ETFs 301: How to Choose the Best ETF --- A Due Diligence Workshop. Sponsored by:

Transcription

1 ETFs 301: How to Choose the Best ETF --- A Due Diligence Workshop Sponsored by:

2 SPEAKERS SPEAKER SPEAKER Elisabeth Kashner, CFA Director of ETF Research FactSet Todd Rosenbluth Director of ETF & Mutual Fund Research S&P Global

3 It s Easy to Submit a Question There is a Q&A box on the upper left side of your screen. Type your question in the lower box and hit Submit. If you do not see a Q&A box in the upper left corner, please click on the red QA widget on the lower part of your screen. To talk among other attendees we have included a Group Chat function. Please click the brown widget that has 3 people visible.

4 Important Information This presentation will be streaming audio through your computer only. If you are not seeing slide movement once the presentation has begun please refresh your screen or hit F5 to refresh. A replay of this presentation and CE Credit information will be sent to you tomorrow via .

5 Important Information If you have any technical difficulty, please click on the Help widget. It has a question mark and covers common technical issues.

6 Picking the Best ETF For You!

7 Millions ($) ETF Assets Are Soaring 2, , , , Source: Factset. Data through 12/31/2015

8 An ETF for Every Season 1940 ETFs 271 new in already in in Registration Source: Factset, as of 7/18/2016

9 Commodities, Currencies & Hedging: Oh My!

10 Issue: ETF Choice 5 China ETFs, over 1 year. 30% difference in return. Source: Factset, as of 6/20/2016

11 How Do You Choose The Best ETF?

12 There Is No Easy Button

13 Efficiency Tradability Fit (Can I trust it?) (Can I trade it?) (Is it the market I want to buy?)

14 Efficiency

15 Evaluating Efficiency Source: Factset, as of 6/20/2016

16 Expense Ratios Aren t Everything Ticker ER Median Tracking Diff. Max Upside Max Downside SCHD 0.07% -0.13% -0.08% -0.17% VYM 0.10% -0.09% -0.06% -0.13% HDV 0.12% -0.27% -0.11% -0.41% SDY 0.35% -0.45% -0.40% -0.52% Source: Factset, as of 5/18/2015

17 ETF Structures & Taxes Fund Structure Equity & Fixed Income Commodity Currency Alternative Open End (40's Act) 20/39.6 N/A 20/ /39.6 UIT (40's Act) 20/39.6 N/A N/A N/A Grantor Trust (33 Act) N/A 28/ /39.6 N/A Limited Partnership (33 Act) N/A *27.84/27.84 *27.84/27.84 *27.84/27.84 Source: Factset

18 Fund Closure Risk Ticker Name Fund Closure Risk SCHB Schwab U.U. Broad Market Low TILT FlexShares Morningstar U.S. Market Factor Tilt Low GURU Global X Guru Low MMTM SPDR S&P 1500 Momentum Tilt Medium TUSA First Trust Total US Market AlphaDEX High IBLN Direxion ibillionaire High Source: Factset, as of 6/20/2016

19 The Scale of Counterparty Risk Low Risk High Risk

20 Tradability

21 Evaluating Tradability Source: Factset, as of 6/20/2016

22 Secondary Liquidity Source: Factset, as of 11/7/2014

23 Don t Look At Spreads Only

24 Evaluating Underlying Liquidity Ticker Fund Name % of Underlying EEM ishares MSCI Emerging Markets 0.43% EEMV ishares Emerging Markets Min Vol 0.73% EEMS ishares Emerging Markets Small Cap 0.81% FM ishares MSCI Frontier % NGE Global X MSCI Nigeria 7.23% Source: Factset.

25 Flows Impact Source: Factset. Data through 6/26/2013

26 Fit

27 Evaluating Fit Source: Factset, as of 6/20/2016

28 Total Return The Best U.S. Financials ETF 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 31/12/ /12/2015 Source: Factset, as of 12/31/2015

29 Total Return All U.S. Financials ETFs 30% 25% 20% 15% 10% 5% 0% -5% -10% The Easy Button Choice? XLF. -15% $17.3 billion in assets. 31/12/2014 $1.08 billion trading a day 31/12/2015 BUT hyper-concentrated portfolio, avoids small caps Bottom-of-the-barrel performance Source: Factset, as of 12/31/2015

30 Total Return Not All ETFs Are Created Equal 30% 25% 20% 15% 10% 5% 0% 7 general Utilities ETFs, over 1 year -5% 8% difference in return 01/07/ /06/2014 Source: Factset, as of 12/31/2015

31 Exposure

32 What s Behind the EM Bond Fund Returns? 20% Performance Dispersion Ticker Fund Name One Month One Year PCY VWOB EMB PFEM PowerShares Emerging Markets Sovereign Debt Vanguard Emerging Markets Government Bond ishares J.P. Morgan USD Emerging Markets Bond PowerShares Fundamental Emerging Markets Local Debt 3.3% 2.0% 3.4% 0.0% 3.4% -0.5% 4.5% -13.4%

33 Big Driver: Currency One Year Range Currency Low High U.S. Dollar -0.5% 2.0% Local Currency -18.0% -13.4% Source: Factset, as of 10/29/2015

34 Secondary Driver: Interest Rate Risk Longer maturities had better returns Best Performer: PCY years Worst Performer: EMLC 7.14 years Source: Factset, as of 8/31/2015

35 Finding the Right ETF For YOU

36 ETFs: What s Inside Matters A Lot July 2016 Todd Rosenbluth Director of ETF & Mutual Fund Research S&P Global Market Copyright 2016 by S&P Global. All rights reserved.

37 ishares S&P 500 (IVV) vs. ishares Russell 1000 (IWB) 35.00% 30.00% 25.00% 20.00% 15.00% IVV IWB 10.00% 5.00% 0.00% Source: S&P Global Market Intelligence, July 11,2016

38 Don t Invest Using Rearview Mirror For illustrative purposes only.

39 S&P Global Market Intelligence ETF Research Philosophy Past performance is not necessarily indicative of future results, so do not rely solely on it. Most ETFs seek to track and replicate a benchmark, so a long record as an ETF is not needed, in our view Understanding what s inside a fund from a risk/reward perspective can help sort through various options We believe an appealing fund is one that has holdings that are aligned with your objectives and that make sense in the current environment A fund s expense ratio can impact returns either directly or indirectly and should be a factor in the selection process We have reports on approximately 1,100 ETFs across various categories, using a unique approach tailored to each Category

40 S&P Capital IQ ETF Coverage S&P Capital IQ has rankings on 890 equity ETFs based on combination of holdings-based analysis of stocks inside and relevant metrics at the ETF level 31% have less than a three-year track record S&P Capital IQ has rankings on 235 fixed income ETFs based on a combination of holdings-based analysis of bonds inside and relevant metrics at the ETF level 29% have less than a three-year track record S&P Capital IQ has research on 65 commodity and currency ETFs. Source: S&P Global Market Intelligence, As of June 2016.

41 Feature Deep-Dive: Equity ETF Ranking Inputs The ETF ranking is based on a weighted average computation of three components performance analytics, risk considerations and cost factors, providing a holistic assessment of the fund. Holdings-based inputs are used in the Performance and Risk ranking components. This is consistent with the Mutual Fund methodology, facilitating cross asset-class research. These factors evaluate the underlying holdings and characteristics of a fund relative to its peers. The factors are evaluated using a proprietary S&P Capital IQ quantitative model, ensuring a consistent and objective application. Component assessments roll up to the overall ranking The individual component assessments are established using a weighted average score of their individual inputs, following a normal distribution curve. Input factors show which model inputs contributed favorably, neutrally or unfavorably to the ranking Calculated as holdings-weighted average score S&P Capital IQ views rankings of Overweight, Marketweight and Underweight as favorable, neutral and unfavorable, respectively. Percentages highlight coverage for holdings-based inputs: % shows S&P Capital IQ coverage (ex: 99% have a STARS opinion, 95% have a Fair Value)

42 Private & Confidential 42

43 Not All ETFs That Sound The Same Are The Same: Large Cap Value ishares Russell 1000 Value (IWD) vs. ishares S&P 500 Value (IVE) Consumer Staples Info Tech IWD IVE Financials % of assets S&P Global, May 2016

44 Not All ETFs That Sound The Same Are The Same: Emerging Markets Vanguard FTSE Emerging Markets (VWO) vs. ishares Core MSCI Emerging Markets (IEMG) China India VWO IEMG South Korea % of assets Source: S&P Global, May 31, 2016

45 Not All ETFs That Sound The Same Are The Same: Currency Hedged Deutsche x-trackers MSCI Europe Hedged Equity (DBEU) vs. WisdomTree Europe Hedged Equity (HEDJ) France Germany DBEU HEDJ United Kingdom % of assets *Source: S&P Global Market Intelligence, May 2016

46 Not All ETFs That Sound The Same Are The Same: Sectors Fidelity MSCI Utilities (FUTY) vs. Utilities Select Sector SPDR (XLU) Electric Utilities Multi Utilities XLU FUTY Gas Utilities % of assets *Source: S&P Global Market Intelligence, May 2016

47 Not All ETFs That Sound The Same Are The Same: Sectors ishares US Home Construction (ITB) vs. SPDR S&P Homebuilders (XHB) Homebuilding Home Furnishing XHB ITB Building Products % of assets S&P Global Market Intelligence, May 2016

48 Who Said Your Beta Was So Smart?: Dividends ishares Core High Dividend (HDV) vs. Vanguard High Dividend Yield (VYM) Consumer Staples Energy HDV VYM Financials % of assets S&P Capital IQ Global Market Intelligence, May 2016

49 Who Said Your Beta Was So Smart?: Low Volatility ishares USA Minimum Volatility (USMV) vs. PowerShares S&P 500 Low Volatility (SPLV) Consumer Staples Industrials USMV SPLV Info Tech % of assets Source: S&P Global Market Intelligence, May 2016

50 Should You Wait Three Years Before Investing in ETFs? or For illustrative purposes only.

51 51 ETFs Gathered $250M Despite Being Under Three ProShares S&P 500 Dividend Aristocrats (NOBL) Record of raising dividend 25 consecutive years. Favorable risk considerations of holdings according to S&P Capital IQ. ishares Short Maturity (NEAR) 30-day SEC yield of 1.0% with duration less than 0.5 years. Trades approximately 700,000 shares daily with tight bid/ask spread. Source: S&P Capital IQ. As of December 31, 2015.

52 Key Takeaways Understand the index provider behind your ETF. How each defines value, dividends and classifies countries and within sectors can be quite different. Understand the ETF provider s philosophy Smart beta ETFs can and do take different approaches, impacting performance. Don t wait three years before considering an ETF. to keep up with the ETF market.

53 Thank you Todd Rosenbluth Director of ETF & Mutual Fund Research S&P Global Market 53

54 Disclosures This research report has been prepared by S&P Global Equity Research, a part of S&P Global Market Intelligence and a wholly owned subsidiary of S&P Global Inc ( S&P Global ). S&P Global Equity Research or an affiliate may license certain intellectual property or provide pricing or other services to, or otherwise have a financial interest in, certain issuers of securities, including exchange-traded investments whose investment objective is to substantially replicate the returns of a proprietary index of S&P Dow Jones Indices, such as the S&P 500. In cases where S&P Global Equity Research or an affiliate is paid fees that are tied to the amount of assets that are invested in the fund or the volume of trading activity in the fund, investment in the fund will generally result in S&P Global Equity Research or an affiliate receiving compensation in addition to the subscription fees or other compensation for services rendered by S&P Global Equity Research. A reference to a particular investment or security by S&P Global Equity Research and/or one of its affiliates is not a recommendation to buy, sell, or hold such investment or security, nor is it considered to be investment advice. No endorsement of any ETF included in S&P Global Equity Research ETF Research Reports should be implied by the fact that the ETF bears the S&P Global mark or is based on an S&P Dow Jones Index. S&P Global Equity Research does not receive fees from ETFs and/ or funds for their inclusion in its report. S&P Global Equity Research does not receive fees from mutual funds and/ or funds for their inclusion in its report. S&P Global Equity Research and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that seeks to provide an investment return based on the returns of any S&P Dow Jones index. No other division of S&P Global, including S&P Dow Jones Indices, contributed to the content of S&P Global Equity Research ETF Research Reports. Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. S&P Global Market Intelligence, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, S&P Global Parties ) do not guarantee the accuracy, completeness or adequacy of this material, and S&P Global Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of the information provided by the S&P Global Parties. S&P GLOBAL PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P Global Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages. Private & Confidential 54

55 S&P Global Market Intelligence and its affiliates do not act as a fiduciary. While S&P Global Market Intelligence has obtained information from sources it believes to be reliable, S&P Global Market Intelligence does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P Global may have information that is not available to other S&P divisions. S&P Global has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P Global Equity Research ETF Research Reports are not intended to be investment advice and do not constitute any form of invitation or inducement by S&P Global Equity Research to engage in investment activity. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors and this material is not intended for any specific investor and does not take into account an investor s particular investment objectives, financial situations or needs. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in S&P Global Equity Research ETF Research Reports may fluctuate, and an investor may, upon selling an investment, lose a portion of, or all of the principal amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor s chosen currency, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in ETF Reports does not constitute advice on the tax consequences of making any particular investment decision. Before acting on any recommendation in S&P Global Equity Research ETF Research Reports, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Each S&P Global Equity Research ETF Research Reports are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject S&P Global Equity Research or its affiliates to any registration or licensing requirements in such jurisdiction. Investment analysis of S&P Global Equity Research ETF Research Reports is prepared from the following sources: S&P MarketScope, S&P Industry Reports; Standard & Poor's, 55 Water St., New York, NY STANDARD & POOR S, S&P, S&P 500, GICS, STARS, S&P MIDCAP 400, and S&P SMALLCAP 600 are registered trademarks of Standard & Poor s Financial Services LLC. Private & Confidential 55

56 SPEAKERS SPEAKER SPEAKER Elisabeth Kashner, CFA Director of ETF Research FactSet Todd Rosenbluth Director of ETF & Mutual Fund Research S&P Global