The only ETF launch during the quarter was BetaShares FTSE RAFI Australia 200 ETF QOZ, which we highlighted in the previous issue of ETFInvestor TM.

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1 16 October 2013 Welcome to the third quarter 2013 edition of Morningstar ETFInvestor TM, our regular overview of key developments in Australian exchange-traded products. Key Points The Australian ETF industry continues rapid growth while flows into unlisted managed funds remain stagnant. Market Vectors enters the Australian ETF market. Established ETFs are displaying tightening bid/ask spreads, and increased trading volumes. Third Quarter 2013 Performance DIGGA Australian Mining ETF DGA topped the performance tables, rising 19.08%, followed closely by BetaShares S&P/ASX 200 Resources Sector QRE (up 18.73%) and SPDR S&P/ASX 200 Resources ETF OZR (17.15%). Mining stocks did well as the slowdown in Chinese data abated, and bulk commodities rallied, iron ore prices rebounding well above US$0 per tonne. In fourth place on the tables was UBS IQ Research Preferred Aus Share Fund ETF, up 15.11%, surpassing passive Australian equity ETFs. Its benchmark is built on fundamental insights from UBS stock research. Nevertheless, its six month return lagged passive rivals, so the jury is still out on this judgement-based ETF. Australian small-cap ETFs did well, with offerings from ishares, State Street, and Vanguard all up more than 14.0%. Specialised commodity products were the worst performers over the quarter. ETFS Corn (AU) CSP ETPCRN was down 19.41%. ETFS Natural Gas (AU) CSP ETPGAS, ETFS Grains (AU) CSP ETPGRN and ETFS Agriculture (AU) CSP ETPAGR were each down more than 5.0%. Volatility and low correlation to other assets means commodity ETFs often sit at the top or bottom of short-term performance tables. Another weak performer was BetaShares Aus Equities Bear Hedge Fund BEAR, as the Australian sharemarket rallied over the quarter. Market Vectors Enters ETF Market On 16 October 2013 Market Vectors launched four equity sector ETFs, in banks, property, resources, and small-cap resources. The firm acquired ETF operator Aii in 2012 and terminated Aii s sector ETFs in the second quarter of 2013 due to lack of assets. With sector offerings already available from SPDR, Vanguard, BetaShares, and Chimaera, incumbent operators have a substantial head start. It appears Market Vectors will compete on two main fronts. Firstly, the firm s differentiated index methodology is not market-cap weighted. Secondly, their fees will undercut most rivals. For example, Market Vectors Australian Banks MVB costs 0.28% annually, while BetaShares S&P/ASX200 Financials Sector QFN costs 0.39%, and SPDR S&P/ASX 200 Financials ex-areit OZF costs 0.40%. The only ETF launch during the quarter was BetaShares FTSE RAFI Australia 200 ETF QOZ, which we highlighted in the previous issue of ETFInvestor TM. ETF Flows Australian ETF industry assets grew 15.2% over the quarter, from A$7.69 billion to A$8.85 billion. A rising Australian stock market (up.0%) accounted for about two-thirds of the increase. We estimate BetaShares Australian High Interest Cash AAA took in a whopping A$ million, its assets up more than 73.0%. International share ETFs continued to do well. ishares Core S&P 500 ETF IVV gathered estimated flows of A$ million, ishares S&P Global 0 (AU) IOO attracted A$54.19 million, Vanguard US Total Market Shares VTS won A$35.36 million, and ishares MSCI EAFE (AU) IVE garnered an estimated A$33.02 million. A range of currency, high dividend and Australian share ETFs also did well. Fixed income ETF assets so far remain paltry, but some products did well. Russell Aus Select Corporate Bond RCB acquired A$18.50 million, almost doubling its total assets. Vanguard Aus Fixed Interest Index VAF gathered A$5.66 million, growing its assets to A$18.50 million. A handful of bond ETFs saw outflows, but this was mostly just a trickle, measured in thousands of dollars, not millions. However fixed income ETFs have not yet matched the success of offerings like BetaShares cash product. Some offerings suffered outflows, though. Market behemoth SPDR S&P/ASX 200 STW is Australia s largest ETF by far with more than A$2.0 billion in assets STW is about one quarter of the entire Australian ETF market. But it continues to lose market share, with an estimated outflow of A$ million over the quarter. ETFS Physical Gold (AU) GOLD also saw an outflow of A$44.84 million, along with A$9.59 million out of BetaShares Gold Bullion ETF (A$ Hedged) QAU. Russell Australian Value RVL saw A$29.01 million flow out 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 ETF Trading Volumes Improve We ve previously highlighted the benefits of ETF scale through liquidity and lower costs. Within reason, the bigger the ETF, the better. Last quarter, for example, we noted a decline in bid/ask spreads, which is good for investors. This quarter we examined whether the ETF industry s larger asset base resulted in increased trading volumes. And the answer trading volumes are up! ETF Trading Volumes 1 January 2011 to 30 September 2013 International Share ETFs As with bid/ask spreads, the trend is not uniform. Sub-scale ETFs have not seen increased volumes, but large ETFs from established providers have benefited. A notable exception was market leader STW, where trading volumes subsided in recent months. Despite the decline, STW s enormous size means trading volumes and liquidity remain far above any other ETF in the industry. These charts illustrate rising volumes for international share ETFs (where the trend was quite pronounced due to the recent high inflows) like ishares S&P Global 0 (AU) IOO, global sector ETFs like ishares Global Healthcare ETF (AU) IXJ, and US equity ETFs like ishares Core S&P 500 ETF (AU) IVV. Trading volume is important for international ETFs, where underlying exchanges like the New York Stock Exchange are typically closed during ASX trading hours. While liquidity has increased, we still suggest following ETF best practice trading as we ve previously highlighted, or contacting the ETF providers for transaction advice. ETFs offer the appeal of low cost, diversification, and transparency. Rising trading volumes and compressing bid/ask spreads make an already attractive structure even more compelling there s a virtuous circle as increasing assets reduce costs, which in turn attracts more investors. The reverse is true for ETFs with a small or rapidly-declining asset base one reason we did not recommend sub-scale ETFs from Aii, our preference being for experienced ETF operators with global scale. Trading volume is just one metric among numerous that we consider, like size, tenure, bid/ask spread, premium/discount and operational experience. We also point out that the market depth on your trading screen may understate the liquidity for a well managed ETF. Marketmakers create or redeem units in ETFs, thereby balancing supply and demand, so liquidity ultimately depends on the underlying assets. Another way of thnking about it is that if the Australian stock market is liquid, then a wellmanaged Australian share ETF should also be liquid. In summary, we ve observed escalating inflows to ETFs contributing to lower trading costs that we highlighted last quarter, and rising trading volume as illustated in this edition of ETFInvestor TM. That s further good news for ETF investors. Global Sector ETFs US Equity ETFs Latest ETF Research Morningstar currently publishes qualitative analyst research for 28 Australian ETFs, accounting for about 84.0% of invested assets. Individual investors can get access to our reports at and financial advisers at 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 ETF Market Data as at 30 September 2013 Bid/Ask Average Average Daily % 1 Prem/Disc 2 SPDR S&P/ASX 200 Fund STW 2,189,076, % , /08/2001 ishares Core S&P 500 ETF (AU) IVV 793,596, % , /05/2000 Vanguard Australian Shares Index ETF VAS 470,423, % , /05/2009 ETFS Physical Gold (AU) GOLD 470,385, % , /03/2003 ishares S&P Global 0 (AU) IOO 444,002, % , //2007 SPDR S&P/ASX 200 Listed Property Fund SLF 379,041, % , /02/2002 SPDR S&P/ASX 50 Fund SFY 329,379, % 0.25, /08/2001 Vanguard Australian Shares High Yld ETF VHY 287,6, % , /05/2011 BetaShares Aus High Interest Cash ETF AAA 278,671, % , /03/2012 ishares MSCI Emerging Markets Index (AU) IEM 275,480, % , /04/2003 ishares MSCI Australia 200 (AU) IOZ 233,388, % , /12/20 Russell High Div Australian Shares ETF RDV 227,049, % 0.22, /05/20 Vanguard US Total Market Shares (AU) ETF VTS 189,151, % ,881 3, /05/2009 ishares S&P/ASX High Dividend IHD 178,381, % , /12/20 ishares S&P/ASX 20 ILC 144,996, % , /12/20 BetaShares US Dollar ETF USD 144,915, % , /01/2011 ishares S&P Asia 50 (AU) IAA 137,605, % , /11/2007 Vanguard All-World Ex US Shares (AU) ETF VEU 130,175, % ,150 2, /05/2009 SPDR MSCI Australia Sel High Div Yld Fd SYI 129,675, % 0.28, /09/20 ishares S&P Europe (AU) IEU 121,905, % , //2007 Vanguard Australian Prop Secs Index ETF VAP 113,245, % , //20 ishares MSCI EAFE (AU) IVE 6,532, % , /08/2001 ishares MSCI Japan (AU) IJP 63,933, % , /03/1996 BetaShares Aus Top 20 Eqty Yld Maximiser YMAX 62,263, % , /11/2012 ETFS Physical Silver (AU) ETC ETPMAG 52,783, % N.Av 4, /12/2008 Russell Australian Value ETF RVL 52,461, % /03/2011 ishares UBS Composite Bond Index Fund IAF 52,375, % , /03/2012 ishares S&P Global Consumer Staples (AU) IXI 47,745, % , /03/2009 ishares FTSE China Large-Cap (AU) IZZ 47,500, % , //2004 UBS IQ Research Preferred Aus Share Fund ETF 46,864, % //2012 ishares MSCI BRIC (AU) IBK 44,566, % , /11/2007 ishares S&P/ASX Small Ordinaries ISO 44,446, % , /12/20 ishares Global Healthcare ETF (AU) IXJ 44,199, % , /03/2009 Russell Aus Select Corporate Bond ETF RCB 43,390, % N.Av 17, /03/2012 ishares Core S&P Mid-Cap ETF (AU) IJH 39,861, % , //2007

4 Bid/Ask % 1 Average Prem/Disc 2 SPDR S&P/ASX 200 Fin Ex A-REIT ETF OZF 32,009, % , /04/2011 BetaShares Aus Equities Bear Hedge Fund BEAR 31,9, % , /07/2012 BetaShares Gold Bullion ETF (A$ Hedged) QAU 28,222, % , /05/2011 SPDR S&P World ex Australia WXOZ 24,701, % , /03/2013 ishares Core S&P Small-Cap ETF (AU) IJR 24,112, % //2007 ishares MSCI Taiwan (AU) ITW 20,802, % /06/2000 Vanguard MSCI Aust Large Comp Index ETF VLC 19,201, % , /05/2011 Vanguard MSCI Aust Small Comp Index ETF VSO 19,099, % , /05/2011 Vanguard Aus Fixed Interest Index ETF VAF 18,498, % , //2012 BetaShares S&P/ASX 200 Financials Sector QFN 17,569, % 0.4 5, /12/20 ishares Russell 2000 (AU) IRU 17,117, % ,053 1, /05/2000 BetaShares S&P/ASX 200 Resources Sector QRE 17,074, % , /12/20 SPDR S&P/ASX 200 Resources ETF OZR 15,171, % , /04/2011 BetaShares FTSE RAFI Australia 200 ETF QOZ 14,261, % ,621 N.Av N.Av /07/2013 ishares UBS Treasury Index Fund IGB 12,095, % /03/2012 Vanguard Australian Govt Bond Index ETF VGB 11,356, % , /04/2012 BetaShares Euro ETF EEU,986, % , /07/2011 Russell Aus Semi-Government Bond ETF RSM,346, % N.Av 1, /03/2012 ishares UBS Government Inflation Index ILB,116, % /03/2012 SPDR S&P/ASX Australian Bond Fund BOND 9,903, % /07/2012 SPDR S&P/ASX Small Ordinaries ETF SSO 9,399, % , /04/2011 Russell Australian Government Bond ETF RGB 8,165, % N.Av /03/2012 ishares MSCI South Korea (AU) IKO 6,269, % /05/2000 ETFS Physical PM Basket (AU) ETC ETPMPM 5,668, % N.Av /12/2008 ishares MSCI Singapore (AU) ISG 5,664, % , /03/1996 ishares MSCI Hong Kong (AU) IHK 5,454, % /03/1996 ishares Global Telecom ETF (AU) IXP 5,322, % /03/2009 SPDR S&P/ASX Aus Government Bond Fund GOVT 4,883, % /07/2012 BetaShares British Pound ETF POU 4,767, % , /07/2011 BetaShares Com Basket ETF Hgd (Synth) QCB 3,939, % /12/2011 ETFS Physical Platinum (AU) ETC ETPMPT 3,857, % /12/2008 BetaShares Crude Oil Idx ETF Hgd (Synth) OOO 2,325, % /11/2011 ETFS Physical Palladium (AU) ETC ETPMPD 2,213, % /12/2008 BetaShares Agriculture ETF Hgd (Synth) QAG 1,664, % /11/2011 DIGGA Australian Mining ETF DGA 715, % , /01/2012 ETFS Copper (AU) CSP ETPCOP 648, % N.Av /06/2012 ETFS Energy (AU) CSP ETPNRG 498, % N.Av /06/2012 ETFS Agriculture (AU) CSP ETPAGR 399, % N.Av /06/2012 ETFS Grains (AU) CSP ETPGRN 381, % N.Av /06/2012 ETFS Brent Crude Oil (AU) CSP ETPOIL 220, % N.Av /06/2012 Average Daily

5 Bid/Ask % 1 Average Prem/Disc 2 ETFS Natural Gas (AU) CSP ETPGAS 186, % N.Av /06/2012 ETFS Wheat (AU) CSP ETPWHT 130, % N.Av /06/2012 ETFS All Commodities (AU) CSP ETPCMD 8, % N.Av /06/2012 ETFS Industrial Metals (AU) CSP ETPIND 86, % N.Av /06/2012 ETFS Corn (AU) CSP ETPCRN 54, % N.Av /06/2012 Perth Mint Gold N.Av N.Av N.Av N.Av N.Av N.Av N.Av 0.15 N.Av N.Av N.Av 1 0 9/05/2003 Market Vectors Australian Banks MVB N.Av N.Av N.Av 16//2013 Market Vectors Australian Resources MVR N.Av N.Av N.Av 16//2013 Market Vectors Australian Emerging Resources MVE N.Av N.Av N.Av 16//2013 Market Vectors Australian Property MVA N.Av N.Av N.Av 16//2013 Average Daily 1 Average % Spread = (offer-bid /midpoint as measured from.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, divided by number of trading days in quarter. Source: Morningstar Direct (ETFS trading volume sourced from ETFS this quarter) 4 Returns to 31 August Returns to 31 July 2013