Q ETP Strategic Beta Tracker

Transcription

1 Q ETP Strategic Beta Tracker

2 Strategic Beta Highlights from Q Strategic Beta Product Evolution Launches: 19 Closures: 3 Strategic Beta Posts Inflows Despite industry outflows in Feb and March, strategic beta ETPs saw monthly inflows YTD State Street, Schwab & Vanguard Dominate Flows The 3 issuers captured over 73% of strategic beta net flows in Q Multi-Factor Tops Q1 Flows Multi-Factor ETPs captured nearly $5 billion in inflows, or 60% of strategic beta net flows Value & Dividends Outflows Value and Dividend ETPs saw the largest outflows, a combined -$5.4 billion American Century ETP Launches American Century debuted its ETP lineup with a multi-factor and active strategy See Appendix for a list of launches, closures and Morningstar Strategic Beta taxonomy and attributes definitions. Please see the final slide for definitions of ETP and Strategic Beta Charles Schwab Investment Management, Inc. For Institutional Use Only 1

3 Q Strategic Beta ETP Assets and Flows Q Total Strategic Beta ETP AUM AUM: $706.5 Billion Q Total Strategic Beta ETP Flows Flows: $8.2 Billion Assets ($B) $760.0 $740.0 $720.0 $700.0 $680.0 $660.0 $640.0 $620.0 $600.0 $608.9 April $617.2 $621.9 May June $632.6 $633.6 July August $652.6 September $672.7 October $699.3 November $710.3 December $741.3 January 2018 $712.6 February 2018 $706.5 March 2018 Flows ($B) $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $4.0 April $3.3 May $1.8 June $2.9 July $1.9 August $4.1 September $7.5 $7.3 October November $6.1 December $3.3 January 2018 $0.5 February 2018 $4.4 March 2018 Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Note: Data only includes assets and flows for existing ETPs, as of March 31, 2018 Charles Schwab Investment Management, Inc. For Institutional Use Only 2

4 Q Strategic Beta ETP League Table State Street, Schwab ETFs and Vanguard led strategic beta inflows in Q1 2018, capturing over 73% of strategic beta ETP net inflows, combined WisdomTree saw by far the largest strategic beta ETP outflows, largely from its currency-hedged, dividend-weighted ETFs, DXJ and HEDJ After leaping 7 spots last quarter, Principal Funds jumped another 3 spots on the Leaderboard after pulling in another $945 million, largely from US Mega-Cap Multi-Factor Index ETF (USMC) Rank in Rank Sponsor Q Products Q Net Flows AUM % of Total # of Strategic Beta ETPs Q1 Flows Flows (% of Total) 1 - BlackRock 266, % 72-1, % 2 - Vanguard 164, % 22 1, % 3 - Invesco 49, % % 4 - WisdomTree 41, % 56-2, % 5 - State Street Global Advisors 40, % 49 2, % 6 - First Trust 34, % 77 1, % 7 - Schwab ETFs 31, % 9 1, % 8 - Guggenheim Investments 23, % % 9 - Flexshares 9, % % 10 - Goldman Sachs 6, % % 11 - ProFunds 4, % % 12 - ALPS 3, % % JPMorgan 2, % % Victory Capital 2, % % 15-2 US Commodity Funds 2, % % 16-2 Oppenheimer 2, % % Principal Funds 2, % % 18-1 Global X 1, % % 19-1 Exchange Traded Concepts 1, % % 20-1 Van Eck 1, % % Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 3

5 Q Strategic Beta ETP Attributes by Assets and Flows Multi-Factor ETPs had a big quarter with almost $5 billion in inflows, the largest of any attribute in Q1, capturing over 60% of all strategic beta ETP net flows Momentum and Growth ETPs also saw large inflows in Q1, capturing over $4.2 billion, combined Dividend and Value ETPs saw the largest net outflows of $3 billion and $2.4 billion, respectively Attribute Q Products Q Net Flows AUM % of Total # of ETPs Q1 % of Total Value 165, % 50-2, % Growth 164, % 35 1, % Dividends 158, % 108-3, % Multi-Factor 60, % 247 4, % Low-Volatility 40, % % Equal Weighted 37, % 64 1, % Fundamental 24, % 12 1, % Momentum 15, % 31 2, % Non-Traditional Fixed Income 11, % % Non-Traditional Commodity 7, % % Quality 7, % % Earnings Weighted 3, % % Risk-Weighted 3, % % Revenue Weighted 1, % % Buyback/Shareholder Yield 1, % % Multi-Asset 1, % % Low/High Beta % % Expected Returns % % Total: 706, % 715 8, % Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 4

6 Q Strategic Beta ETP Net Flows Dividend ETPs continued their large net outflows from last quarter, though the large outflows from DXJ and HEDJ were likely attributed more to their currency-hedged feature There was a large dispersion of flows in Q1 with Growth, Low-Volatility, Value, Dividend, and Non- Traditional Commodity ETPs appearing in both the Top 10 Net Inflows and the Top 10 Net Outflows Top 10 Net Inflows Ticker Name Sponsor Attribute MTUM ishares Edge MSCI USA Momentum Factor ETF BlackRock Momentum 7, ,252.0 VUG Vanguard Growth Index ETF Vanguard Growth 32, USMC Principal US MegaCap Multi-Factor Index ETF Principal Funds Low-Volatility 1, KRE SPDR S&P Regional Banking ETF State Street Equal Weighted 5, SPYV SPDR Portfolio S&P 500 Value ETF State Street Value 1, SPYG SPDR Portfolio S&P 500 Growth ETF State Street Growth 1, DGRO ishares Core Dividend Growth ETF BlackRock Dividends 3, XT ishares Exponential Technologies ETF BlackRock Equal Weighted 2, DBC PowerShares DB Commodity Index Tracking Fund Invesco Non-Traditional Commodity 2, SCHD Schwab U.S. Dividend Equity ETF Schwab ETFs Dividends 7, Top 10 Net Outflows Ticker Name Sponsor Attribute IWD ishares Russell 1000 Value ETF BlackRock Value 36, ,822.0 DXJ WisdomTree Japan Hedged Equity Fund WisdomTree Dividends 6, ,405.2 HEDJ WisdomTree Europe Hedged Equity Fund WisdomTree Dividends 6, ,110.7 IWF ishares Russell 1000 Growth ETF BlackRock Growth 39, USMV ishares Edge MSCI MinVol USA ETF BlackRock Low-Volatility 14, DVY ishares Select Dividend ETF BlackRock Dividends 16, SDY SPDR S&P Dividend ETF State Street Dividends 15, SPLV PowerShares S&P 500 Low Volatility Invesco Low-Volatility 6, IWN ishares Russell 2000 Value ETF BlackRock Value 8, USO US Oil Fund US Commodity Funds Non-Traditional Commodity 1, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 5

7 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Value Dividends Top 10 Ticker Name Sponsor IWD ishares Russell 1000 Value ETF BlackRock 36, ,822.0 VTV Vanguard Value Index ETF Vanguard 35, IVE ishares S&P 500 Value ETF BlackRock 14, VBR Vanguard Small Cap Value Index ETF Vanguard 12, IWS ishares Russell Mid Cap Value ETF BlackRock 10, IWN ishares Russell 2000 Value ETF BlackRock 8, VOE Vanguard Mid Cap Value Index ETF Vanguard 8, EFV ishares MSCI EAFE Value ETF BlackRock 6, IJJ ishares S&P Mid Cap 400 Value ETF BlackRock 5, IJS ishares S&P Small Cap 600 Value ETF BlackRock 5, Top 10 Ticker Name Sponsor VIG Vanguard Dividend Appreciation Index ETF Vanguard 27, VYM Vanguard High Dividend Yield Index ETF Vanguard 20, DVY ishares Select Dividend ETF BlackRock 16, SDY SPDR S&P Dividend ETF State Street 15, SCHD Schwab U.S. Dividend Equity ETF Schwab ETFs 7, DXJ WisdomTree Japan Hedged Equity Fund WisdomTree 6, ,405.2 HEDJ WisdomTree Europe Hedged Equity Fund WisdomTree 6, ,110.7 HDV ishares Core High Dividend ETF BlackRock 6, IDV ishares International Select Dividend ETF BlackRock 4, FVD First Trust Value Line Dividend Index Fund First Trust 4, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 6

8 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Growth Multi-Factor Top 10 Ticker Name Sponsor IWF ishares Russell 1000 Growth ETF BlackRock 39, VUG Vanguard Growth Index ETF Vanguard 32, IVW ishares S&P 500 Growth ETF BlackRock 20, IWO ishares Russell 2000 Growth ETF BlackRock 9, IWP ishares Russell Mid Cap Growth ETF BlackRock 8, IJK ishares S&P Mid Cap 400 Growth ETF BlackRock 8, VBK Vanguard Small Cap Growth Index ETF Vanguard 7, SCHG Schwab U.S. Large Cap Growth ETF Schwab ETFs 5, VOT Vanguard Mid Cap Growth Index ETF Vanguard 5, IJT ishares S&P Small Cap 600 Growth ETF BlackRock 5, Top 10 Ticker Name Sponsor GSLC GS ActiveBeta US Large Cap Equity ETF Goldman Sachs 2, SPHD PowerShares S&P 500 High Dividend Low Volatility Portfolio Invesco 2, DGRW WisdomTree US Quality Dividend Growth Fund WisdomTree 2, FXL First Trust Technology AlphaDEX Fund First Trust 1, QDF FlexShares Quality Dividend Index Fund FlexShares 1, GEM GS ActiveBeta Emerging Markets Equity ETF Goldman Sachs 1, FXR First Trust Industrials/Producer Durables AlphaDEX Fund First Trust 1, JPIN JPMorgan Diversified Return International Equity ETF JPMorgan 1, FEX First Trust NASDAQ AlphaDEX Large Cap Core Fund First Trust 1, FTXO First Trust NASDAQ Bank ETF First Trust 1, Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 7

9 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Low-Volatility Equal-Weighted Top 10 Ticker Name Sponsor USMV ishares Edge MSCI MinVol USA ETF BlackRock 14, EFAV ishares Edge MSCI MinVol EAFE ETF BlackRock 8, SPLV PowerShares S&P 500 Low Volatility ETF Invesco 6, EEMV ishares Edge MSCI MinVol Emerging Markets ETF BlackRock 4, USMC Principal US MegaCap Multi-Factor Index ETF Principal Funds 1, XMLV PowerShares S&P Mid Cap Low Volatility ETF Invesco 1, XSLV PowerShares S&P Small Cap Low Volatility ETF Invesco 1, IDLV PowerShares S&P International Developed Low Volatility ETF Invesco EELV PowerShares S&P Emerging Markets Low Volatility Portfolio Invesco SMLV SPDR SSGA US Small Cap Low Volatility Index ETF State Street Top 10 Ticker Name Sponsor RSP Guggenheim S&P 500 Equal Weight ETF Guggenheim 14, KRE SPDR S&P Regional Banking ETF State Street 5, QTEC First Trust NASDAQ 100 Technology Sector Index Fund First Trust 2, XT ishares Exponential Technologies ETF BlackRock 2, RYT Guggenheim S&P 500 Equal Weight Technology ETF Guggenheim 1, XAR SPDR S&P Aerospace & Defense ETF State Street 1, KIE SPDR S&P Insurance ETF State Street XHB SPDR S&P Homebuilders ETF State Street XME SPDR S&P Metals & Mining ETF State Street RYH Guggenheim S&P 500 Equal Weight Healthcare ETF Guggenheim Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of December 31,. ETP Strategic Beta Tracker Q4 Charles Schwab Investment Management, Inc. For Institutional Use Only 8

10 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Fundamental Momentum Top 10 Ticker Name Sponsor PRF PowerShares FTSE RAFI US 1000 Invesco 5, FNDX Schwab Fundamental US Large Company Index ETF Schwab ETFs 3, FNDF Schwab Fundamental International Large Company Index ETF Schwab ETFs 3, FNDA Schwab Fundamental US Small Company Index ETF Schwab ETFs 2, FNDE Schwab Fundamental Emerging Markets Large Company Index ETF Schwab ETFs 2, PRFZ PowerShares FTSE RAFI US 1500 Small Mid Portfolio Invesco 1, FNDC Schwab Fundamental International Small Company Index ETF Schwab ETFs 1, PXF PowerShares FTSE RAFI Developed Markets xus Portfolio Invesco 1, PXH PowerShares FTSE RAFI Emerging Markets Portfolio Invesco 1, FNDB Schwab Fundamental U.S. Broad Market Index ETF Schwab ETFs Top 10 Ticker Name Sponsor MTUM ishares Edge MSCI USA Momentum Factor ETF BlackRock 7, ,252.0 FV FirstTr Dorsey Wright Focus 5 First Trust 2, PDP PowerShares DWA Momentum Portfolio Invesco 1, ONEO SPDR Russell 1000 Momentum Focus ETF State Street EEMO PowerShares S&P Emerging Markets Momentum Portfolio Invesco FVC FirstTr Dorsey Wright Dynamic Foc 5 First Trust DWAS PowerShares DWA Small Cap Momentum Portfolio Invesco PIE PowerShares DWA EmMkt Momentum Portfolio Invesco PIZ PowerShares DWA DvMkt Momentum Portfolio Invesco PTH PowerShares DWA Healthcare Momentum Portfolio Invesco Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 9

11 Largest ETPs in the 10 Largest Strategic Beta Attributes by Assets Non-Traditional Fixed Income Top 10 Ticker Name Sponsor PCY PowerShares Emerging Markets Sovereign Debt Portfolio Invesco 4, TDTT FlexShares iboxx 3 Year Target Duration TIPS Index Fund FlexShares 2, PHB PowerShares Fundamental High Yield Corporate Bond Portfolio Invesco TDTF FlexShares iboxx 5 Year Target Duration TIPS Index Fund FlexShares VBND Vident Core US Bond Strategy ETF Exchange Traded Concepts AGGY WisdomTree Barclays Yield Enhanced US Aggregate Bond Fund WisdomTree AGGP IQ Enhanced Core Plus Bond US ETF IndexIQ Advisors PGHY PowerShares Global Short Term High Yield Bond Portfolio Invesco HYUP Xtrackers High Beta High Yield Bond ETF Deutsche Bank FIBR ishares Edge US Fixed Income Balanced Risk ETF BlackRock Non-Traditional Commodity Top 10 Ticker Name Sponsor DBC PowerShares DB Commodity Index Tracking Fund Invesco 2, USO US Oil Fund US Commodity Funds 1, DBA PowerShares DB Agriculture Fund Invesco USCI US Commodity Index Fund US Commodity Funds DBB PowerShares DB BaseMetals Fund Invesco DBO PowerShares DB Oil Fund Invesco DGL PowerShares DB Gold Fund Invesco GCC WisdomTree Continuous Commodity Index Fund WisdomTree DBP PowerShares DB Precious Metals Fund Invesco DBE PowerShares DB Energy Fund Invesco Source: Morningstar and Strategic Insight SimFund. Strategic beta classification based on Morningstar, as of March 31, Charles Schwab Investment Management, Inc. For Institutional Use Only 10

12 Disclosures Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus by visiting or calling Please read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility, so that an investor s shares, when redeemed or sold, may be worth more or less than their original cost. Some specialized exchanged-traded funds can be subject to additional market risks. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. ETF Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV). ETPs mentioned are for informational purposes and not an offer to buy or sell a particular security. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Charles Schwab Investment Management, Inc. (CSIM), is the investment advisor for Schwab ETFs. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with CSIM Charles Schwab Investment Management, Inc. All rights reserved C04 MARS EML Charles Schwab Investment Management, Inc. For Institutional Use Only 11

13 Appendix Q1 2018

14 Q Strategic Beta ETP Launches and Closures A total of 19 new strategic beta ETPs launched in Q1, with multi-factor strategies continuing to lead launches again with 6 new funds 3 more strategic beta fixed income ETPs launched, including two from Deutsche Bank covering high yield bonds and one from JPMorgan focused on emerging markets bonds Only 3 strategic Beta ETPs shuttered in Q1, all of them dividend-weighted, currency-hedged strategies from WisdomTree Launches Ticker Name Sponsor Attribute OER Inception DOGS Arrow Dogs of the World ETF Arrow Investment Multi-Factor 0.65% 1/2/2018 PRID InsightShares LGBT Employment Equality ETF Exchange Traded Concepts Value 0.65% 1/10/2018 VALQ American Century STOXX US Quality Value ETF American Century Multi-Factor 0.29% 1/11/2018 HYUP Xtrackers High Beta High Yield Bond ETF Deutsche Bank Non-Traditional Fixed Income 0.35% 1/11/2018 HYDW Xtrackers Low Beta High Yield Bond ETF Deutsche Bank Non-Traditional Fixed Income 0.25% 1/11/2018 FIDI Fidelity International High Dividend ETF Fidelity Dividends 0.39% 1/16/2018 WLDR Affinity World Leaders Equity ETF Regents Park Funds Multi-Factor 0.47% 1/16/2018 BLCN Reality Shares Nasdaq NexGen Economy ETF Reality Shares Quality 0.68% 1/16/2018 FIVA Fidelity International Value Factor ETF Fidelity Value 0.39% 1/16/2018 HNDL Strategy Shares NASDAQ 7 HANDL Index ETF Rational Advisors Multi-Factor 0.96% 1/17/2018 HONR InsightShares Patriotic Employers ETF Exchange Traded Concepts Equal Weighted 0.65% 1/18/2018 KARS KraneShares Electric Vehicles and Future Mobility Index ETF Krane Funds Equal Weighted 0.69% 1/18/2018 LEGR First Trust Indxx Innovative Transaction and Process ETF First Trust Equal Weighted 0.65% 1/25/2018 Sources: NYSE Arca, BATS, NASDAQ, Strategic Insight, FUSE, ETF.com, Morgan Stanley Smith Barney, Ignites, ETFTrends and Company websites. Strategic beta classification based on Morningstar. Charles Schwab Investment Management, Inc. For Institutional Use Only 13

15 Q Strategic Beta Launches and Closures Launches (Cont d) Ticker Name Sponsor Attribute OER Inception JPMB JPMorgan USD Emerging Markets Sovereign Bond ETF JPMorgan Non-Traditional Fixed Income 0.39% 1/29/2018 ROBT First Trust NASDAQ Artificial Intelligent and Robotics ETF First Trust Equal Weighted 0.65% 2/21/2018 VSL Volshares Large Cap ETF Whitford Multi-Factor 0.65% 2/22/2018 BOON NYSE Pickens Oil Response ETF TriLine Index Equal Weighted 0.85% 2/27/2018 KNG CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF CBOE Vest Multi-Factor 0.75% 3/26/2018 MXDE Nationwide Max Diversification Emerging Markets Core Equity ETF Nationwide Funds Risk-Weighted 0.64% 3/26/2018 Closures Ticker Name Sponsor Attribute Closure Date DXUS WisdomTree Global ex-u.s. Hedged Dividend Fund WisdomTree Dividends 3/16/2018 HDRW WisdomTree Global ex-u.s. Hedged Real Estate Fund WisdomTree Dividends 3/16/2018 DXPS WisdomTree United Kingdom Hedged Equity Fund WisdomTree Dividends 3/16/2018 Sources: NYSE Arca, BATS, NASDAQ, Strategic Insight, FUSE, ETF.com, Morgan Stanley Smith Barney, Ignites, ETFTrends and Company websites. Strategic beta classification based on Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 14

16 Morningstar s Strategic Beta Taxonomy Return-Oriented Risk Oriented Other Dividend Screened/Weighted (Dividends) Low/Minimum Volatility/Variance (Low Volatility) Non-Traditional Commodity Value Risk-Weighted Non-Traditional Fixed Income Growth Low/High Beta Equal-Weighted Fundamentally Weighted (Fundamental) Multi-Asset Multi-Factor Size Momentum Buyback/Shareholder Yield Earnings Weighted Quality Expected Returns Revenue Weighted Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 15

17 Morningstar Strategic Beta Attributes Definitions Attribute Dividend Screened/Weighted (Dividends) Size Value Growth Fundamentally Weighted (Fundamental) Definition Dividend screened and/or weighted strategies seek to deliver equity income by employing a number of dividend-oriented screening and/or weighting criteria. These include screening a universe of stocks for dividend paying firms, weighting stocks on the basis of dividend payments, screening on the basis of dividend growth, isolating firms based on metrics that would indicate dividend stability, and other dividend-related criteria. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Morningstar does not consider size on a stand-alone basis, but only within the context of a multi-factor strategy that introduces size tilts. Products tracking small cap benchmarks, such as the Russell 2000 Index, are not classified as strategic beta. Also, Morningstar does not classify small- or mid-cap benchmarks that screen constituents for growth or value characteristics as being Multi-Factor. Only those products that track multi-factor benchmarks that implement a size tilt will be tagged with this attribute for example, the JP Morgan Diversified Return Global Equity ETF (JPGE). Value strategies will screen a segment of the stock market looking to identify those stocks that display value characteristics. These characteristics will differ across index providers. Common value characteristics include: low price/prospective earnings, price/book, price/sales, and price/cash flow ratios, and above average dividend yields among others. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Growth strategies will screen a segment of the stock market looking to identify those stocks that display growth characteristics. These characteristics will differ across index providers. Common growth characteristics include: aboveaverage long-term projected earnings growth, historical earnings growth, sales growth, cash flow growth, and book value growth, among others. It is important to note that some of these strategies will weight the results of their screening criteria by market capitalization. Fundamentally weighted in this case refers exclusively to Research Affiliates RAFI Fundamental Index equity strategies which select and weight their constituents based on fundamental measures such as sales, adjusted sales, cash flow, dividends, dividends plus share buybacks, book value, and retained cash flow. Multi-Factor Multifactor strategies set out to combine a variety of factors (e.g., value, growth, size, momentum, quality, low volatility, etc.) in an effort to improve risk-adjusted performance relative to a standard benchmark. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 16

18 Morningstar Strategic Beta Attributes Definitions (Cont d) Attribute Momentum Buyback/Shareholder Yield Earnings Weighted Quality Expected Returns Definition Momentum strategies will select and/or weight their constituent securities on a number of factors which might include price momentum, adjustments to earnings estimates, and earnings surprises. Buyback/shareholder yield strategies will select and/or weight their constituents of some measure of cash returned to shareholders (typically any one or some combination of the following: dividends, share repurchases, and debt retirement) over a specified period. Earnings screened and/or weighted strategies seek to deliver excess returns by employing a number of earnings-oriented screening and/or weighting criteria. These strategies look to build a portfolio of stocks comprised of quality companies, which are characterized by their durable business models and sustainable competitive advantages. Quality companies tend to have high and stable levels of profitability and clean balance sheets. These equity strategies will select their constituents based on one or more measures of expected returns or relative performance (e.g., quantitative rankings, broker recommendations, etc.) and weight them in a variety of ways. Revenue Weight Low/Minimum Volatility/Variance (Low-Volatility) Low/High Beta Revenue weighted strategies assign weights to their constituents according to each company s revenue relative to the total revenue of all the companies in the index. Low/Minimum Volatility/Variance strategies select and weight their constituents on the basis of historical volatility. Low/High Beta strategies select and weight their constituents based on their beta relative to a standard market capitalization weighted benchmark. Risk-Weighted Risk-weighted strategies weight constituents according to their individual expected contributions to overall portfolio risk. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 17

19 Morningstar Strategic Beta Attributes Definitions (Cont d) Attribute Non-Traditional Commodity Definition Non-traditional commodity benchmarks aim to improve upon the performance of standard indexes (e.g., Dow Jones UBS Commodity Index, Standard & Poor s GSCI) by avoiding their chief drawbacks (e.g., roll losses resulting from contango). These include benchmarks that employ alternative weighting and/or rolling methodologies. Equal-Weighted Equal-weighted strategies assign an equal weight to their constituent securities. Non-Traditional Fixed Income Non-traditional fixed income benchmarks are not market capitalization weighted. The oft-cited drawback of market capitalization weighting in the case of bond benchmarks is that it results in a portfolio that overweights the most heavily indebted issuers. At present, most non-traditional bond benchmarks weight constituents on the basis of fundamental metrics indicative of debt service capacity which results in portfolios that skew towards more creditworthy issuers. Multi-Asset Multi-asset strategies tend to be income-oriented and will screen eligible securities (which may include but not be limited to stocks, bonds, preferred securities, and master limited partnerships) on the basis of yield amongst other characteristics. Source: Morningstar Charles Schwab Investment Management, Inc. For Institutional Use Only 18

20 Definition ETP (exchange-traded product) Exchange-Traded Products include a number of investment products. ETFs (exchangetraded funds) consist of several different structures such as open-end funds, unit investment trusts (UITs), grantor trusts and commodity pools (limited partnerships). Exchange-traded notes (ETNs) are not structurally ETFs but another type of exchangetraded product. As ETFs represent the vast majority of these exchange-traded investment products, the term is often used as a catchall. Here, the label exchange-traded product (ETP) is used as the umbrella under which ETFs and other related investment products, including ETNs, fall. Strategic Beta Morningstar defines strategic beta indexes as indexes that seek to either improve their return profile or alter their risk profile relative to traditional cap-weighted indexes. According to Morningstar, strategic beta products represent a middle ground on the active-to-passive spectrum, deviating from traditional cap-weighted products but do so in a rules-based, transparent and relatively low-cost manner. Charles Schwab Investment Management, Inc. For Institutional Use Only 19