The Global ETP Landscape War of the Titans

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1 30 April 2015 Welcome to the April 2015 edition of Morningstar ETFInvestor TM, our regular overview of key developments in Australian exchangetraded funds and products. The Global ETP Landscape War of the Titans In this issue of ETFInvestor TM we put the Australian industry in context by examining the global ETP landscape. Why should investors care what is going on outside Australia? There are many reasons, but chiefly it s because the industry is global. One thing our manager research team looks for is the parent company s committment to the fund and investment process, whether it be active or passive. If that commitment is missing, a fund s attractive attributes today may not be sustainable and its easier to be confident where indexing and ETPs are a core part of a firm s business, both in Australia and abroad. So it s crucial to understand the parent company and its operating landscape. We ve long said that the ETP industry is a global war of the titans. Much of the process behind an index fund is automated, so ETPs can eke out a competitive edge from the parent company s infrastructure, scale, risk management and trading capabilities. Some scale benefits pass to investors via lower fees and better products, typified by Vanguard where asset growth in Australia enabled it to cut fees by as much as half for some of its global equity index funds in 2012, with ETP investors also benefiting from low prices. The most efficient operators with the best products and the lowest costs are likely to be around in the long-run. Exhibit 1 ETP Assets Under Management 31 March 2015 Source: Morningstar Direct Eventually diseconomies of scale kick in, but that threshold is higher for indexing than for active funds. Thus the global ETP industry is dominated by a few large providers. Exhibit 1 shows the assets of global ETP providers in the outer circle and the inner ring shows Australia (excluding some minor players where data is limited). An obvious point is that the same firms that dominate the global ETP landscape also lead in Australia. For example, ishares has 38% market share in both Australia and the world. ishares, State Street and Vanguard loom above all others and UBS is also a top 10 ETP provider globally. Some firms dominate their large home markets and may have clients here even if they don t run Australian products. For example, Nomura is Japan s largest asset manager, while db X-trackers is the second-largest ETP operator in Europe and has local institutional clients that use its offshore ETPs. There are further global links than are apparent in this chart. For example, Australia s fourth-largest provider, BetaShares, is partowned by Mirae Asset which runs ETPs in Korea, Canada, the U.S. and Hong Kong. BetaShares also has an alliance with Wisdom Tree, the world s fifth-largest provider. Continuing the theme, Market Vectors in Australia is a subsidiary of Van Eck Global, the 14 th largest ETP provider in the world and also a mutual fund operator. ETF Securities is the 19 th largest ETP provider in the world. And while Russell isn t one of the largest ETP managers, the firm has a large multi-manager and asset consulting business. There s no denying the investment and ETP game is global Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at

2 The relevance of scale for ETPs is particularly observable when you consider the number of ETPs in Australia that build directly on an existing capability. Exhibit 2 illustrates a few (but certainly not all) examples. Scale can be leveraged in various ways, including cross-listing, cross-investment in a fund or ETF, multiple fund/etp share classes and more generally by using existing expertise. For example, Vanguard s trading is now implemented by local teams in each region. So Vanguard s ASX-listed global equity ETPs have Melbourne-based portfolio managers, but local staff around the world that execute trades. That expertise would not be possible in a sub-scale provider that had no global presence. It s worth noting that these approaches have advantages and disadvantages cross-listings can introduce extra paperwork and tax complications for investors, while multiple share classes can be complex for ETP managers to administer, and the impact of one share class on the other needs to be minimised. But provided these issues are dealt with appropriately, large-scale operators have a headstart over the field. That said, with the increasing diversity of ETFs, there is room for small players with differentiated, compelling products to prosper. Exhibit 2 Australian ETPs That Build on Existing Scale Source: Morningstar Analyst reports Exhibit 3 Worldwide Strategic Beta Assets May 2000 to March 2015 Source: Morningstar Direct The Rise of Strategic Beta A prevalent global ETP theme is the rise of strategic beta, which we examined in Australia in the March 2014 edition of ETFInvestor TM. The dynamics in Australia also apply globally, the point being that while ETP assets are growing rapidly, strategic beta is growing even faster. In fact, it is one of the fastest growing segments in the investment industry. Exhibit 3 shows the stratospheric rise in assets flattered by the fall in the Australian dollar (the chart being A$ denominated) but even so, strategic beta assets have been on a tear. The Australian ETP Landscape There were some interesting developments in Australia s ETP industry during the quarter. Magellan Global Equities Fund MGE listed on 2 March The vehicle is not strictly an ETF, but it is a product traded on the exchange, thus we thought readers of this newsletter may be interested. Magellan has developed an innovative structure whereby the firm s unlisted fund in effect will act as market-maker for the listed product. Morningstar analysts have a Gold rating on the unlisted fund Magellan Global Equity but our analysts are yet to review the listed structure, which has some intricacies that need to be understood. Magellan has had early success with the vehicle, raising nearly AUD125 million in the month of March. UBS launched five ethical ETFs during the quarter. UBS IQ MSCI Australia Ethical ETF UBA, UBS IQ MSCI World ex Australia Ethical ETF UBW, UBS IQ MSCI Europe Ethical ETF UBE and 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at

3 UBS IQ MSCI USA Ethical ETF UBU all launched on 18 February 2015, and then UBS IQ MSCI Japan Ethical ETF UBJ debuted on 24 March By the end of March these ETFs had gathered more than AUD92 million, most of it (more than AUD80 million) in the Australian ethical ETF. These ETFs screen out companies with significant business activities involving tobacco and controversial weapons, though it s worth noting that in UBA (the Australian ETP) no companies are presently screened out. BetaShares Strong Bear Hedged Fund BBOZ debuted on 17 April The fund offers inverse, leveraged exposure to the Australian sharemarket. That is, if the market falls, BBOZ should rise by an even larger amount, and vice versa. BetaShares uses ASX SPI 200 futures to target inverse leverage of % and charges an annual fee of 1.19% plus expenses of up to 0.19%. This goes beyond BetaShares existing BEAR offering which offers unleveraged, inverse exposure. There was also a product closure during the quarter Chimaera Capital announced that DIGGA Australian Mining ETF DGA would cease trading on 27 March 2015, citing extremely weak market conditions across the Australian resources sector and low levels of funds under management. The closure reflects the points made earlier in this report that there is a high hurdle for sub-scale ETP operators. Previous ETP closures in the Australian market were from a similarly small outfit, Aii. That firm initially operated only in Australia and had less than AUD12 million spread across six ETP products. Aii was acquired by global operator Market Vectors and Aii s local product suite was closed in Market Vectors now offers a suite of ETFs in Australia and abroad under its own brand. Australian ETP Flows There was a continuation of strong inflows to Australian ETPs in the first quarter of Morningstar estimates AUD1,455 million in flows to the ETP industry over the quarter. Combined with market movements, that took total assets under management to AUD17.62 billion, up from AUD14.88 billion. The number of ETPs rose to 115 (including the launch of BBOZ in April), up from 108 at the end of The quarter also spawned two of the most popular Australian ETP debuts ever. Investors often prefer to see a track record, so it can take years for some ETFs to win substantial flows (if they do). The largest flows went to the long-running ishares MSCI Emerging Markets (AU) IEM which we estimate took in AUD133 million over the quarter. But the previously mentioned Magellan Global Equities Fund MGE came in second place with an impressive AUD125 million of inflows in less than a month from its debut. ishares Europe (AU) IEU wasn t far behind, accumulating AUD123 million. BetaShares Aus High Interest Cash ETF AAA gathered AUD95 million. And another new entrant, UBS IQ MSCI Australia Ethical ETF UBA, collected AUD80 million during the quarter. Russell High Div Australian Shares ETF RDV experienced the largest outflows, bleeding AUD34 million, and AUD24 million flowed out of ETFS Physical Gold ETC GOLD. Investor appetite for offshore exposure appears to remain strong. Global equity ETPs dominated the top 20 in terms of inflows. Popular products of various descriptions included diversified global equity, emerging markets, global health care, the U.S., Europe and Japan. A smattering of other strategies littered the top 20 including cash, US dollar, Australian dividend harvesting, inverse ETFs, crude oil and Australian listed property. It s difficult to draw a common theme from that mixed bag, though it appears the focus on income endures, while the popularity of inverse, cash and currency ETFs suggests investors are cautious about the market outlook no surprises there. All up, it was another strong quarter for ETF flows and shows ETFs are holding their own and even eating into the market share of the much larger unlisted funds market. Latest ETF Research In April 2015, Morningstar initiated research coverage of six global equity and emerging markets ETFs from State Street and Vanguard: SPDR S&P Global Dividend ETF WDIV, SPDR S&P World ex Australia ETF WXOZ, SPDR S&P World ex Australia (Hedged) ETF WXHG, Vanguard MSCI Index Intl ETF VGS, Vanguard MSCI Index Intl (Hdg) ETF VGAD and Vanguard FTSE Emerging Markets Shrs ETF VGE. Morningstar currently publishes qualitative analyst research on 40 Australian ETPs, accounting for about 82.0% of invested assets. Individual investors can get access to our reports at and financial advisers at K 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at

4 ETF Market Data as at 31 March 2015 ETF Name Ticker Net Assets Return YTD % 1 Mo % 3 Mo % 6 Mo % 1 Yr% 3 Yr %pa Fee % Bid/Ask % 1 Average Prem/Disc 2 Traded Volume 3 No. Holdings SPDR S&P/ASX 200 ETF STW 2,654,342, , /08/2001 ishares Core S&P 500 (AU) IVV 1,874,301, , /05/2000 Vanguard Australian Shares ETF VAS 985,567, , /05/2009 ishares Global 100 (AU) IOO 983,703, , /10/2007 BetaShares Aus High Interest Cash ETF AAA 781,772, , /03/2012 Vanguard US Total Market Shares ETF VTS 660,188, ,953 3, /05/2009 SPDR S&P/ASX 200 Listed Property ETF SLF 571,827, , /02/2002 Vanguard Australian Shares High Yld ETF VHY 524,230, , /05/2011 ishares MSCI Emerging Markets (AU) IEM 518,216, , /04/2003 ishares Europe (AU) IEU 463,947, , /10/2007 SPDR S&P/ASX 50 ETF SFY 446,942, , /08/2001 Vanguard All-World ex-us Shares ETF VEU 440,732, ,743 2, /05/2009 ETFS Physical Gold ETC GOLD 437,862, , /03/2003 Vanguard Australian Property Secs ETF VAP 381,432, , /10/2010 BetaShares US Dollar ETF USD 375,242, , /01/2011 ishares MSCI Australia 200 (AU) IOZ 369,180, , /12/2010 BetaShares Aus Top 20 Eq Yld Maxmsr YMAX 335,057, , /11/2012 ishares Global Healthcare (AU) IXJ 299,299, , /03/2009 ishares S&P/ASX 20 ILC 299,237, , /12/2010 Russell High Div Australian Shares ETF RDV 279,844, , /05/2010 ishares Asia 50 (AU) IAA 265,486, , /11/2007 ishares S&P/ASX Dividend Opportunities IHD 244,133, , /12/2010 ishares MSCI EAFE (AU) IVE 243,055, , /08/2001 ishares Composite Bond IAF 207,369, , /03/2012 SPDR MSCI Australia Sel Hi Div Yld ETF SYI 181,859, , /09/2010 Vanguard Australian Fixed Interest ETF VAF 150,854, , /10/2012 Russell Australian Semi-Govt Bd ETF RSM 143,985, , /03/2012 ishares MSCI Japan (AU) IJP 139,972, , /03/1996 ishares China Large-Cap (AU) IZZ 135,793, , /10/2004 SPDR S&P World ex Australia ETF WXOZ 133,397, ,716 1, /03/2013 ishares Global Consumer Staples (AU) IXI 125,143, , /03/2009 Magellan Global Equities MGE 124,757, N.Av N.Av 2/03/2015 Russell Australian Government Bond ETF RGB 88,825, , /03/2012 ishares Core S&P Mid-Cap (AU) IJH 83,653, /10/2007 UBS IQ MSCI Australia Ethical ETF UBA 80,054, /02/2015 % Top 10 Launch Date 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at

5 ETF Name Ticker Net Assets Return YTD % 1 Mo % 3 Mo % 6 Mo % 1 Yr% 3 Yr %pa Fee % Bid/Ask % 1 Average Prem/Disc 2 Traded Volume 3 No. Holdings Russell Australian Select Corp Bd ETF RCB 80,046, , /03/2012 BetaShares Australian Div Harvester(mgd) HVST 76,214, , /10/2014 SPDR S&P World ex Australia(Hedged) ETF WXHG 69,902, , /07/2013 BetaShares Aus Equities Bear Hedge BEAR 64,096, , /07/2012 SPDR S&P Global Dividend ETF WDIV 61,459, , /11/2013 BetaShares FTSE RAFI Australia 200 ETF QOZ 61,339, , /07/2013 ishares S&P/ASX Small Ordinaries ISO 60,395, , /12/2010 UBS IQ Research Preferred Aus Shr ETF ETF 59,461, , /10/2012 Vanguard MSCI Australian Small Coms ETF VSO 50,988, , /05/2011 ishares Russell 2000 (AU) IRU 47,735, ,085 2, /05/2000 ETFS Physical Silver ETC ETPMAG 47,635, , /12/2008 SPDR S&P/ASX 200 Fincls EX A-REIT ETF OZF 45,658, , /04/2011 SPDR Dow Jones Global Real Estate ETF DJRE 45,143, , /11/2013 ishares Core S&P Small-Cap (AU) IJR 43,412, /10/2007 Vanguard MSCI Index Intl ETF VGS 43,319, ,551 1, /11/2014 Vanguard MSCI Australian Large Coms ETF VLC 41,692, , /05/2011 Vanguard Australian Government Bond ETF VGB 40,644, , /04/2012 ishares MSCI BRIC (AU) IBK 37,700, , /11/2007 ishares MSCI Taiwan (AU) ITW 35,083, , /06/2000 Market Vectors Australian Property ETF MVA 33,782, , /10/2013 ishares Government Inflation ILB 33,708, , /03/2012 Vanguard FTSE Emerging Markets Shrs ETF VGE 33,518, ,700 1, /11/2013 BetaShares S&P 500 Yield Maximiser UMAX 31,216, , /09/2014 Market Vectors MSCI Wld ex Aus Qlty ETF QUAL 30,628, , /10/2014 BetaShares Crude Oil ETF Ccy Hgd(Synth) OOO 28,830, , /11/2011 UBS IQ Research Preferred Aus Div ETF DIV 26,610, , /01/2014 Market Vectors Australian Equal Wt ETF MVW 26,356, , /03/2014 BetaShares S&P/ASX200 Fincls Sect ETF QFN 25,161, , /12/2010 SPDR S&P 500 ETF SPY 20,654, /01/1993 BetaShares Geared Australian Equity(Hdg) GEAR 19,440, , /04/2014 BetaShares Gold Bullion ETF Ccy Hedged QAU 17,610, , /05/2011 ishares Global Telecom (AU) IXP 17,445, , /03/2009 ishares Treasury IGB 17,167, /03/2012 SPDR S&P/ASX 200 Resources ETF OZR 16,202, , /04/2011 SPDR S&P/ASX Australian Bond ETF BOND 16,042, , /07/2012 Vanguard MSCI Index Intl (Hdg) ETF VGAD 15,890, ,166 1, /11/2014 Russell Australian Value ETF RVL 15,768, /03/2011 ishares S&P 500 AUD Hedged IHVV 14,013, N.Av ,649 N.Av N.Av 15/12/2014 ishares Global 100 AUD Hedged IHOO 13,542, N.Av ,105 N.Av N.Av 15/12/2014 Market Vectors Australian Banks ETF MVB 12,899, , /10/ Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at % Top 10 Launch Date

6 ETF Name Ticker Net Assets Return YTD % 1 Mo % 3 Mo % 6 Mo % 1 Yr% 3 Yr %pa Fee % Bid/Ask % 1 Average Prem/Disc 2 Traded Volume 3 No. Holdings BetaShares S&P/ASX200 Res Sect ETF QRE 12,421, , /12/2010 ishares MSCI South Korea Capped (AU) IKO 10,907, /05/2000 ishares MSCI Hong Kong (AU) IHK 9,644, , /03/1996 SPDR S&P/ASX Small Ordinaries ETF SSO 9,328, , /04/2011 ishares MSCI Singapore (AU) ISG 9,020, , /03/1996 BetaShares Com Basket ETF Ccy Hgd(Synth) QCB 6,658, , /12/2011 BetaShares FTSE RAFI US 1000 ETF QUS 5,467, N.Av ,632 N.Av N.Av 17/12/2014 BetaShares British Pound ETF POU 5,334, , /07/2011 SPDR S&P/ASX Australian Govt Bd ETF GOVT 5,308, , /07/2012 UBS IQ MSCI Japan Ethical ETF UBJ 4,991, /03/2015 ETFS Physical PM Basket ETC ETPMPM 4,751, /12/2008 ETFS Physical Platinum ETC ETPMPT 3,750, /12/2008 SPDR S&P Emerging Markets ETF WEMG 3,706, , /11/2013 BetaShares Euro ETF EEU 3,667, , /07/2011 BetaShares Agriculture ETF CcyHgd(Synth) QAG 2,885, , /11/2011 UBS IQ MSCI World ex Australia Ethcl ETF UBW 2,538, ,066 1, /02/2015 UBS IQ MSCI Europe Ethical ETF UBE 2,529, /02/2015 UBS IQ MSCI USA Ethical ETF UBU 2,521, /02/2015 Market Vectors Australian Resources ETF MVR 1,803, /10/2013 ETFS Physical Palladium ETC ETPMPD 1,557, /12/2008 ETFS Brent Crude Oil CSP ETC ETPOIL 1,036, /06/2012 ETFS Grains CSP ETC ETPGRN 758, /06/2012 Market Vectors Australian Emerg Res ETF MVE 657, /10/2013 ETFS Copper CSP ETC ETPCOP 644, /06/2012 ETFS Agriculture CSP ETC ETPAGR 493, /06/2012 ETFS Wheat CSP ETC ETPWHT 189, /06/2012 ETFS All Commodities CSP ETC ETPCMD 100, /06/2012 ETFS Industrial Metals CSP ETC ETPIND 92, /06/2012 DIGGA Australian Mining ETF DGA 84, /01/2012 ETFS Natural Gas CSP ETC ETPGAS 66, , /06/2012 ETFS Corn CSP ETC ETPCRN 49, /06/2012 ETFS Energy CSP ETC ETPNRG 40, /06/2012 Perth Mint Gold ETF PMGOLD N.Av N.Av N.Av N.Av N.Av N.Av N.Av N.Av /05/2003 BetaShares Aus Equities Strong Bear Hedge Fund BBOZ /04/ Average % Spread = (offer-bid /midpoint as measured from 10.30am pm). Source: ASX 2 The monthly average premium/discount of ETF from its NAV at the closing price. Source: Morningstar Direct 3 Total traded volume over the quarter. Source: Morningstar Direct % Top 10 Launch Date 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: , AFSL: (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest. Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO"). DISCLOSURE: Employees may have an interest in the securities discussed in this report. Please refer to our Financial Services Guide (FSG) for more information at