ACCESSING THE EMERGING MARKETS WITH ETFS

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1 ACCESSING THE EMERGING MARKETS WITH ETFS In the past, access to exotic asset classes and emerging markets was reserved for institutional investors. More recently however, the barriers between markets and retail investors have broken down with the advent of Exchange Traded Funds. There s a world of choice when it comes to investing. Most investors tend to focus on what are called developed world stockmarkets - places such as the US or Europe - but there s an increasingly popular alternative called emerging markets. These developing markets stretch from Latin America through to the Far East and take in some of the most powerful countries on earth. These countries used to be difficult to access for mainstream European investors but in recent decades emerging markets have well and truly opened up - many of their national governments welcome foreign investors in order to help speed up their already fast growing economies! If you do want to access this global growth opportunity the simplest and most cost effective way may be via an Exchange Traded Fund (ETF) that tracks the key local businesses and their shares through a financial Index. What are Exchange Traded Funds? Exchange Traded Funds, or ETFs as they are known are similar to mutual funds, the major difference being that they are listed on stock exchanges just like ordinary shares. This feature gives investors more flexibility as they have the freedom to buy or sell their holdings at any point during market hours through their regular stock broking account, rather than just once a day as is the case for non-listed funds. Furthermore, most ETFs are index tracking funds, meaning they simply seek to replicate the performance of an underlying index. This index is simply a collection of stocks or bonds that are grouped together so that instead of buying an individual stock, such as Apple in the US or Petrobas, the Brazilian oil giant, you can gain exposure to a whole selection of business in one simple trade. You can t buy an Index directly but you can get exposure to one by purchasing an Exchange Traded Fund. The indices tracked by an ETF will typically be weighted by market capitalisation, which means that you get more exposure to the largest companies of that region or country. Indices can be very diverse with over 1,600 stocks in them, or quite targeted with approximately 30 stocks within the universe. For investors it simply means that instead of picking stocks, you buy a whole market. As such, your investment view is more about the region, country or theme as a whole, rather than any single stock. THIS COMMUNICATION IS FOR RETAIL CLIENTS IN THE UK. 1

2 EMERGING MARKET ETFs The first step in ETF selection actually starts with the index investors need to do their due diligence on the underlying to make sure they re truly getting the exposure they re after. As an example, over 50% of the constituents of the Bovespa Brazilian equities index are Financials and Consumer Goods companies, meaning an ETF tracking this index will have a strong bias towards these sectors. Every ETF has a factsheet which will tell you the past performance of the ETF and what you are buying in terms of companies, geographies and sectors. The more granular the investment, the higher the potential risk. Picking an individual country shouldn t be done without a thorough understanding of the local economy and the index. That s why many investors opt for investing globally or regionally. GLOBAL EMERGING MARKETS Buying global exposure is the simplest and most diverse way to invest in Emerging Markets. Through the MSCI Emerging Markets Index investors can gain access to over 835 stocks, covering 23 countries and over 10% of the total world equity market capitalisation. TAKE A REGIONAL VIEW The MSCI Emerging Markets Index is regionally biased, and the so called BRIC (Brazil, Russia, India & China) countries make up over 35% of the Index. Some investors are uncertain about Russia and China and therefore may not want to be so skewed towards these countries (approx 20%). For them, the MSCI EM Beyond BRIC Index may be more suitable which puts more emphasis on South Africa, Taiwan and Mexico in comparison to the MSCI Emerging Markets Index. Similarly, through a single ETF investors can gain access to Latin American or Central and Eastern European companies. This can prove a powerful tool if you are looking to break down your emerging market exposure and take a more targeted view without picking specific countries yourself. PICKING A SINGLE COUNTRY For investors with a very firm investment view, who have done their research on the economic and political characteristics of a specific country, ETFs can provide the possibility to drill down even further by gaining exposure to single country ETFs, from Mexico to Taiwan. Because you are tracking an Index, you still gain diversified exposure to the main companies from that region but your market risk is much higher as you are completely reliant on the economic and political environment of that one country. The difficulty with single emerging market countries is that the returns are not consistent and can be very volatile from year to year. For example, over one year Taiwan has provided a return of 16.1% as of April 30th, However, look at the five year performance and you will see that if you were holding the Taiwan linked ETF it would have lost you 13%. This is why single emerging markets are typically used by sophisticated investors who have a shorter, more tactical view of the markets based on thorough research. The returns can be greater than investing in a regional or global emerging market index, but so can the losses. To help you decide if an ETF provides exposure to the companies that you are interested in, you should read the ETF factsheet before making an investment. WHY LYXOR ETF FOR EMERGING MARKETS? Lyxor launched its first Exchange Traded Fund (ETF) on the Paris Euronext stock exchange back in Today, with approximately EUR 49 billion of Assets Under Management, Lyxor is the third largest ETF provider in Europe, and the sixth globally*. Our success is built on a history of innovation and a constant drive to provide investors with better, more efficient ways to access more investment opportunities around the world. ACCESSING THE EMERGING MARKETS One of our greatest strengths is our ability to deliver secure, liquid and precise tracking in even the most remote investment markets. Today, our range of ETFs encompasses a huge diversity of countries, regions, themes, sectors, commodities and fixed income baskets. On the London Stock Exchange, UK investors can access ETFs in GBP, Euro or USD. With 19 individual ETFs listed on the London Stock Exchange, UK investors have the choice of 11 individual emerging market countries, 4 regional emerging market exposures or global emerging market exposure through the MSCI emerging market Index. *Source: Lyxor Asset Management, June,

3 USING THE RIGHT STRUCTURE Performance ETF Benchmark Index Time Tracking an emerging market country or region is not as straight forward as tracking a highly liquid index like the FTSE 100 Index. Some emerging market stocks for example may not be available to foreign investment. Or, even if you can access the underlying securities, different time zones and limited liquidity can create issues when you come to trading in or out of those securities. This can pose a problem for Physical ETFs, which rely on buying some or all of the stocks of the Index in order to provide the performance of the ETF. If a Physical ETF cannot efficiently buy and manage all the stocks of the Index it may have to invest in just a sample of the bigger or more liquid securities. Funds using this kind of sampling strategy can expose the fund to positive or negative Tracking Error as the basket of securities is not an accurate reflection of the Benchmark Index. This means that the ETF s performance may be different to that of the Index over a short period. Precise tracking Due to the way that the performance is delivered, Synthetic ETFs can offer more effective tracking against even the most illiquid or hard to track Benchmark Indices. Synthetic ETFs also invest in a basket of physical assets such as equities or bonds, which are owned directly by the fund and appear on the Fund s balance sheet. However, the role of the physical assets is not to provide the performance of the fund, but to act as security. The performance of the Fund is instead provided by a financial instrument called a Performance Swap (Swap). This Swap is a contractual agreement which is negotiated over-the-counter (OTC) between two parties: the ETF and the Swap Counterparty. Under the terms of the Swap, the Swap Counterparty commits to pay the precise daily performance of the Benchmark Index, including any dividends to the ETF. This means that before taxes and replication costs, the daily performance of the ETF is a precise replication of the Benchmark Index. How a Swap works etf Physical Assets Target value of 100% of the fund value Performance (positive or negative) and dividends from the basket of Physical Assets performance Swap Performance (positive or negative) and dividends from the Benchmark Index net of taxes, fees and replication costs (if any) Swap counterparty index basket 3

4 The benefits of Synthetic replication are therefore twofold; one, you get the precise performance of the Index no matter how remote the stocks, and two; instead of holding these illiquid stocks, you can restrict your holdings to highly liquid, blue chip stocks. This means that the physical assets owned by the ETF can be more liquid and better diversified than those of the index it is tracking. MSCI emerging markets top 10 index constituents Index constituents Weighting Country Samsung Electronics Co Ltd 3.46% South Korea Taiwan Semiconductor Manufacturing Co Ltd 2.82% Taiwan Tencent Holdings Ltd 2.55% China China Mobile Ltd 2.08% China China Construction Bank-H 1.67% China ICBC H 1.53% China Naspers N 1.48% China Bank of China H 1.30% China Hon Hai Precision Ind Co 0.90% Taiwan Ping an Insurance H 0.89% China Source: Lyxor, July For illustrative purposes only. This is not a recommendation. Lyxor ETF MSCI emerging markets top 10 Fund Holdings Index constituents Weighting Country Siemens Ag/Etr 9.61% Germany Daimler AG 9.61% Germany Bayer Ag Action 9.44% France Total SA 6.71% France Banco Bilbao Vizcaya Argentaria SA 4.50% Spain Sanofi 3.46% France Continental AG 3.06% Germany BASF SE 3.05% Germany Anheuser-Busch Inbev NV 3.04% Belgium/Brazil Iberdrola SA 2.93% Spain Source: Lyxor, June, For illustrative purposes only. This is not a recommendation. As UCITS compliant funds, all Lyxor ETFs must comply with stringent regulations governing the quantity, quality and diversification of fund holdings. All physical assets are held in a segregated account, and are monitored daily to ensure that they comply with UCITS policies. 4

5 KNOW YOUR RISKS The use of a Swap in a Synthetic ETF can introduce Counterparty Risk to the issuer of the Swap. This is because if the Swap Counterparty was to default, the performance of the fund would be lost. However, exposure to the Swap Counterparty is strictly governed by the UCITS Directive and cannot exceed 10% of the fund s Net Asset Value (NAV). This means that the maximum at risk is 10% of the fund value. However, issuers such as Lyxor impose stricter limits and in fact target 0% Counterparty Risk each day. To ensure investors know exactly what they re getting when they buy an ETF, Lyxor discloses all holdings and financial exposures online on a daily basis. This level of transparency empowers investors with better control and understanding around their investments, eliminating the risk of nasty surprises appearing in their holdings. On each product page you can see how the ETF is replicated and what the fund holds as collateral or physical assets to mitigate Counterparty Risk. The Counterparty Exposure field tells you the extent to which capital is at risk if the Counterparty defaults. A positive figure means capital is at risk. A negative figure means that the Counterparty Risk is mitigated by the physical assets. PROVEN EFFICIENCY As the objective of an ETF is simply to track its Benchmark Index as efficiently as possible, logic may tell us that the best one would be the one with the lowest fees. The most obvious measure of an ETF s cost is the Total Expense Ratio or `TER as it is better known. A low TER is a very important starting point, but it is only one part of an ETF s true efficiency. The benefit of a low TER can for example be easily outweighed by a wide Bid / Ask spread or poor tracking. The truth is that some ETFs track better than others, and the spread between the buy (Ask) and sell (Bid) price can be very different too. A cheap ETF by TER can give up all that advantage if the spread is too wide, or the tracking is poor. At Lyxor, we are totally committed to efficiency, and strive to not only keep the TER low, and liquidity high, but to ensure our ETFs track as precisely as possible, regardless of the index you choose. tracking difference How close is the performance of the ETF to the Benchmark? true performance tracking error How accurately does the ETF track the Benchmark Index? liquidity What is the spread between the Buy (Ask) price and Sell (Bid) price? 5

6 LYXOR ETFs AVAILABLE FOR EMERGING MARKETS ETF name Lyxor UCITS ETF MSCI emerging markets Lyxor UCITS ETF MSCI EM Beyond BRIC Lyxor UCITS ETF MSCI EM Latin America Lyxor UCITS ETF Eastern Europe (CECE NTR EUR) Asset class Geographic Coverage ISIN Total Expense Ratio Fact Sheet Equities Global FR % LEML Equities Global ex-bric FR % BBEL Equities Latin America FR % LTML Equities Eastern Europe FR % CECL Lyxor UCITS ETF Brazil (Ibovespa) Equities Brazil FR % RIOL Lyxor UCITS ETF CSI 300 A-Share Equities China A-Shares FR % CSIL Lyxor UCITS ETF China Enterprise (HSCEI) Equities China H-Shares FR % ASIL Lyxor UCITS ETF MSCI India Equities India FR % INRL Lyxor UCITS ETF MSCI Indonesia Equities Indonesia FR % INDL Lyxor UCITS ETF MSCI Korea Equities South Korea FR % KRWL Lyxor UCITS ETF Kuwait (FRSE Coast Kuwait 40) Equities Kuwait FR % LKUW Lyxor UCITS ETF MSCI Malaysia Equities Malaysia FR % MALL Lyxor UCITS ETF MSCI Mexico Equities Mexico FR % MEXL Lyxor UCITS ETF South Africa (FTSE JSE Top 40) Equities South Africa FR % AFSL Lyxor UCITS ETF MSCI Taiwan Equities Taiwan FR % TWNL Lyxor UCITS ETF Thailand (SET 50 NET TR) Lyxor UCITS ETF Turkey (DJ Turkey Titans 20) Lyxor UCITS ETF iboxx $ Liquid emerging markets Sovereigns Equities Thailand FR % THAG Equities Turkey FR % TURL Bonds Global FR % LEMB 6

7 QUALITY YOU CAN DEPEND ON Since our first ETF launched in 2001, Lyxor has always maintained an utmost commitment to quality. In 2011 we formalised this commitment by creating the Lyxor ETF quality charter, which goes above and beyond the regulatory requirements of the UCITS directives and the recent guidelines from the European Securities and Markets Authority (ESMA). About Lyxor Lyxor Asset Management is one of Europe s leading providers of Exchange Traded Funds (ETFs) with approximately EUR 49 billion of assets under management.* With extensive capabilities covering equity, commodity and fixed income indices, Lyxor UCITS ETFs provide retail investors and Financial Advisers with a wide range of investment opportunities. *As of June 4th, KEY ETF RISKS Capital at Risk Investors capital is fully at risk and investors may not get back the amount originally invested. Counterparty Risk Investors may be exposed to risks resulting from the use of an OTC Swap with Societe Generale. Physical ETFs may have Counterparty Risk resulting from the use of a Securities Lending Programme. Currency Risk ETFs may be exposed to currency risk if the ETF or Benchmark Index holdings are denominated in a currency different to that of the Benchmark Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. Replication Risk ETFs are designed to replicate the performance of the Benchmark Index. Unexpected events relating to the constituents of the Benchmark Index may impact the Index provider s ability to calculate the Benchmark Index, which may affect the ETF s ability to replicate the Benchmark Index efficiently. This may create Tracking Error in the ETF. Underlying Risk The Benchmark Index of a Lyxor ETF may be complex and volatile. Liquidity Risk On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Benchmark Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other Market Maker systems; or an abnormal trading situation or event. THIS COMMUNICATION IS FOR RETAIL CLIENTS IN THE UK ONLY. Lyxor and Lyxor ETF are names used by Societe Generale to promote the products of Lyxor Asset Management. Lyxor ETFs are open ended mutual investment funds established under French law and approved by the Autorite des Marches Financiers (the French Financial Markets Authority). This communication is issued by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank) authorised by the Autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution Authority) and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. The products described within this document are not suitable for everyone. Prior to any investment in one of these products, investors should make their own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us, both in this document, the Prospectus and KIID for the product which is available on the website Investors should note that holdings in these products will not be covered by the provisions of the Financial Services Compensation Scheme, or by any similar compensation scheme. Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof, which changes could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied upon. The tax treatment of investments will, inter alia, depend on an individual s circumstances. Investors must consult with an appropriate professional tax adviser to ascertain for themselves the taxation consequences of acquiring, holding and/or disposing of any investments mentioned on this document. The securities can be neither offered in nor transferred to the United States. Telephone calls may be recorded and/or monitored for training and quality purposes.