares High Dividend HDV , db X-trackers MSCI Japan Hedged Equity DBJP FlexShares Mstar Global Upstream Nat. Resources GUNR , ishares MBS MBB , Vanguard High Dividend Yield VYM , International Equity: Emerging ishares Global Materials MXI Vanguard Mortgage-Backed Securities VMBS Schwab US Dividend Equity SCHD , ishares MSCI Indonesia EIDO ishares Global Telecom IXP U.S. Fixed Income: TIPS PowerShares Dividend Achievers PFM ishares MSCI Philippines EPHE ishares North American Natural Resources IGE , Schwab U.S. TIPS SCHP Vanguard Dividend Appreciation VIG , ishares MSCI All Peru Capped EPU ishares Global Financials IXG SPDR Barclays TIPS IPE Global Equity PowerShares Golden Dragon China PGJ ishares Global Industrials EXI ishares TIPS Bond TIP , ishares MSCI All Country World Minimum Volatility ACWV , ishares MSCI Thailand Capped THD Market Vectors Oil Services OIH , FlexShares iboxx 5-Year Target Duration TIPS TDTF Vanguard Total World Stock VT , ipath MSCI India ETN INP ishares Global Consumer Discretionary RXI PIMCO 1-5 Year U.S. TIPS STPZ , ishares MSCI ACWI ACWI , Guggenheim China Small Cap HAO SPDR Global Natural Resources GNR ishares 0-5 Year TIPS Bond STIP ishares Global 100 IOO , PowerShares India PIN ishares Global Consumer Staples KXI Vanguard Short-Term Inflation-Protected Securities VTIP , Global Equity Ex-U.S. ishares MSCI India INDA ishares Global Energy IXC FlexShares iboxx 3-Year Target Duration TIPS TDTT , Vanguard FTSE All-World ex-us Small Cap VSS , ishares MSCI Taiwan EWT , Market Vectors Agribusiness MOO , U.S. Fixed Income: Municipal - Broad Market ishares Core MSCI Total International Stock IXUS ishares MSCI Poland Capped EPOL Global Ex-U.S. Equity: Sector PowerShares Insured National Municipal Bond PZA Vanguard Total International Stock VXUS , SPDR S&P Emerging Markets Small Cap EWX SPDR Dow Jones International Real Estate RWX , ishares California AMT-Free Muni Bond CMF SPDR MSCI ACWI ex-us CWI ishares India 50 INDY Vanguard Global ex-u.s. Real Estate VNQI , SPDR Nuveen Barclays Municipal Bond TFI Vanguard FTSE All-World ex-us VEU , SPDR S&P Emerging Asia Pacific GMF International Equity: Developed Sector ishares National AMT-Free Muni Bond MUB , ishares MSCI ACWI ex U.S. ACWX , WisdomTree Emerging Markets SmallCap Dividend DGS , ishares MSCI Europe Financials EUFN U.S. Fixed Income: Municipal - Short-Term International Equity: Blended Development db X-trackers Harvest CSI 300 China A-Shares ASHR ishares International Developed Real Estate IFGL SPDR Nuveen Barclays Short Term Municipal Bond SHM , Vident International Equity VIDI ishares MSCI Malaysia EWM International Equity: Emerging Sector ishares Short-Term National AMT-Free Muni Bond SUB ishares MSCI All Country Asia ex Japan AAXJ , WisdomTree India Earnings EPI EGShares Emerging Markets Consumer ECON , Market Vectors Short Municipal SMB ishares Asia 50 AIA First Trust Emerging Markets AlphaDex FEM Global Equity: High Dividend Yield U.S. Fixed Income: Municipal - Intermediate International Equity: Developed ishares MSCI Mexico Capped EWW , Global X SuperDividend SDIV Market Vectors Intermediate Municipal ITM WisdomTree Europe SmallCap Dividend DFE ishares Core MSCI Emerging Markets IEMG , First Trust Dow Jones Global Select Dividend FGD PIMCO Intermediate Municipal Bond Strategy MUNI ishares MSCI Italy Capped EWI SPDR S&P Emerging Markets GMM Global Ex-U.S. Equity: High Dividend Yield U.S. Fixed Income: Municipal - High Yield ishares MSCI Spain Capped EWP , ishares MSCI Emerging Markets Minimum Volatility EEMV , PowerShares International Dividend Achievers PID , SPDR Nuveen S&P High Yield Municipal Bond HYMB WisdomTree International SmallCap Dividend DLS SPDR S&P China GXC SPDR S&P International Dividend DWX , Market Vectors High-Yield Municipal HYD WisdomTree Japan SmallCap Dividend DFJ FlexShares Morningstar Emerging Mrkts Factor Tilt TLTE International Equity: High Dividend Yield U.S. Fixed Income: Municipal - Build America Bonds First Trust Europe AlphaDex FEP Vanguard FTSE Emerging Markets VWO , WisdomTree International Dividend ex-financials DOO PowerShares Build America Bond BAB ishares MSCI EAFE Small-Cap SCZ , ishares MSCI Emerging Markets EEM , WisdomTree DEFA Equity Income DTH U.S. Fixed Income: Corporate - Investment Grade - Broad Maturities SPDR S&P International Small Cap GWX PowerShares S&P Emerging Mrkts Low Volatility EELV ishares International Select Dividend IDV , ishares iboxx $ Investment Grade Corporate Bond LQD , ishares MSCI Switzerland Capped EWL , Schwab Emerging Markets Equity SCHE WisdomTree Emerging Markets Equity Income DEM , ishares Credit Bond CFT ishares MSCI Kokusai TOK ishares MSCI China MCHI , SPDR S&P Emerging Markets Dividend EDIV PIMCO Investment Grade Corporate Bond CORP Schwab International Small-Cap Equity SCHC PowerShares FTSE RAFI Emerging Markets PXH International Equity: Alpha Seeking ishares Aaa - A Rated Corporate Bond QLTA ishares MSCI EAFE Minimum Volatility EFAV ishares MSCI BRIC BKF PowerShares DWA Developed Markets Momentum PIZ U.S. Fixed Income: Corporate - Investment Grade - Short-Term WisdomTree Europe Hedged Equity HEDJ BLDRS Emerging Markets 50 ADR ADRE PowerShares DWA Emerging Markets Momentum PIE Vanguard Short-Term Corporate Bond VCSH , ishares MSCI Canada EWC , SPDR S&P BRIC 40 BIK U.S. Fixed Income: Broad Market - Broad Maturities Guggenheim BulletShares 2016 Corporate Bond BSCG FlexShares Morningstar Dev. Mrkts ex-us Factor Tilt TLTD ishares China Large-Cap FXI , Schwab U.S. Aggregate Bond SCHZ SPDR Barclays Short Term Corporate Bond SCPB , PowerShares FTSE RAFI Dev. Mrkts ex-u.s. PXF ishares MSCI South Africa EZA Vanguard Total Bond Market BND , Guggenheim BulletShares 2015 Corporate Bond BSCF db X-trackers MSCI EAFE Hedged Equity DBEF ishares Latin America 40 ILF ishares Core Total U.S. Bond Market AGG , ishares 1-3 Year Credit Bond CSJ , Vanguard FTSE Europe VGK , ishares MSCI Russia Capped ERUS SPDR Barclays Aggregate Bond LAG Guggenheim BulletShares 2014 Corporate Bond BSCE ishares Europe IEV , ishares MSCI Brazil Capped EWZ , U.S. Fixed Income: Government/Credit - Short-Term U.S. Fixed Income: Corporate - Investment Grade - Intermediate ishares MSCI United Kingdom EWU , Market Vectors Russia RSX Vanguard Short-Term Bond BSV , Vanguard Intermediate-Term Corporate Bond VCIT , Schwab International Equity SCHF , ishares MSCI Turkey TUR U.S. Fixed Income: Government/Credit - Intermediate SPDR Barclays Intermediate Term Corporate Bond ITR SPDR STOXX Europe 50 FEU ishares MSCI Chile Capped ECH Vanguard Intermediate-Term Bond BIV , Guggenheim BulletShares 2018 Corporate Bond BSCI ishares MSCI Sweden EWD International Equity: Frontier ishares Intermediate Government/Credit Bond GVI , ishares Intermediate Credit Bond CIU , ishares MSCI EAFE Value EFV , Market Vectors Vietnam VNM U.S. Fixed Income: Government/Credit - Long-Term Guggenheim BulletShares 2017 Corporate Bond BSCH ishares Core MSCI EAFE IEFA , ishares MSCI Frontier 100 FM Vanguard Long-Term Bond BLV U.S. Fixed Income: Corporate - Investment Grade - Long-Term ishares MSCI EMU EZU , Global Equity: Sector U.S. Fixed Income: Government Vanguard Long-Term Corporate Bond VCLT SPDR S&P World ex-us GWL Market Vectors Junior Gold Miners GDXJ , Vanguard Short-Term Government Bond VGSH ishares 10+ Year Credit Bond CLY ishares MSCI EAFE EFA , Guggenheim Solar TAN U.S. Fixed Income: Treasury - Short Term U.S. Fixed Income: Corporate - Investment Grade - Floating Rate Vanguard FTSE Developed Markets VEA , Market Vectors Gold Miners GDX , ishares 1-3 Year Treasury Bond SHY , ishares Floating Rate Bond FLOT , WisdomTree International LargeCap Dividend DOL Global X Silver Miners SIL Schwab Short-Term U. S. Treasury SCHO SPDR Barclays Investment Grade Floating Rate FLRN WisdomTree DEFA DWM PowerShares WilderHill Clean Energy PBW ishares Short Treasury Bond SHV , U.S. Fixed Income: Corporate - High Yield - Broad Maturities ishares MSCI Australia EWA , Market Vectors Pharmaceutical PPH SPDR Barclays 1-3 Month T-Bill BIL , AdvisorShares Peritus High Yield HYLD ishares MSCI France EWQ ishares Global Healthcare IXJ , PowerShares Fundamental HiYld Corp. Bond PHB SPDR Euro STOXX 50 FEZ , SPDR Dow Jones Global Real Estate RWO SPDR Barclays High Yield Bond JNK , ETF.com/ETF Report March

24 Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % Fund Name Ticker ExP Ratio % AUM ($M) YTD % 3Yr % 5Yr % ishares iboxx $ High Yield Corporate Bond HYG , ishares Silver Trust SLV , U.S. Fixed Income: Corporate - High Yield - Short-Term ETFS Physical Silver SIVR Guggenheim BulletShares 2015 HiYld Corp Bond BSJF Currency: Developed Guggenheim BulletShares 2016 HiYld Corp Bond BSJG CurrencyShares Japanese Yen Trust FXY SPDR Barclays Short Term High Yield Bond SJNK , CurrencyShares Swiss Franc Trust FXF Guggenheim BulletShares 2014 HiYld Corp. Bond BSJE CurrencyShares Australian Dollar FXA PIMCO 0-5 Year High Yield Corporate Bond HYS , CurrencyShares Euro FXE U.S. Fixed Income: Corporate - High Yield - Intermediate CurrencyShares Canadian Dollar Trust FXC Guggenheim BulletShares 2017 HiYld Corp. Bond BSJH Currency: Emerging U.S. Fixed Income: Corporate - Convertibles WisdomTree Chinese Yuan CYB SPDR Barclays Convertible Securities CWB , Asset Allocation U.S. Fixed Income: Corporate - Loans First Trust Multi-Asset Diversified Income MDIV PowerShares Senior Loan BKLN , PowerShares CEF Income Composite PCEF U.S. Fixed Income: Corporate - Preferred Stock ishares Moderate Allocation AOM SPDR Wells Fargo Preferred Stock PSK Guggenheim Multi-Asset Income CVY , PowerShares Preferred PGX , ishares Growth Allocation AOR PowerShares Financial Preferred PGF , ishares Aggressive Allocation AOA ishares U.S. Preferred Stock PFF , Alternatives: Absolute Return Global Fixed Income IQ Hedge Multi-Strategy Tracker QAI PIMCO Total Return BOND , Alternatives: Tactical Tools SPDR Blackstone / GSO Senior Loan SRLN ipath S&P 500 VIX Short-Term Futures ETN VXX , Guggenheim Enhanced Short Duration Bond GSY ProShares VIX Short-Term VIXY PIMCO Enhanced Short Maturity Strategy MINT , Leveraged International Fixed Income: Blended Development VelocityShares 3X Long Natural Gas ETN UGAZ SPDR Barclays International Treasury Bond BWX , Direxion Daily Gold Miners Bull 3X NUGT Vanguard Total International Bond BNDX ProShares Ultra VIX Short-Term Futures UVXY SPDR Barclays International Corporate Bond IBND ProShares Ultra NASDAQ Biotech BIB SPDR DB Int l Govt Inflation-Protected Bond WIP ProShares Ultra Real Estate URE WisdomTree Asia Local Debt ALD ETRACS 2X Monthly Lev Long Alerian MLP Infrastr ETN MLPL International Fixed Income: Developed ProShares Ultra Silver AGQ ishares International Treasury Bond IGOV ProShares Ultra QQQ QLD SPDR Barclays Short Term Int l Treasury Bond BWZ UBS AG FI Enhanced Big Cap Growth ETN FBG International Fixed Income: Emerging ProShares Ultra MidCap 400 MVV , PowerShares Chinese Yuan Dim Sum Bond DSUM ProShares Ultra Russell 2000 UWM Market Vectors Emerging Markets HiYld Bond HYEM ProShares UltraPro QQQ TQQQ PowerShares Emerging Markets Sovereign Debt PCY , ProShares Ultra Financials UYG ishares J.P. Morgan USD Emerging Markets Bond EMB , ProShares Ultra S&P 500 SSO , ishares Emerging Markets Local Currency Bond LEMB Barclays ETN+ FI Enhanced Global High Yield ETN FIGY , WisdomTree Emerging Markets Local Debt ELD , ProShares UltraPro Russell 2000 URTY Market Vectors Emerging Markets Local Currency Bond EMLC Direxion Daily Small Cap Bull 3x TNA Commodities: Broad Market Barclays ETN+ FI Enhanced Europe 50 ETN FEEU GreenHaven Continuous Commodity GCC ProShares Ultra Dow30 DDM ipath Dow Jones-UBS Commodity Total Return ETN DJP , Direxion Daily Financial Bull 3x FAS , Elements Rogers Int l Commodity - Total Return ETN RJI ProShares UltraPro S&P 500 UPRO United States Commodity USCI Direxion Daily S&P 500 Bull 3X Shares SPXL ishares S&P GSCI Commodity GSG , Direxion Daily Emerging Markets Bull 3x EDC PowerShares DB Commodity Tracking DBC , Inverse Commoditites: Agriculture ProShares UltraShort Dow 30 DXD PowerShares DB Agriculture DBA , ProShares UltraPro Short S&P 500 SPXU Elements RICI Agriculture ETN RJA Direxion Daily Financial Bear 3x FAZ Commodities: Energy ProShares Short MSCI Emerging Markets EUM United States Natural Gas UNG Direxion Daily Small Cap Bear 3x TZA United States Oil USO ProShares UltraShort S&P 500 SDS , ipath S&P GSCI Crude Oil Total Return ETN OIL ProShares Short Dow30 DOG PowerShares DB Energy DBE ProShares UltraShort Russell 2000 TWM PowerShares DB Oil DBO ProShares UltraShort Euro EUO Commodities: Industrial Metals ProShares Short S&P 500 SH , PowerShares DB Base Metals DBB ProShares UltraShort QQQ QID Commodities: Precious Metals ProShares Short Russell 2000 RWM SPDR Gold GLD , ProShares UltraShort DJ-UBS Crude Oil SCO ETFS Physical Swiss Gold SGOL , PowerShares DB US Dollar Index Bullish UUP ishares Gold Trust IAU , ProShares UltraShort 7-10 Year Treasury PST ETFS Physical Precious Metal Basket Shares GLTR ProShares Short 20+ Year Treasury TBF , ETFS Physical Platinum PPLT ProShares UltraShort Yen YCS ETFS Physical Palladium PALL ProShares UltraShort 20+ Year Treasury TBT , DBC advertisement DBC PowerShares DB Commodity Index Tracking Fund To download a copy of the prospectus, visit The funds are not mutual funds or any other type of Investment Company within the meaning of the Investment Company Act of 1940 and are not subject to its regulation. DB Commodity Services LLC, a wholly owned subsidiary of Deutsche Bank AG, is the managing owner of the funds. Certain marketing services may be provided to the funds by Invesco Distributors, Inc. or its affiliate, Invesco PowerShares Capital Management LLC (together, Invesco ). Invesco will be compensated by Deutsche Bank or its affiliates. ALPS Distributors, Inc. is the distributor of the funds. Invesco, Deutsche Bank and ALPS Distributors, Inc. are not affiliated. Commodity futures contracts generally are volatile and are not suitable for all investors. An investor may lose all or substantially all of an investment in the funds. 44 ETF.com/ETF Report