Alternative ETFs for Low Cost Diversification Rick Lake Lake Partners Mario Manfredi First Trust Advisors Tripp Zimmerman WisdomTree Sal Bruno NYLIM/IndexIQ
LASSO Long and Short Strategic Opportunities Over eighteen years of liquid alternatives Liquid Alts 2.0 Alternative ETFs for Low Cost Diversification October 2017
TWENTY YEARS ON: THE DEMOCRATIZATION OF ALTERNATIVES President Clinton signs the Taxpayers Relief Act in 1997. John Kasich, House Budget Committee Chair, led tax law changes creating Liquid Alts.
LIQUID ALTS 1.0 ALTERNATIVE MUTUAL FUNDS Growth in Number of Alternative Mutual Funds From 2005 to 2016 700 650 614 600 577 Option Writing (55) 500 400 300 200 100 0 412 315 232 163 116 89 64 70 49 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Long/Short Equity (127) Multialternative (138) Long/Short Credit (18) Nontraditional Bond (96) Market Neutral (49) Managed Futures (53) Commodities Broad Basket (36) Bear Market (27) Multicurrency (15) Source: Morningstar Direct
LIQUID ALTS 2.0 ALTERNATIVE ETFs Growth in Number of Alternative ETFs/ETNs From 2005 to 2016 450 400 350 Alternative Strategies 300 250 Alternative Assets Volatility 200 150 Trading Tools 100 50 Source: Morningstar Direct 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trading - Leveraged (117) Trading - Inverse (123) Trading - Miscellaneous (14) Volatility (20) Currency (26) Commodities Broad Basket (22) Long-Short Equity (19) Nontraditional Bond (16) Market Neutral (9) Multialternative (8) Option Writing (6) Managed Futures (4)
GROWTH OF ALTERNATIVE ETFs The universe of alternative ETFs has expanded across a broad spectrum of alternative strategies and assets. Wave 1: Trading Vehicles Leveraged Inverse Wave 2: Alternative Assets Commodities Currencies Volatility Wave 3: Alternative Strategies Long-Short Equity Non-Traditional Bond Multialternative Market Neutral Managed Futures Option Writing Source: Lake Partners, Morningstar
LASSO SPECTRUM ALTERNATIVE ETF PORTFOLIO Target Strategy Allocation as of April 30, 2017 20.0% Arbitrage Vola0lity Reducers 15.0% Equity Put Writing 10.0% Merger Arbitrage 10.0% Diversified Arbitrage 22.5% Strategic Fixed Income Vola0lity Reducers 22.5% Alternative Fixed Income Return Drivers 40.0% Hedged Equity 15.0% Hedged Equity 10.0% Long Bias 10.0% Managed Futures (Systematic) 7.5% Global Macro (Discretionary) 17.5% Macro Diversifiers Source: Lake Partners
EXPENSE RATIO COMPARISON Average Expense Ratios: LASSO Spectrum Alternative ETF Portfolio vs. Largest Morningstar Alternative Mutual Fund Categories October 2017 2.25% 2.00% Multialternative 1.79% Long/Short Equity 1.82% Managed Futures 1.99% 1.75% 1.50% 1.25% 1.00% 0.75% Alt ETF Portfolio 0.55% 0.50% 0.25% 0.00% Source: Lake Partners, Morningstar Note: Average weighted expense ratio of underlying funds for the LASSO Spectrum Alternative ETF Portfolio does not include brokerage or custodial expenses or Lake Partners management fees.
Alternative ETFs for Low Cost Diversification Rick Lake Lake Partners Mario Manfredi First Trust Advisors Tripp Zimmerman WisdomTree Sal Bruno NYLIM/IndexIQ
FIRST TRUST Alternative Etfs FOR INSTITUTIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION. NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
WHY NOW? Stocks Bonds 3000 7% 2500 S&P 500 Index Price 6% 10-Year Treasury Yield 5% 2000 4% 1500 3% 1000 2% 500 1% 0 0% Data from 9/30/02 through 9/30/17 Source: Bloomberg. These examples are for illustrative purposes only and not indicative of the fund. The performance excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Past performance is no guarantee of future results.
ALTERNATIVES DEFINED How Does an Alternative Strategy Differ from a Traditional Investment Strategy?! Different set of risks and returns! Different set of assets or investment instruments! Seeks lower beta and / or correlation! Potential client benefits
HOW HAS ALTERNATIVE INVESTING CHANGED? Alternative Investments have traditionally been offered as Private Placements. Due to a variety of changes, Alternative Investments are increasingly being offered in 1940 Act products, such as open end mutual funds and ETFs. Alternatives 20 Years Ago Hedge Funds Only Qualified Investors Only Alternatives Today ETFs, Mutual Funds All Investors High Minimums for Investment Low Minimums for Investments Quarterly or Yearly Liquidity Limited disclosure of Strategy Limited disclosure of Holdings Monthly or Quarterly NAV Pricing Daily Liquidity Greater Transparency of Strategy Greater Transparency of Holdings Daily Pricing / Intra-Day Trading with ETFs Management + Incentive Fee (between 2-20%) Flat fee Qualified Investors natural person who has individual net (or joint with spouse) worth that exceeds $1mm at the time of the purchase or income exceeding $200k (or $300k with spouse) for the prior two years and reasonable expectation of the same income level in the future. 1
POTENTIAL IMPACT OF ALTERNATIVE INVESTMENTS ON RISK AND RETURN STOCKS 60% 50% 45% 40% BONDS 40% 40% 40% 40% ALTERNATIVE INVESTMENTS 0% 10% 15% 20% AVERAGE ANNUAL TOTAL RETURN 6% 4% 2% 0% 6.35% 6.19% 6.11% 6.03% 60/40 50/40/10 45/40/15 40/40/20 SHARPE RATIO 0.5% 0.0% 0.61% 0.66% 0.69% 0.73% 60/40 50/40/10 45/40/15 40/40/20 10% 8% 6% 4% 2% 0% STANDARD DEVIATION 8.35% DRAWDOWN 0% -4% -8% -12% -16% -20% -24% -28% -32% 7.43% 6.99% 6.55% 60/40 50/40/10 45/40/15 40/40/20 60/40 50/40/10 45/40/15 40/40/20-30.90% -27.70% -26.10% -24.50% 15-year period, ending 12/30/16. Stocks S&P 500 Index; Bonds Bloomberg Barclays Capital US Aggregate Bond Index; Alternative Investments HFRI Fund Weighted Composite Index. This example is for illustrative purposes only and not indicative of any investment or fund. The example assumes the portfolios are rebalanced annually. The illustration excludes the effects of taxes and brokerage commissions or other fees incurred when investing. Past performance is no guarantee of future results. An index cannot be purchased directly by investors. Diversification does not guarantee a profit or protect against a loss.
FIRST TRUST ALTERNATIVES TEAM ETFS ASSETS UNDER MANAGEMENT: APPROX. $363 MILLION As of 9/30/17 Low Correlation Strategies FTGC First Trust Global Tactical Commodity Strategy Fund FMF First Trust Morningstar Managed Futures Strategy Fund FAAR First Trust Alternative Absolute Return Strategy ETF Hedged Equity Strategies FTLS First Trust Long/Short Equity ETF " Low Correlation " Hedged Equity " Option Overlay Option Overlay Strategies FTHI First Trust High Income ETF FTLB First Trust Low Beta Income ETF Alternative investments may employ complex strategies, have unique investment and risk characteristics and may not be suitable for all investors.
RISKS AND CONSIDERATIONS ETF Characteristics Investors buying or selling fund shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the fund by authorized participants, in very large creation/redemption units. If a fund's authorized participants are unable to proceed with creation/ redemption orders and no other authorized participant is able to step forward to create or redeem, fund shares may trade at a discount to a fund's net asset value and possibly face delisting. Risk Considerations A fund s shares will change in value, and you could lose money by investing in a fund. One of the principal risks of investing in a fund is market risk. Market risk is the risk that a particular security owned by a fund, fund shares or securities in general may fall in value. There can be no assurance that a fund s investment objective will be achieved. A fund may invest in small capitalization and mid capitalization companies. Such companies may experience greater price volatility than larger, more established companies. The trading prices of commodities futures, fixed income securities and other instruments fluctuate in response to a variety of factors. A fund s net asset value and market prices may fluctuate significantly in response to these factors. As a result, an investor could lose money over short or long periods of time. In addition, the net asset value of a fund may be more volatile over short-term periods than other investment options because of a fund s significant use of financial instruments that have a leveraging effect. The value of commodities, commodity-linked instruments, and futures instruments typically is based upon the price movements of a physical commodity or an economic variable linked to such price movements. The prices of commodities, commodity-linked instruments, and futures instruments may fluctuate quickly and dramatically and may not correlate to price movements in other asset classes. All futures and futures-related products are highly volatile. Futures instruments may be less liquid than other types of investments. An active trading market may not exist for certain commodities. Each of these factors and events could have a significant negative impact on a fund. The use of options, futures and other derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivatives. These risks are heightened when a fund s portfolio managers use derivatives to enhance the fund s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund. An investment in a fund containing securities of non-u.s. issuers is subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting non-u.s. issuers. A fund may invest in depositary receipts which may be less liquid than the underlying shares in their primary trading market. FTGC, FAAR and FMF regularly purchase and sell commodity futures contracts to maintain a fully invested position. This frequent trading may increase the amount of commissions or mark-ups to broker-dealers that the funds pay when buying and selling contracts, which may detract from the funds' performance. FTGC, FAAR and FMF do not invest directly in futures instruments. Rather, they invest in a whollyowned subsidiary, which has the same investment objective as the funds, but unlike the funds, it may invest without limitation in futures instruments. The subsidiary is not registered under the 1940 Act and is not subject to all the investor protections of the 1940 Act. Thus, the funds, as investors in the subsidiary, will not have all the protections offered to investors in registered investment companies. The funds, through the subsidiary, will engage in trading on commodity markets outside the U.S. Trading on such markets is not regulated by any U.S. government agency and may involve certain risks not applicable to trading on U.S. exchanges. The failure or bankruptcy of a fund and the subsidiary's clearing broker could result in a substantial loss of fund assets. A fund may hold investments that are denominated in non-u.s. currencies, or in securities that provide exposure to such currencies, currency exchange rates or interest rates denominated in such currencies. Changes in currency exchange rates and the relative value of non-u.s. currencies may affect the value of a fund s investments and the value of a fund s shares. Commodity futures contracts traded on non-u.s. exchanges or with non-u.s. counterparties present risks because they may not be subject to the same degree of regulation as their U.S. counterparts.
RISKS AND CONSIDERATIONS CONTINUED Certain funds may be subject to the forces of whipsaw markets (as opposed to choppy or stable markets), in which significant price movements develop but then repeatedly reverse, which could cause substantial losses. Certain securities held by certain funds are subject to credit risk, interest rate risk, and income risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and that the value of a security may decline as a result. Interest rate risk is the risk that the value of the fixed income securities in a fund will decline because of rising market interest rates. Income risk is the risk that income from a fund s fixed income investments could decline during periods of falling interest rates. Alternative investments may employ complex strategies, have unique investment and risk characteristics that may not be suitable for all investors. FTLS may invest in the shares of other ETFs, and therefore, the fund s investment performance and risks may be related to the investment performance and risks of the underlying ETFs. In general, as a shareholder in other ETFs, the fund bears its ratable share of the underlying ETF s expenses, and would be subject to duplicative expenses to the extent the fund invests in other ETFs. Shorting may result in greater gains or greater losses. Short selling creates special risks which could result in increased volatility of returns. Because losses on short sales arise from increases in the value of the security sold short, such losses are theoretically unlimited. A fund may be subject to gap risk, which is the risk that a commodity price will change from one level to another with no trading in between. A fund may be subject to regulatory risk, which may result in commodity contract positions requiring liquidation at disadvantageous times or prices. A fund s investment in repurchase agreements may be subject to market and credit risk with respect to the collateral securing the repurchase agreements. A fund may invest in U.S. government obligations, including U.S. Treasury obligations and securities. Securities issued or guaranteed by federal agencies and U.S. government sponsored instrumentalities may or may not be backed by the full faith and credit of the U.S. government. Large inflows and outflows may impact a fund s market exposure for limited periods of time. The funds are actively managed and are subject to management risk. In managing the funds investment portfolios, the advisor will apply investment techniques and risk analyses that may not have the desired result. FTHI, FTLS and FTLB may, under certain circumstances, and FAAR, FTGC and FMF will, under most circumstances, effect creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the funds may be less tax-efficient. The funds are classified as non-diversified and may invest a relatively high percentage of their assets in a limited number of issuers. As a result, the funds may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers. First Trust Advisors L.P. is the adviser to the funds. First Trust Advisors L.P. is an affiliate of First Trust Portfolios L.P., the funds distributor. First Trust Advisors L.P. is registered as a commodity pool operator and commodity trading advisor and is also a member of the National Futures Association. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients. Morningstar is a registered trademark of Morningstar, Inc. and has been licensed for use by First Trust Advisors L.P. The First Trust Morningstar Managed Futures Strategy Fund is not sponsored, endorsed, issued, sold or promoted by Morningstar, Inc., nor does this company make any representation regarding the advisability of investing in the fund. You should consider each fund s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visit www.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about each fund. The prospectus or summary prospectus should be read carefully before investing.
Alternative ETFs for Low Cost Diversification Rick Lake Lake Partners Mario Manfredi First Trust Advisors Tripp Zimmerman WisdomTree Sal Bruno NYLIM/IndexIQ
Long/Short Strategies Can Help Improve Risk/Return Tradeoffs Source: WisdomTree, Bloomberg, Zephyr StyleAdvisor, 12/31/98-8/31/17. Start date was chosen based on data availability of Credit Suisse Long/Short Equity Hedge Fund Index. Equity refers to S&P 500 Index and Bonds refer to Bloomberg Barclays U.S. Aggregate Bond Index. The square boxes illustrate the impact of adding a 20% allocation to the Credit Suisse Long/Short Equity Hedge Fund Index proportionately from the various blends. Past performance is not indicative of future results. You cannot invest directly in an index.
Long Portfolio: Stock Selection & Low Volatility Weighting Value & growth fundamentals determine both top-down market hedge ratios and bottom-up stock selection Mechanics of Stock Selection Stocks are graded on combination of growth and value indicators and most attractive stocks from each sector are included Rebalanced Quarterly Fundamental Scoring Growth Score Value Score Selection Score Stock Selection Mechanism Growth Indicators Return on Equity Return on Capital Value Indicators Dividend Yield Price to Cash Flow Starting Universe - U.S. Listed - $2bn Market Cap - $3 Share Price Fundamental Selection Mechanism Applied Return on Assets Price to Book Low Volatility Weighted Operating Income/Sales Operating Income Growth Price to Sales Sector Neutral Constraints Invest in Top 100 Scored Stocks Source: WisdomTree. Graphics represents long stock selection component for WisdomTree Dynamic Long/Short U.S. Equity Index
Short Portfolio: Dynamic Market Hedge Ranging from 0%-100% Reset Monthly Value & growth fundamentals determine both top-down market hedge ratios and bottom-up stock selection Mechanics of Market Hedge Market Hedge Cycle Growth Score Value Score Sentiment Value Market Hedge Signals Growth Indicators Value Indicators Operating Income to Sales Net Income to Sales Price to Book Price to Cash Flow Positive 0% Hedged 50% Hedged Mixed Operating Cash Flow/ Operating Income 100% Hedged Negative Hedge Ratio Source: WisdomTree. Graphics represents hedge ratio component for WisdomTree Dynamic Long/Short U.S. Equity Index
WisdomTree CBOE S&P 500 PutWrite Strategy Fund + Investment Objective: The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW) seeks investment results that, before fees and expenses, generally correspond to the performance of the CBOE S&P 500 PutWrite Index (PUT). + Investment Strategy: PUTW invests in one and three month treasury bills, and sells or writes S&P 500 Index put options. The number of put options sold is chosen to ensure full collateralization, meaning the total value of the treasury account must be equal to the maximum possible loss from the final settlement of the put options at expiration. In addition: Options written at the money, in order to provide sufficient liquidity Options are written monthly, instead of quarterly or longer, to capture more gross premium The Fund uses European style options, so they can only be exercised at maturity The Fund has net expense ratio of 0.38% Sophisticated Institutional Overlay Strategy offered via 40 Act Structure 22
Over 71% of the PUT Index Returns fell between 0% to 4%; compared to only 48% of the returns for the S&P 500 Index 50% Histogram of Monthly Returns 40% PUT Index S&P 500 Index Return Percentage 30% 20% 10% 0% < -16% -14% to - 16% -12% to - 14% -10% to - 12% -8% to - 10% -6% to -8% -4% to -6% -2% to -4% 0% to -2% 0% to 2% 2% to 4% 4% to 6% 6% to 8% 8% to 10% 10% to 12% > 12% Source: WisdomTree, CBOE, 6/20/07-9/30/17. Indexes are unable to be directly invested into and the performance results may differ from actual fund performance. Index performance is not affected by the fees and charges inherent with investing in options or the underlying securities. You cannot invest directly in an index. Past performance is not indicative of future results. 23
Long Run Blending of PUT & During Crisis: Adding PUT Helps Lower Risk & Enhance Returns Annualized Returns 8.0% 7.5% 7.0% 6.5% 6.0% Put Index 80% Put Index 100% Blending PUT Index With S&P 500 Index 6/30/2007-09/30/2017 Put Index 60% Put Index 90% Put Index 70% Put Index 40% Put Index 50% Put Index 20% Put Index 30% Put Index 10% S&P Total Return 100% Annualized Returns -42.0% -44.0% -46.0% -48.0% -50.0% -52.0% -54.0% -56.0% Blending PUT Index With S&P 500 Index Peak Of Financial Crisis: 05/19/2008-03/09/2009 Put Index 100% Put Index 90% Put Index 70% Put Index 80% Put Index 60% Put Index 50% Put Index 40% Put Index 30% Put Index 20% -58.0% Put Index 10% S&P Total Return 100% 5.5% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% Annualized Risk -60.0% 34.0% 36.0% 38.0% 40.0% 42.0% 44.0% 46.0% 48.0% Annualized Risk Source: WisdomTree, CBOE, 6/30/07-9/30/17. The 5/19/08-3/9/09 period is chosen to capture the maximum drawdown of the S&P 500 Index during the financial crisis. Indexes are unable to be directly invested into and the performance results may differ from actual fund performance. Index performance is not affected by the fees and charges inherent with investing in options or the underlying securities. You cannot invest directly in an index. Past performance is not indicative of future results. 24
Low Correlated Asset Classes Can Potentially Help With Diversification 1.00 Credit Suisse Managed Futures Index Rolling 3-Year Correlation 0.80 0.60 0.40 Correlation 0.20 0.00-0.20 0.12 0.08-0.18-0.40-0.60-0.80 Correlation vs. MSCI ACWI Index Average Median -1.00 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 S&P 500 Index Correlation Matrix: 12/31/00-8/31/17 Russell 2000 Index MSCI ACWI Index MSCI EAFE Index Source: WisdomTree, Zephyr StyleAdvisor, 12/31/00-8/31/17. Dates were chosen based on data availability. MSCI Emerging Markets Index Bloomberg Barclays U.S. Aggregate Index BofA Merrill Lynch 10+ Year US Treasury Index Credit Suisse Managed Futures Index S&P 500 Index 1.00 0.88 0.96 0.88 0.78-0.11-0.32-0.09 Russell 2000 Index 0.88 1.00 0.85 0.78 0.73-0.16-0.34-0.08 MSCI ACWI Index 0.96 0.85 1.00 0.97 0.89-0.04-0.29-0.04 MSCI EAFE Index 0.88 0.78 0.97 1.00 0.86 0.01-0.26-0.01 MSCI Emerging Markets Index 0.78 0.73 0.89 0.86 1.00 0.05-0.22 0.00 Bloomberg Barclays U.S. Aggregate Index -0.11-0.16-0.04 0.01 0.05 1.00 0.85 0.29 BofA Merrill Lynch 10+ Year US Treasury Index -0.32-0.34-0.29-0.26-0.22 0.85 1.00 0.30 Credit Suisse Managed Futures Index -0.09-0.08-0.04-0.01 0.00 0.29 0.30 1.00 25
Summary of WisdomTree Managed Futures Index Investment universe 24 futures contracts: 16 commodities and 8 financials, including Rebalance frequency Monthly Crude Oil, Natural Gas, Heating Oil, Gasoline, Copper, Gold, Silver, Soybeans, Corn, Wheat, Coffee, Sugar, Cotton, Cocoa, Live Cattle, Lean Hogs EURUSD, JPYUSD, GBPUSD, CHFUSD, AUDUSD, CADUSD 10-Year U.S. Treasury Note, 30-Year U.S. Treasury Bond Long/short decision Weight decision Based on the Composite Momentum Signal (CMS) framework Short positions in energy commodities (Crude, Natural Gas, Heating Oil and Gasoline) are not allowed; if signals suggest short position, the strategy will go flat for those four commodities Rank the last 36-month annualized volatilities of 24 assets under the CMS framework; select the first 20 assets with lower volatilities; selected contracts are given equal nominal weight If energy commodities are selected but signals suggest short position, the strategy will go flat for the selected commodities and assign their nominal weights to other selected futures proportionally The effective weight of each selected contract is decided based on the degree of conviction under CMS. With full conviction, the effective weight is the same as the nominal weight; otherwise, the effective weight is 2/3 of the nominal weight Collateral investment U.S. 3-Month Treasury Bill
CMS Incorporates Diversification of Momentum Signal Time Horizons: Scales Down Position Size When Less Conviction Bullish Momentum Signals 3 Composite Momentum Signal Illustration 2 1 1 1 Total agreement. Fully invested. 1 1 1 Partial agreement. Not fully invested. 2/3 of notional invested. 1 1 1 1 1 1 1 0-1 -1-1 -1-1 -1-1 Bearish Momentum Signals -1-2 -1-1 -1-1 -1-3 Short Term Medium Term Long Term + When momentum signals do not indicate totally investing, the CMS scales down the position size (both long and short) while maintaining the directional bet indicated by the majority of the signals. + 6% would be allocated to an asset when all three momentum signals are aligned. When 2 of 3 signals align, only 4% is allocated to that position (2/3 notional allocation) and that 4% weight is what we call the effective weight. A composite momentum signal is a signal that is composed of other signals, which are originated separately and joined to form the composite signal. The composite momentum signal framework (CMS) is a framework that incorporates three momentum signals across different time horizons to create a composite momentum signal.
Important Information Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com to view or download a prospectus. Investors should read the prospectus carefully before investing. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. WisdomTree, its affiliates and their independent providers are not liable for any informational errors, incompleteness or delays or for any actions taken in reliance on information contained herein. Additional Index information is available at www.wisdomtree.com Diversification does not eliminate the risk of experiencing investment losses There are risks associated with investing, including possible loss of principal. PUTW will invest in derivatives, including S&P 500 Index put options ( SPX Puts ). Derivative investments can be volatile, and these investments may be less liquid than securities, and more sensitive to the effects of varied economic conditions. The value of the SPX Puts in which the Fund invests is partly based on the volatility used by market participants to price such options (i.e., implied volatility). The options values are partly based on the volatility used by dealers to price such options, so increases in the implied volatility of such options will cause the value of such options to increase, which will result in a corresponding increase in the liabilities of the Fund and a decrease in the Fund s NAV. Options may be subject to volatile swings in price influenced by changes in the value of the underlying instrument. The potential return to PUTW is limited to the amount of option premiums it receives; however, PUTW can potentially lose up to the entire strike price of each option it sells. An investment in the WisdomTree Managed Futures Strategy (WDTI) is speculative and involves a substantial degree of risk. One of the risks associated with WDTI is the complexity of the different factors that contribute to the Fund s performance, as well as its correlation (or non-correlation) to other asset classes. These factors include use of long and short positions in commodity futures contracts, currency forward contracts, swaps and other derivatives. WDTI generally does not make intra-month adjustments and therefore is subject to substantial losses if the market moves against the Fund s established positions on an intra-month basis. WDTI is actively managed thus the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. The WisdomTree Dynamic Long/Short U.S. Equity Fund may engage in short sale transactions and will lose value if the security or instrument that is the subject of a short sale increases in value. A Fund that has exposure to one or more sectors may increase the Fund s vulnerability to any single economic or regulatory development. This may result in greater share price volatility. The composition of the Fund s Index is heavily dependent on quantitative models and data from one or more third parties and the Index may not perform as intended. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Due to the investment strategy of the Funds, they may make higher capital gain distributions than other ETFs. Please read each Fund s prospectus for specific details regarding the Fund s risk profile. WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only. Tripp Zimmerman is a registered representative of Foreside Fund Services, LLC.
Alternative ETFs for Low Cost Diversification Rick Lake Lake Partners Mario Manfredi First Trust Advisors Tripp Zimmerman WisdomTree Sal Bruno NYLIM/IndexIQ
Hedge Funds in ETFs! Passive Factor Based: Use models to estimate hedge fund exposure to key factors that drive their risk and returns and invest in liquid proxies for the factors i=1 n (Bi,t Where B=Exposure to factor i, F=Return of factor i 1 Fi,t+1)+e Mechanical: Construct a set of rules to passively mimic a hedge fund strategy Where W=Weight in security i, R=Return of security i i=1 n (Wi,t Ri,t+1)+e Holdings Based: Use historical hedge fund holdings to determine current positions i=1 n (Wi,t 1 Where W=Weight in security i, R=Return of security i Ri,t+1)+e! Active Pure Active: Fully discretionary approach Overlay: Discretion on top of a model based approach Active ETFs: Model based approach in an Active ETF structure FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Largest Alternative ETFs TICKER FUND NAME ISSUER MANAGEMENT FEE AUM ($M) INCEPTION DATE ACTIVE QAI IQ Hedge Multi-Strategy Tracker ETF IndexIQ 0.75% * $1,084 3/25/2009 N MNA IQ Merger Arbitrage ETF IndexIQ 0.75% $290 11/17/2009 N WDTI WisdomTree Managed Futures Strategy Fund WisdomTree 0.65% $162 1/5/2011 Y JPHF JPMorgan Diversified Alternatives ETF JPMorgan 0.85% $152 9/15/2016 Y FTLS First Trust Long/Short Equity ETF First Trust 0.99% $114 9/9/2014 Y RLY SPDR SSgA Multi-Asset Real Return ETF State Street Global Advisors 0.70% $109 4/26/2012 Y HTUS Hull Tactical US ETF Exchange Traded Concepts 0.91% $94 6/25/2015 Y QXTR QuantX Risk Managed Multi-Asset Total Return ETF Northern Lights 1.51% $69 1/26/2017 N DYLS WisdomTree Dynamic Long/Short U.S. Equity Fund WisdomTree 0.48% $80 12/23/2015 N DIVY Reality Shares DIVS ETF Reality Shares 0.91% $53 12/18/2014 Y *QAI management fee will be 0.53% after fee waiver effective Nov 1, 2017 Source: ETF.com Category= Absolute Returns, Asset Class= Alternatives, Exclude Inverse/Leveraged, Bloomberg, AUM>$50MM as of 10/10/2017 FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Index Construction: IQ Hedge Multi-Strategy Index Systematic, Rules-Based Investment Process ETF Universe Step 1 Annual Index Constitution Identify ETFs that represent asset classes that drive hedge fund returns. Emerging Market Hedge Global Macro Liquid Daily Liquidity, No Lock-Ups Long/Short Equity Event- Driven IQ Hedge Multi-Strategy Tracker ETF Ticker: QAI Market Neutral Low Fee No Hedge Fund Fees Fixed Income Arbitrage Step 2 Monthly Index Reweighting Replicate the risk/return profiles of 6 distinct hedge fund strategies, using ETFs from Step 1. Step 3 Monthly Strategy Allocation Hedge fund strategies from Step 2 are combined into one portfolio to maximize returns and minimize volatility. Transparent Portfolio Updated Daily Tax-Efficient No K-1 FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Hedge Multi-Strategy Index Since Index Inception 1 IQ Hedge Multi-Strategy Index HFRI Fund of Funds Index Cumulative Return 33.34% 21.78% Annualized Return 3.34% 2.28% Annualized Std Dev 5.47% 4.53% Correlation to S&P 500 0.76 0.78 Beta to S&P 500 0.27 0.23 10 Worst Months for S&P 500 1 IQ Hedge Multi-Strategy Index HFRI Fund of Funds Index Total -18.44% -19.37% -57.21% Downside Capture 32.23% 33.85% 100.00% S&P 500 10 Best Months for S&P 500 1 IQ Hedge Multi-Strategy Index HFRI Fund of Funds Index Total 22.45% 12.92% 117.09% Upside Capture 19.17% 11.04% 100.00% Data through 9/30/2017. 1 9/30/2008 Past performance does not guarantee future results. Sources: IndexIQ, FactSet, and Bloomberg. It is not possible to invest directly in an index. There can be no guarantee that investment objectives will be met. The IQ Hedge Multi-Strategy Index seeks to replicate the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. The HFRI Fund of Funds Index tracks hedge fund industry performance of a large universe of hedge fund strategies. The Barclays U.S. Aggregate Bond Index is a broad-based index that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance. S&P 500 FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Hedge Multi-Strategy Tracker ETF (QAI) vs. Morningstar Alternative Category Average 6.00 QAI has outperformed the category average over time. Annual Return 4.00 2.00 0.00-2.00-4.00 2012 2013 2014 2015 2016 2017 QAI (NAV) M* Multi Alt Category Avg Total Return (Indexed to 100 as of Dec 31, 2011) 120 115 110 105 100 95 90 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 QAI (NAV) M* Multi Alt Category Avg Sources: IndexIQ and FactSet as of 9/30/17.M* Multi Alt Category Avg represents the average of the entire Morningstar Multi Alternative Category. Past performance is not a guarantee of future results. It is not possible to invest directly in an index.. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Hedge Multi Strategy Index Alternatives have provided consistent risk/return profile over time (10/1/2012-9/30/2017) Source: FactSet as of 9/30/17. The S&P 500 Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. Standard deviation is a measure of the dispersion of a set of data from its mean. Past performance is not a guarantee of future results. It is not possible to invest directly in an index. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Index Construction: IQ Merger Arbitrage Index Systematic, Rules-Based Investment Process! IndexIQ analyzed almost 13,000 Merger & Acquisition transactions over 10 years.! This analysis yielded the ideal characteristics of M&A transactions in regard to profits to shareholders.! These characteristics were distilled into the rules-based process that drives our IQ Merger Arbitrage Index. Universe Definition! All Announced Deals! Global Developed Markets Deal Criteria! Percent of Target Sought > 50%! Mergers, Acquisition, LBOs, Private Equity! Stock & Cash Deals Portfolio Construction! Index Components Updated Monthly! Liquidity-Based Weighting! Short Exposure Provides Market Hedge Buy Discipline! Add Announced Deals that Meet Criteria! Targets from Developed Markets Globally! Deal Proceeds Held in Cash Equivalents until Monthly Rebalance Sell Discipline! Remove Closed Deals from Index Intra-month! Remove Broken Deals from Index Monthly! Remove Deal when Holding Time Limit Expires Past performance is not a guarantee of future results. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Example: Anatomy of an Acquisition Share Price of National Semiconductor Corp. (NSM) 4/4/11 TI offers $25.00 per share cash $26.00 25.00 24.00 23.00 22.00 21.00 20.00 19.00 18.00 17.00 16.00 15.00 14.00 13.00 4/5/11 Post-Announcement: NSM=$24.06 4/4/11 Pre-Announcement: NSM=$14.07 5/4/11 NSM added to MNA at $24.20 Total Return for the 99 day holding period is 3.26% Annualized return is 8.61% 9/25/11 TI completes acquisition of NSM NSM removed from MNA at $24.99 12/31 2010 1/14 2011 1/28 2011 2/11 2011 2/25 2011 3/11 2011 3/25 2011 4/8 2011 4/22 2011 5/6 2011 5/20 2011 6/3 2011 6/17 2011 7/1 2011 7/15 2011 7/29 2011 8/12 2011 8/26 2011 9/9 2011 9/23 2011 Source: IndexIQ. MNA did not own shares of National Semiconductor as of 6/30/17. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Merger Arbitrage ETF (MNA) 3 Year Correlation vs. S&P 500 Index (US Equity) Bloomberg Barclays U.S. Aggregate Bond Index (US Fixed Income) IQ Merger Arb ETF (NAV) 0.28-0.16 As well as strong risk/return characteristics (Annualized October 2014-September 2017) Sources: IndexIQ and FactSet as of 9/30/17. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasurys, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities. The S&P 500 Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. R-squared is a statistical measure that represents the percentage of a fund or security s movements that can be explained by movements in a benchmark index. Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Correlation is a statistic that measures the degree to which two securities move in relation to each other. Past performance is not a guarantee of future results. It is not possible to invest directly in an index. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Hedge Multi-Strategy Tracker ETF (QAI) 1 Month 3 Months YTD 1 Year 3 Years* 5 Years* Since Fund Inception* Inception Date Expense Ratio Share Price 0.27% 1.70% 4.33% 1.98% 0.86% 2.05% 3.07% 03/25/2009 0.76%* NAV 0.24% 1.72% 4.33% 2.01% 0.89% 2.04% 3.07% *As of November 1, 2017 the Total Annual Fund Expense will be 0.76% based on a 22 bps fee waiver. *Annualized. All data as of September 30, 2017. The performance data quoted above represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund shares will fluctuate so that an investor s shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Fund performance current to the most recent month-end is available by calling 888-474-7725 or by visiting IQetfs.com. IndexIQ shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total returns are calculated using the daily 4:00 p.m. net asset value (NAV). Market price returns reflect the share price as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Index performance is for illustrative purposes only and does not represent actual Fund performance. One cannot invest directly in an index. Performance data for the Index assumes reinvestment of dividends and is net of the management fees for the Index s components, as applicable, but it does not reflect management fees, transaction costs or other expenses that you would pay if you invested in the Fund directly. No representation is being made that any investment will achieve performance similar to that shown. Sources: IndexIQ, FactSet, and S&P. Past performance is not a guarantee of future results. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
IQ Merger Arbitrage ETF (MNA) 1 Month 3 Months YTD 1 Year 3 Years* 5 Years* Since Fund Inception* Inception Date Expense Ratio Share Price 1.15% 0.32% 5.22% 6.16% 4.36% 4.91% 3.18% 11/17/2009 0.77% NAV 1.07% 0.44% 5.04% 5.93% 4.35% 4.77% 3.15% *Annualized. All data as of September 30, 2017. The performance data quoted above represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund shares will fluctuate so that an investor s shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Fund performance current to the most recent month-end is available by calling 888-474-7725 or by visiting IQetfs.com. IndexIQ shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Total returns are calculated using the daily 4:00 p.m. net asset value (NAV). Market price returns reflect the share price as of the close of trading on the exchange where Fund shares are listed. Market price returns do not represent the returns you would receive if you traded shares at other times. Index performance is for illustrative purposes only and does not represent actual Fund performance. One cannot invest directly in an index. Performance data for the Index assumes reinvestment of dividends and is net of the management fees for the Index s components, as applicable, but it does not reflect management fees, transaction costs or other expenses that you would pay if you invested in the Fund directly. No representation is being made that any investment will achieve performance similar to that shown. Sources: IndexIQ, FactSet, and S&P. Past performance is not a guarantee of future results. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Disclosure All investments are subject to market risk and fluctuate in value. Alternative investments are speculative and entail substantial risk. If a security sold short increases in price, an investor may have to cover its short position at a higher price than the short sale price, resulting in a loss. Because the loss on a short sale arises from increases in the value of the security sold short, such loss is theoretically unlimited. When borrowing a security for delivery to a buyer, an investor also may be required to pay a premium and other transaction costs, which would increase the cost of the security sold short. Options and futures contracts have the risks of unlimited losses of the underlying holdings, due to unanticipated market movements and failure to correctly predict the direction of securities prices, interest rates, and currency exchange rates. The investment in options is not suitable for all investors. Investments in absolute-return strategies are not intended to outperform stocks and bonds during strong market rallies. Investments in derivatives often involve leverage, which may increase the volatility of the investment and may result in a loss. IQ Hedge Multi-Strategy Tracker ETF (QAI) The Fund's investment performance, because it is a fund of funds, depends on the investment performance of the underlying ETFs in which it invests. There is no guarantee that the Fund itself, or any of the ETFs in the Fund's portfolio, will perform exactly as its underlying index. The Fund s underlying ETFs invest in: foreign securities, which subject them to risk of loss not typically associated with domestic markets, such as currency fluctuations and political uncertainty; commodities markets, which subject them to greater volatility than investments in traditional securities, such as stocks and bonds; and fixed income securities, which subject them to credit risk the possibility that the issuer of a security will be unable to make interest payments and/or repay the principal on its debt and interest rate risk changes in the value of a fixed-income security resulting from changes in interest rates. Leverage, including borrowing, will cause some of the Fund s underlying ETFs to be more volatile than if the underlying ETFs had not been leveraged. The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market (performance data assumes reinvestment of dividends, but it does not reflect management fees, transaction costs or other expenses). The HFRI Fund of Funds Composite Index ( HFRI FoF Composite Index ) is an equally weighted hedge fund index including over 650 domestic and off-shore fund of funds. The index is rebalanced monthly with performance updates three times per month. Sources for IndexIQ and benchmark data: IndexIQ, FactSet, Bloomberg. The Fund employs a passive management or indexing investment approach designed to track the performance of the Index. The Fund invests primarily in the Index components that comprise the Index. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION
Disclosure Con t IQ Merger Arbitrage ETF (MNA) Certain of the proposed takeover transactions in which the Fund invests may be renegotiated, terminated or involve a longer time frame than originally contemplated, which may negatively impact the Fund s returns. The Fund s investment strategy may result in high portfolio turnover, which, in turn, may result in increased transaction costs to the Fund and lower total returns. The Fund is susceptible to foreign securities risk since the Fund invests in foreign markets, it will be subject to risk of loss not typically associated with domestic markets, including currency transaction risk. Diversification does not eliminate the risk of experiencing investment losses. Stock prices of mid and small capitalization companies generally are more volatile than those of larger companies and also more vulnerable than those of larger capitalization companies to adverse economic developments. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The ETF should be considered a speculative investment with a high degree of risk, does not represent a complete investment program and is not suitable for all investors. The S&P 500 is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. Sources for IndexIQ and benchmark data: IndexIQ, FactSet, Bloomberg. The Fund employs a passive management or indexing investment approach designed to track the performance of the Index. The Fund invests primarily in the Index components that comprise the Index. Consider the Fund s investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Fund and are available by visiting IQetfs.com or calling 888-474-7725. Read the prospectus carefully before investing. MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC. FOR REGISTERED REPRESENTATIVE USE ONLY. NOT FOR PUBLIC DISTRIBUTION